<PAGE>
Prospectus
December 11, 2000
A&B SHARES
Money Market Fund
Tax-Exempt Money Market Fund
Ohio Tax-Exempt Money Market Fund
U.S. Government Money Market Fund
U.S. Treasury Money Market Fund
Short-Term Bond Fund
Intermediate Bond Fund
U.S. Government Securities Fund
Aggregate Bond Fund
Bond IMMDEXTM Fund
Strategic Income Fund
Tax-Exempt Intermediate Bond Fund
Missouri Tax-Exempt Bond Fund
National Municipal Bond Fund
Balanced Income Fund
Balanced Growth Fund
Growth & Income Fund
Equity Income Fund
Relative Value Fund
Equity Index Fund
Large Cap Core Equity Fund
Large Cap Growth Fund
International Value Fund
International Growth Fund
MidCap Index Fund
MidCap Core Equity Fund
Small Cap Index Fund
Small Cap Core Equity Fund
Science & Technology Fund
MicroCap Fund
As with all mutual funds, the Securities and Exchange
Commission has not approved or disapproved any shares
of these funds or determined if this prospectus is
truthful or complete. Anyone who tells you otherwise is
committing a criminal offense.
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Table of Contents
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<TABLE>
<S> <C>
Money Market Fund 1
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Tax-Exempt Money Market Fund 3
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Ohio Tax-Exempt Money Market Fund 6
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U.S. Government Money Market Fund 10
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U.S. Treasury Money Market Fund 13
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Short-Term Bond Fund,
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Intermediate Bond Fund and Bond IMMDEXTM Fund 16
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U.S. Government Securities Fund 21
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Aggregate Bond Fund 25
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Strategic Income Fund 29
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Tax-Exempt Intermediate Bond Fund 35
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Missouri Tax-Exempt Bond Fund 39
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National Municipal Bond Fund 43
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Balanced Income Fund 47
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Balanced Growth Fund 52
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Growth & Income Fund 56
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Equity Income Fund 60
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Relative Value Fund 64
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Equity Index Fund 68
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Large Cap Core Equity Fund 72
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Large Cap Growth Fund 75
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International Value Fund 80
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International Growth Fund 84
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MidCap Index Fund 88
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MidCap Core Equity Fund 91
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Small Cap Index Fund 95
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Small Cap Core Equity Fund 99
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Science & Technology Fund 103
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MicroCap Fund 107
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Types of Investment Risk 112
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Investing With Firstar Funds 121
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Share Classes Available 121
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Sales Charges and Waivers 122
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Purchasing Shares 126
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Redeeming Shares 129
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Exchanging Shares 132
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Additional Shareholder Services 132
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Additional Information 133
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Dividends, Capital Gains Distributions and Taxes 133
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Management of the Funds 135
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Net Asset Value and Days of Operation 140
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Appendix 142
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Financial Highlights 142
</TABLE>
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An investment in the Funds is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although each money market fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Funds.
Learn about each Fund's Objective, Principal Investment Strategies, Principal
Risks, Performance and Expenses.
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Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Money Market Fund is to provide a high level of
taxable current income consistent with liquidity, the preservation of capital
and a stable net asset value. This investment objective may be changed by the
Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Money Market Fund invests principally in short-term, high quality, dollar-
denominated money market debt obligations generally maturing in 397 days or
less. These obligations may be issued by entities including domestic and
foreign corporations, banks and other financial institutions and other types of
entities or by investment companies, or they may be issued or guaranteed by a
U.S. or foreign government, agency, instrumentality or political subdivision.
The Fund will acquire only securities which are rated in the highest short-term
rating category by at least two rating agencies (or by the only rating agency
providing a rating), or are issued or guaranteed by, or otherwise provide the
right to demand payment from, entities with those ratings. If the securities
are unrated, they must be of comparable quality, as determined at the time of
acquisition.
The Fund maintains an average maturity of 90 days or less.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed-income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed-income
securities will decline in value. Long-term fixed-income securities will
normally have more price volatility because of this risk than short-term
securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
[GRAPHIC]
Bar Chart and Performance Table
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A Shares from year to year and the average annual returns of the Fund's
Retail A Shares. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990 8.05%
1991 5.87%
1992 3.42%
1993 2.67%
1994 3.84%
1995 5.54%
1996 5.00%
1997 5.14%
1998 5.14%
1999 4.57%
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The Money Market Fund's total return for Retail A Shares for the nine-month
period ended September 30, 2000 was 4.23%.
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<TABLE>
<S> <C> <C> <C>
Best Quarter: Q2 '89 2.33%
Worst Quarter: Q2 '93 0.64%
</TABLE>
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Average Annual Total Return as of 12/31/99 (Retail A Shares)
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<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
---------------------------------------------
<S> <C> <C> <C>
Money Market Fund -
Retail A Shares 4.57% 5.07% 4.91%
---------------------------------------------
</TABLE>
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
Money Market Fund was 5.30%, and without giving effect to fee waivers was
5.18%. Figures reflect past performance. Yields will vary. You may call 1-800-
677-FUND to obtain the current 7-day yield of the Retail A Shares of the Money
Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A Shares of the Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
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<TABLE>
<CAPTION>
Retail
A Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/2/
Exchange Fees None
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
---------------------------------------------------
<S> <C>
Management Fees (before waivers)/3/ 0.50%
Distribution and Service (12b-1) Fees
(before waivers)/4/ 0.01%
Other Expenses (before waivers)/5/ 0.51%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.02%
Fee Waivers and Expense Reimbursements/6/ (0.23)%
-------
Net Annual Fund Operating Expenses/6/ 0.79%
=======
---------------------------------------------------
</TABLE>
1 A contingent deferred sales charge may be payable upon redemption of Retail A
Shares of the Money Market Fund which were acquired upon exchange for Retail
B Shares. The contingent deferred sales charge is described under the heading
"Investing with Firstar Funds - Contingent Deferred Sales Charge - Retail B
Shares."
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the Money Market
Fund is 0.43% of the Fund's average daily net assets.
4 12b-1 fees after waivers currently are 0.01% of the average daily net assets
of the Fund's Retail A Shares. The maximum 12b-1 fee applicable to this Fund
is 0.25%.
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2
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5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the Money Market Fund currently are
0.35% of the Fund's average daily net assets.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares of the Money Market Fund until October
31, 2001, so that Net Annual Fund Operating Expenses will be no more than
0.79% of the Fund's average daily net assets for the current fiscal year.
These fee waivers and expense reimbursements may be terminated at any time
after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
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<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Fund - Retail A Shares $81 $353 $646 $1,481
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</TABLE>
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Tax-Exempt Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Tax-Exempt Money Market Fund is to provide a
high level of current income exempt from federal income taxes consistent with
liquidity, the preservation of capital and a stable net asset value. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in a diversified portfolio of dollar-denominated
debt obligations ("municipal obligations") issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their authorities, agencies, instrumentalities and political subdivisions. The
Fund will acquire only securities which are rated in the highest short-term
rating category by at least two rating agencies (or by the only rating agency
providing a rating), or are issued or guaranteed by, or otherwise provide the
right to demand payment from, entities with those ratings. If the security is
unrated, it must be of comparable quality to securities with those ratings, as
determined at the time of acquisition. During normal market conditions, the
Fund will invest at least 80% of its net assets in municipal obligations which
are exempt from federal income taxes with remaining maturities of 13 months or
less. (Securities which are subject to demand features and certain U.S.
government obligations may have longer maturities). The Fund maintains an
average portfolio maturity of 90 days or less.
The two principal classifications of municipal obligations which the Tax-Exempt
Money Market Fund invests in are:
General Obligation Revenue Securities
Securities Revenue securities are payable only from the
General obligation revenues derived from a particular facility or
securities are secured class of facilities or, in some cases, from the
by the issuer's pledge proceeds of a special excise tax or other
of its full faith, specific revenue source such as the issuer of the
credit and taxing power facility being financed.
for the payment of
principal and interest.
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Municipal obligations purchased by the Fund may include variable and floating
rate instruments which are instruments with interest rates that are adjusted
either on a schedule or when an index or benchmark changes. While there may be
no active secondary market with respect to a particular variable or floating
rate demand instrument, the Fund may demand payment in full of the principal
and interest.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Long-term fixed-income securities will
normally have more price volatility because of this risk than short-term
securities.
Municipal obligations which the Fund purchases may be backed by letters of
credit issued by banks and other financial institutions. Adverse developments
affecting banks could have a negative effect on the Fund's portfolio
securities.
The Fund may invest more than 25% of its total assets in municipal obligations
issued by entities located in the same state and the interest on which is paid
solely from revenues of similar projects. As a result, changes in economic,
business or political conditions relating to a particular state or types of
projects may have a disproportionate impact on the Fund's share price.
The Fund may acquire municipal lease obligations which are issued by a state or
local government or authority to acquire land and a wide variety of equipment
and facilities. 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.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A Shares from year to year and the average annual returns of the Fund's
Retail A Shares. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
[GRAPH]
Year-by-year total returns as of 12/31 each year (%) (Retail A Shares)
1990 5.48%
1991 4.24%
1992 2.64%
1993 2.06%
1994 2.49%
1995 3.44%
1996 3.06%
1997 3.13%
1998 2.97%
1999 2.58%
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4
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The Tax-Exempt Money Market Fund's total return for Retail A Shares for the
nine-month period ending September 30, 2000 was 2.52%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q2 '89 1.58%
Worst Quarter: Q1 '94 0.50%
</TABLE>
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Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1
Year 5 Years 10 Years
-------------------------------------------------------
<S> <C> <C> <C>
Tax-Exempt Money Market Fund -
Retail A Shares 2.58% 3.03% 3.20%
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</TABLE>
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
Tax-Exempt Money Market Fund was 3.66% and without giving effect to fee waivers
was 3.66%. Figures reflect past performance. Yields will vary. You may call 1-
800-677-FUND to obtain the current 7-day yield of Retail A Shares of the Tax-
Exempt Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A Shares of the Tax-Exempt Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/2/
Exchange Fees None
-----------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
--------------------------------------------------
<S> <C>
Management Fees 0.50%
Distribution and Service (12b-1) Fees
(before waivers)/3/ 0.00%
Other Expenses (before waivers)/4/ 0.43%
-------
Total Annual Fund Operating Expenses
(before waivers) 0.93%
Fee Waivers and Expense Reimbusements/5/ (0.14)%
-------
Net Annual Fund Operating Expenses/5/ 0.79%
=======
--------------------------------------------------
</TABLE>
1 A contingent deferred sales charge may be payable upon redemption of Retail A
Shares of the Tax-Exempt Money Market Fund which were acquired upon exchange
for Retail B Shares. The contingent deferred sales charge is described under
the heading "Investing with Firstar Funds - Contingent Deferred Sales
Charge - Retail B Shares."
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.,
is custodian.
3 The Fund does not intend to pay 12b-1 fees for the current fiscal year. The
maximum 12b-1 fee applicable to this Fund is 0.25%.
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4 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under "Investing with Firstar Funds - Shareholder
Organizations") equal to up to 0.25% of the average daily net assets of the
Fund's Retail A Shares. As a result of fee waivers and/or expense
reimbursements, Other Expenses of the Tax-Exempt Money Market Fund currently
are 0.29% of the Fund's average daily net assets.
5 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares of the Tax-Exempt Money Market Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 0.79% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
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<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money Market Fund - Retail A
Shares $81 $336 $611 $1,397
</TABLE>
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Ohio Tax-Exempt Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Ohio Tax-Exempt Money Market Fund is to provide
current income exempt from federal income tax and the personal income taxes
imposed by the state of Ohio and Ohio municipalities consistent with stability
of principal. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund intends to achieve its investment goal by investing its assets so that
at least 80% of its annual interest income is exempt from federal income tax and
not subject to the alternative minimum tax and the personal income taxes imposed
by the state of Ohio and Ohio municipalities. In addition, the Fund will invest
its assets so that under normal circumstances, at least 65% of the value of its
total assets will be invested in Ohio municipal securities exempt from federal
regular income tax and Ohio State income tax. The Fund's portfolio consists of
municipal securities maturing in 397 days or less. The average maturity,
however, of all the securities in the Fund's portfolio will be 90 days or less
on a dollar-weighted basis. The Fund may invest more than 25% of its total
assets in securities credit-enhanced by banks. Credit-enhanced securities are
investments backed by a guaranty, a letter of credit or insurance.
Examples of Ohio Municipal Securities
. tax and revenue anticipation notes issued to finance working capital needs in
anticipation of receiving taxes or other revenues
. bond anticipation notes that are intended to be refinanced through a later
issuance of longer term bonds
. municipal commercial paper and other short-term notes
. variable rate demand notes
. municipal bonds and leases
. participation interests in any of the above
The municipal securities in which the Fund invests are primarily debt
obligations issued by or on behalf of Ohio and its political subdivisions and
financing authorities and obligations of other states, territories and
possessions of the United States and any political subdivision or financing
authority of any of these. The income from such obligations must be exempt from
federal income tax (including alternative minimum tax) and the personal income
taxes imposed by the state of Ohio and its political subdivisions.
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6
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Participation Interests
The Fund may purchase interests in municipal securities from financial
institutions such as commercial and investment banks, savings associations and
insurance companies. Financial institutions provide guarantees, letters of
credit or insurance to the Fund on the underlying municipal securities.
Municipal Leases
The Fund may also invest in municipal leases, which are obligations issued by
state and local governments to finance the acquisition of equipment and
facilities. Municipal leases may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation interest.
Municipal leases may be considered illiquid.
Variable Rate Demand Notes
The Fund may invest in variable rate demand notes, which are obligations with
variable or floating interest rates. The notes provide the Fund with the right
to tender the security for repurchase at its stated principal amount plus
accrued interest. These securities usually bear interest at a rate that allows
the securities to trade at par. Most variable rate demand notes allow the fund
to demand the repurchase of the security on not more than 7 days' notice. Other
notes only permit the Fund to tender the security at the time of each interest
rate adjustment or at other fixed intervals. The Fund treats variable rate
demand notes as maturing on the later of the date of the next interest
adjustment or the date on which the Fund may next tender the security for
repurchase.
Temporary Investments
From time to time, the Fund may invest in tax-exempt or taxable short-term
temporary investments when the Fund's Adviser determines that market conditions
call for a temporary defensive posture. During such times, it is possible for
the Fund not to reach its investment objective. Although the Fund is permitted
to make taxable temporary investments, the Adviser currently has no intention
to generate income subject to federal regular income tax.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk and tax risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal;
to the extent the Fund invests in credit enhanced securities, it is especially
susceptible to credit risk. The ability of a state or local government issuer
to make payments can be affected by many factors, including economic
conditions, the flow of tax revenues and changes in the level of federal, state
or local aid. Some municipal securities are payable only from limited revenue
sources or by private entities. Interest rate risk is the risk that, when
interest rates increase, fixed income securities, including municipal
securities, will decline in value. Tax risk is the risk that the Fund may be
more adversely impacted by changes in tax rates and policies than other funds.
Municipal obligations which the Fund purchases may be backed by letters of
credit issued by banks and other financial institutions. Adverse developments
affecting banks could have a negative effect on the Fund's portfolio
securities.
The Fund is also subject to Ohio state-specific risks, as it may invest at
least 65% of its total assets in municipal obligations issued by the State or
entities located in the state of Ohio. Ohio's economy is largely composed of
manufacturing, which is concentrated in the automobile sector and other durable
goods. The exposure to these industries, particularly the auto sector, leaves
Ohio vulnerable to an economic slowdown associated with business cycles.
Furthermore, population growth, as in many states around the Great Lakes, has
been stagnant.
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The Fund's concentration in securities issued by Ohio and its political
subdivisions provides a greater level of risk than a fund whose assets are
diversified across numerous states and municipal issuers. The ability of Ohio
or its local issuers to meet their obligations will depend on, among other
factors:
1. the availability of tax and other revenues;
2. economic, political and demographic conditions within the state or region of
the state; and
3. the underlying fiscal condition of the state, its counties and its
municipalities and school districts.
See the Additional Statement for additional information regarding Ohio-state
specific risks.
Investing in the Fund has added risks because the Fund is a non-diversified
fund under the Investment Company Act of 1940, as amended (the "1940 Act"),
subjecting the Fund to non-diversification risks. Compared with other mutual
funds, this Fund may invest a greater percentage of its assets in a more
limited number of issues concentrated in one state which, as a result, can
increase the Fund's volatility. The value of the Fund's securities can be
impacted by economic or political developments affecting certain securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A Shares from year to year and the average annual returns of the Fund's
Retail A Shares. The Fund began operations on December 2, 1997 as the Firstar
Stellar Ohio Tax-Free Money Market Fund, a separate portfolio (a "Predecessor
Stellar Fund") of Firstar Stellar Funds. On December 11, 2000, the Predecessor
Stellar Fund was reorganized as a new portfolio of Firstar Funds, Inc. The
performance set forth below is based on the performance of a corresponding
class of the Predecessor Stellar Fund.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
[GRAPH]
1990
1991
1992
1993
1994
1995
1996
1997
1998 2.85%
1999 2.69%
The Ohio Tax-Exempt Money Market Fund's total return for Retail A Shares for
the nine-month period ending September 30, 2000 was 2.49%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q2 '98 0.78%
Worst Quarter: Q2 '99 0.62%
</TABLE>
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Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (December 2, 1997)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Ohio Tax-Exempt Money
Market Fund -
Retail A Shares 2.69% -- -- 2.77%
-----------------------------------------------------------------
</TABLE>
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
Ohio Tax-Exempt Money Market Fund was 3.52% and without giving effect to fee
waivers was 3.20%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-FUND to obtain the current 7-day yield of Retail A Shares of the
Ohio Tax-Exempt Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A Shares of the Ohio Tax-Exempt Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/2/
Exchange Fees None
-----------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
---------------------------------------------------
<S> <C>
Management Fees (before waivers)/3/ 0.50%
Distribution and Service (12b-1) Fees
(before waivers)/4/ 0.00%
Other Expenses (before waivers)/5/ 0.63%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.13%
Fee Waivers and Expense Reimbursements/6/ (0.34)%
-------
Net Annual Fund Operating Expenses/6/ 0.79%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge may be payable upon redemption of Retail A
Shares of the Ohio Tax-Exempt Money Market Fund which were acquired upon
exchange for Retail B Shares. The contingent deferred sales charge is
described under the heading "Investing with Firstar Funds - Contingent
Deferred Sales Charge - Retail B Shares."
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the Ohio Tax-Exempt
Money Market Fund is 0.34% of the Fund's average daily net assets.
4 The Fund does not intend to pay 12b-1 fees for the current fiscal year. The
maximum 12b-1 fee applicable to this Fund is 0.25%.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the Ohio Tax-Exempt Money Market
Fund currently are 0.45% of the Fund's average daily net assets.
.............................................................................. 9
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6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares of the Ohio Tax-Exempt Money Market
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than 0.79% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ohio Tax-Exempt Money Market Fund - Retail A
Shares $81 $379 $699 $1,606
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
U.S. Government Money Market Fund
Objective
[GRAPHIC]
The investment objective of the U.S. Government Money Market Fund is to provide
a high level of taxable current income consistent with liquidity, the
preservation of capital and a stable net asset value (irrespective of state
income tax considerations). This investment objective may be changed by the
Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The U.S. Government Money Market Fund invests in short term dollar-denominated
debt obligations generally maturing in 397 days or less, issued or guaranteed
as to principal and interest by the U.S. government, its agencies or
instrumentalities. Under normal market conditions, the Fund intends to invest
at least 65% of its total assets in these obligations. The Fund also invests in
variable and floating rate instruments and repurchase agreements.
The Fund maintains an average maturity of 90 days or less.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares
will vary from day to day so that Even though the U.S. Government Money
the dividends on your investment Market Fund purchases mostly U.S.
will vary. The Fund is subject to government obligations, shares of the
credit risk and interest rate risk. Fund are not themselves issued or
Credit risk is the risk that an guaranteed by any government agency.
issuer of fixed income securities
may default on its obligation to pay
interest and repay principal.
Interest rate risk is the risk that,
when interest rates increase, fixed
income securities will decline in
value.
There can be no assurance that the
U.S. government will provide
financial support to U.S. government-sponsored agencies or instrumentalities
where it is not obligated to do so by law.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
................................................................................
10
<PAGE>
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Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A Shares from year to year and the average annual returns of the Fund's
Retail A Shares. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
[GRAPH]
1990 7.71%
1991 5.56%
1992 3.30%
1993 2.61%
1994 3.76%
1995 5.39%
1996 4.92%
1997 4.97%
1998 4.95%
1999 4.41%
The U.S. Government Money Market Fund's total return for Retail A Shares for
the nine-month period ending September 30, 2000 was 4.12%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q2 '89 2.24%
Worst Quarter: Q2 '93 0.63%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
<TABLE>
-------------------------------------------------------------
<CAPTION>
1 Year 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Money Market Fund -
Retail A Shares 4.41% 4.92% 4.75%
</TABLE>
--------------------------------------------------------------------------------
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
U.S. Government Money Market Fund was 4.66%, and without giving effect to fee
waivers was 4.66%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-FUND to obtain the current 7-day yield of Retail A Shares of the
U.S. Government Money Market Fund.
............................................................................. 11
<PAGE>
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A Shares of the U.S. Government Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/2/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
---------------------------------------------------
<S> <C>
Management Fees (before waivers)/3/ 0.50%
Distribution and Service (12b-1) Fees
(before waivers)/4/ 0.00%
Other Expenses (before waivers)/5/ 0.66%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.16%
Fee Waivers and Expense Reimbursements/6/ (0.37)%
-------
Net Annual Fund Operating Expenses/6/ 0.79%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge may be payable upon redemption of Retail A
Shares of the U.S. Government Money Market Fund which were acquired upon
exchange for Retail B Shares. The contingent deferred sales charge is
described under the heading "Investing with Firstar Funds - Contingent
Deferred Sales Charge - Retail B Shares."
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the U.S. Government
Money Market Fund is 0.31% of the Fund's average daily net assets.
4 The Fund does not intend to pay 12b-1 fees for the current fiscal year. The
maximum 12b-1 fee applicable to this Fund is 0.25%.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the U.S. Government Money Market
Fund currently are 0.48% of the Fund's average daily net assets.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares of the U.S. Government Money Market
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than 0.79% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
................................................................................
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Money Market Fund -
Retail A Shares $81 $385 $712 $1,637
</TABLE>
--------------------------------------------------------------------------------
U.S. Treasury Money Market Fund
Objective
[GRAPHIC]
The investment objective of the U.S. Treasury Money Market Fund is to seek
stability of principal and current income consistent with stability of
principal. This investment objective may be changed by the Board of Directors
without approval of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The U.S. Treasury Money Market Fund invests exclusively in short-term U.S.
Treasury obligations that have a maturity of 397 days or less from the date of
purchase. The Fund may purchase repurchase agreements collateralized by U.S.
Treasury obligations. The Fund intends to invest in the agreements that provide
for repurchase within 397 days from the date of acquisition. The average
maturity of these securities is 120 days or less. The average maturity,
however, of all the securities in the Fund's portfolio will be 90 days or less
on a dollar-weighted basis. Securities subject to repurchase agreements are
marked to market on a daily basis. U.S. Treasury obligations are issued by the
U.S. government and are fully guaranteed as to principal and interest by the
United States government. The Fund may also retain assets in cash and may
purchase U.S. Treasury obligations on a when-issued or delayed delivery basis.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that the
dividends on your investment will vary. The Fund is subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value.
Even though the U.S. Treasury Money Market Fund purchases mostly U.S. government
obligations, shares of the Fund are not themselves issued or guaranteed by any
government agency.
The Fund is subject to when-issued and delayed delivery transaction risks. When-
issued and delayed delivery transactions involve securities with payment and
delivery scheduled for a future time. One of the risks of investing in when-
issued or delayed delivery transactions is if the seller chooses not to complete
the transaction, the Fund could miss an advantageous price or yield. The Fund
may enter into transactions to sell its purchase commitments to third parties at
current market rates and simultaneously acquire other commitments to purchase
similar securities at later dates. The Fund may realize short-term profits or
losses on the sale of these kinds of commitments.
The Fund is also subject to repurchase agreement risk. Repurchase agreements
are arrangements in which banks, broker/dealers and other financial
institutions sell securities to the Fund and agree to repurchase them at a
certain time and price within one year. Repurchase agreement risk is the risk
that the seller may not
--------------------------------------------------------------------------------
............................................................................. 13
<PAGE>
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--------------------------------------------------------------------------------
repurchase the securities from the Fund, which may result in the Fund selling
the security for less than the agreed upon price. Another risk of repurchase
agreements is that the seller may default or file for bankruptcy. That could
mean the Fund might have to wait through lengthy court actions before selling
the securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A Shares from year to year and the average annual returns of the Fund's
Retail A Shares.
On November 27, 2000, the Mercantile Treasury Money Market Portfolio, a
portfolio of Mercantile Mutual Funds, Inc., and the Firstar Stellar Treasury
Fund, a portfolio of Firstar Stellar Funds, reorganized into the Firstar U.S.
Treasury Money Market Fund. At that time, the Firstar U.S. Treasury Money
Market Fund adopted an investment objective and certain non-fundamental
investment policies and restrictions that are substantially the same as those
of the Firstar Stellar Treasury Fund (a "Predecessor Stellar Fund"). The
performance set forth below for the U.S. Treasury Money Market Fund is based on
the performance of a corresponding class of the Firstar Stellar Treasury Fund.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990 7.64%
1991 5.49%
1992 3.26%
1993 2.54%
1994 3.51%
1995 5.26%
1996 4.77%
1997 4.86%
1998 4.61%
1999 4.06%
The U.S. Treasury Money Market Fund's total return for Retail A Shares for the
nine-month period ending September 30, 2000 was 3.81%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q3 '90 1.89%
Worst Quarter: Q4 '93 0.62%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
----------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Money Market Fund -
Retail A Shares 4.06% 4.71% 4.59%
</TABLE>
--------------------------------------------------------------------------------
................................................................................
14
<PAGE>
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--------------------------------------------------------------------------------
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
U.S. Treasury Money Market Fund was 3.98%, and without giving effect to fee
waivers was 3.98%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-FUND to obtain the current 7-day yield of Retail A Shares of the
U.S. Treasury Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A Shares of the U.S. Treasury Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/2/
Exchange Fees None
-----------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
---------------------------------------------------------
<S> <C>
Management Fees 0.44%
Distribution and Service (12b-1) Fees (before
waivers)/3/ 0.15%
Other Expenses (before waivers)/4/ 0.39%
-------
Total Annual Fund Operating Expenses (before
waivers) 0.98%
Fee Waivers and Expense Reimbursements/5/ (0.04)%
-------
Net Annual Fund Operating Expenses/5/ 0.94%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge may be payable upon redemption of Retail A
Shares of the U.S. Treasury Money Market Fund which were acquired upon
exchange for Retail B Shares. The contingent deferred sales charge is
described under the heading "Investing with Firstar Funds - Contingent
Deferred Sales Charge - Retail B Shares."
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 12b-1 fees after waivers currently are 0.15% of the average daily net assets
of the U.S. Treasury Money Market Fund's Retail A Shares. The maximum 12b-1
fee applicable to this Fund is 0.25%.
4 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the U.S. Treasury Money Market Fund
currently are 0.35% of the Fund's average daily net assets.
5 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares of the U.S. Treasury Money Market Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 0.94% of the Fund's average daily net assets for the current fiscal
year. The fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that
............................................................................. 15
<PAGE>
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--------------------------------------------------------------------------------
the Fund's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Money Market Fund - Retail A
Shares $96 $330 $582 $1,305
</TABLE>
--------------------------------------------------------------------------------
Short-Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund
Objectives
[GRAPHIC]
The investment objective of the Short-Term Bond Fund (formerly Short-Term Bond
Market Fund) is to provide an annual rate of total return, before Fund
expenses, comparable to the annual rate of total return of the Lehman Brothers
1-3 Year Government/Credit Bond Index (the "Lehman 1-3 Index").
The investment objective of the Intermediate Bond Fund (formerly Intermediate
Bond Market Fund) is to provide an annual rate of total return, before Fund
expenses, comparable to the annual rate of total return of the Lehman Brothers
Intermediate Government/Credit Bond Index (the "Lehman Intermediate Index").
The investment objective of the Bond IMMDEX(TM) Fund is to provide an annual
rate of total return, before Fund expenses, comparable to the annual rate of
total return of the Lehman Brothers Government/Credit Bond Index (the "Lehman
Index").
Each of these investment objectives may be changed by the Board of Directors
without approval of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Adviser attempts to make each Fund's duration and return comparable to those
of its respective bond index, and to maintain an overall interest rate
sensitivity for each Fund equivalent to its respective bond index.
The Adviser generally will sell a security when it, on a relative basis and in
the Adviser's opinion, will no longer help a Fund to maintain overall interest
sensitivity and return objectives.
The effective dollar-weighted average portfolio maturity of each Fund will be
more than one year but less than three years for the Short-Term Bond Fund; more
than three years but less than ten for the Intermediate Bond Fund; and more than
five years for the Bond IMMDEX(TM) Fund during normal market conditions.
Each Fund typically holds less than 200 securities.
The Adviser will attempt to keep each Fund fully invested. Each Fund's policy is
to invest at least 65% of total assets in the following types of debt
securities:
. U.S. government . U.S. government
. Stripped U.S. agencies
government . Corporate
. Collateralized . Medium-term
mortgage notes
obligations . Eurobonds
. Asset-backed and
mortgage-backed
obligations
Duration Defined:
"Duration" is the average time it takes to receive expected cash flows
(discounted to their present value) on a particular fixed-income instrument or a
portfolio of instruments. Duration usually defines the effect of interest rate
changes on bond prices. However, for large interest rate changes (generally
changes of 1% or more) this measure does not completely explain the interest
rate sensitivity of a bond.
For Example
The duration of a 5-year zero coupon bond which pays no interest or principal
until the maturity of the bond is 5 years. This is because a zero coupon bond
produces no cash flow until the maturity date.
On the other hand, a coupon bond that pays interest semiannually and matures in
5 years will have a duration of less than 5 years reflecting the semiannual cash
flows resulting from coupon payments.
--------------------------------------------------------------------------------
................................................................................
16
<PAGE>
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Debt obligations acquired by each Fund will be "investment grade," as rated by
at least one rating agency. The Adviser may purchase unrated obligations that
are determined by the Adviser to be comparable in quality to the rated
obligations. Average quality for each Fund is expected to be at least the second
highest rating category of S&P or Moody's. After purchase, a security may cease
to be rated or may have its rating reduced below the minimum rating required by
the Fund for purchase. The Adviser will consider whether to continue to hold the
security. If over 5% of the Fund's net assets consist of obligations which have
fallen below the minimum rating, the Adviser will immediately sell the
securities.
Investment Grade Securities are:
securities rated in the highest 4 categories by S&P, Moody's or another
nationally recognized rating agency.
Although these Funds attempt to achieve returns comparable to those of their
respective benchmark indices by maintaining a comparable duration (see
"Strategies" for definition), these Funds are NOT index funds. Each Fund may
invest more than 50% of their assets in securities not included in the index.
Description of Bond Indices
The bond indices measure the price changes of securities and the income
provided by the securities. The bond indices are intended to measure
performance of fixed-rate debt markets over given time intervals. The
difference between the indices is the maturity range of the securities
included. Each index is comprised of:
.U.S. Treasury securities
.U.S. government agency securities
.U.S. dollar denominated debt of certain foreign sovereign or supranational
entities
.investment-grade corporate debt obligations
The indices require that investment-grade corporate debt obligations must:
.be fixed-rate debt (as opposed to variable-rate debt);
.have at least one year until maturity;
.have a minimum outstanding par value of $100 million
.have a minimum quality rating of Baa by Moody's, BBB by S&P, or BBB by Fitch
IBCA.
The indices also require the following maturities for each debt obligation:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Index Length of Maturity
--------------------------------------------------------------------------
<S> <C>
Lehman 1-3 Index From one to three years remaining until maturity
Lehman Intermediate
Index From one to 10 years remaining until maturity
Lehman Index From one to 30 years or more remaining until maturity
</TABLE>
--------------------------------------------------------------------------------
The following chart depicts the number of bond issues and their aggregate
dollar values as represented by the indices on October 31, 1999.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Bond Issues Dollar Value
----------------------------------------------------
<S> <C> <C>
Lehman 1-3 Index 1,059 $ 974 billion
Lehman Intermediate Index 406 $2.6 trillion
Lehman Index 829 $3.6 trillion
</TABLE>
--------------------------------------------------------------------------------
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Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Funds are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Funds are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Obligations rated in the lowest of the top
four rating categories are considered to have speculative characteristics and
are subject to greater credit and interest rate risk than higher rated
securities.
Because of the smaller number of issues held by a Fund than its respective bond
index, material events affecting a Fund's portfolio (for example, an issuer's
decline in credit quality) may influence the performance of the Fund to a
greater degree than such events will influence its respective bond index and
may prevent the Fund from attaining its investment objective for particular
periods.
While the Adviser believes purchasing securities which are not in each Fund's
respective index or not consistent with the "mix" of the index provides the
opportunity to achieve an enhanced gross return compared to the index, the
Adviser may err in its choices of securities or portfolio mixes. Further, the
Adviser calculates the Funds' duration and average maturity based on certain
estimates relating to the duration and maturity of the securities held by the
Fund. The estimates used may not always be accurate, so the Adviser's
calculations may be incorrect. Such errors could result in a negative return
and a loss to you. In the event the performance of a Fund is not comparable to
the performance of its respective index, the Board of Directors will examine
the reasons for the deviation and the availability of corrective measures.
An investment in the Funds is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in a Fund by showing: (a) changes in the performance of a Fund's
Retail A Shares from year to year; and (b) how the average annual returns of a
Fund's Retail A Shares compare to those of a broad-based securities market
index.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, each Fund offered to investors one series of shares
with neither a sales charge nor a service fee. The average annual total return
calculation reflects a maximum initial sales charge of 4.00% for the Retail A
Shares, but for periods prior to January 10, 1995, performance does not reflect
service organization fees. If service organization fees were reflected,
performance would be reduced. Performance reflects fee waivers in effect. If
these fee waivers were not in place, a Fund's performance would be reduced. The
bar chart does not reflect the sales load applicable to Retail A and B shares.
If the sales loads were reflected, performance would be reduced. The Retail B
Shares commenced operations on March 1, 1999. Because those shares have less
than one calendar year's performance, no average annual returns are shown for
that class in this section.
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<PAGE>
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[GRAPH]
Year-by year total return as of 12/31 each year (%) (Retail Shares)
Short-Term Bond Fund Intermediate Bond Bond IMMDEX
1990 7.62% 8.22%
1991 13.50% 16.58%
1992 6.85% 7.56%
1993 6.47% 10.96%
1994 0.93% (2.09)% (3.06)%
1995 10.47% 14.99% 19.28%
1996 4.73% 3.81% 2.79%
1997 6.13% 7.07% 9.16%
1998 6.31% 7.64% 8.94%
1999 3.11% 0.75% (1.64)%
The Short Term Bond Fund's total return for Retail A Shares for the nine-month
period ending September 30, 2000 was 5.25%.
The Intermediate Bond Fund's total return for Retail A Shares for the nine-
month period ending September 30, 2000 was 6.04%.
The Bond IMMDEX(TM) Fund's total return for Retail A Shares for the nine-month
period ending September 30, 2000 was 7.01%.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short-Term Bond Fund Intermediate Bond Fund Bond IMMDEX(TM) Fund
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Best Quarter: Q4 '91 4.18% Q2 '95 4.96% Q2 '95 6.58%
Worst Quarter: Q4 '92 -0.45% Q1 '94 -2.04% Q1 '94 -2.90%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
<TABLE>
----------------------------------------------------------------------------
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Bond Fund -
Retail A Shares -1.03% 5.26% 6.12% --
Lehman Brothers 1-3 Year
Government/Credit Bond Index 3.15% 6.55% 6.64% --
Intermediate Bond Fund -
Retail A Shares -3.32% 5.87% -- 5.09%
(January 5, 1993)
Lehman Brothers Intermediate
Government/Credit Bond Index 0.39% 7.10% -- 5.94%
(January 5, 1993)
Bond IMMDEX(TM) Fund -
Retail A Shares -5.58% 6.61% 7.23% --
Lehman Brothers Government/Credit
Bond Index -2.15% 7.61% 7.65% --
----------------------------------------------------------------------------
</TABLE>
Each of the Lehman Brothers 1-3 Year Government/Credit Bond Index, Intermediate
Government/Credit Bond Index and Government/Credit Bond Index is a widely-
recognized unmanaged index of bond prices
............................................................................. 19
<PAGE>
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compiled by Lehman Brothers. The Index figures do not reflect any fees or
expenses. Investors cannot invest directly in the Index.
Securities included in the Lehman Brothers 1-3 Year Government/Credit Bond
Index must meet the following criteria: not less than one year to maturity; not
more than three years remaining to maturity.
Securities included in the Lehman Brothers Intermediate Government/Credit Bond
Index must meet the following criteria: remaining maturity of one to ten years;
and rated investment grade or higher by Moody's, Standard & Poor's, or Fitch,
in that order.
Securities included in the Lehman Brothers Government/Credit Bond Index must
meet the following criteria: not less than one year to maturity; and rated
investment grade or higher by Moody's, Standard & Poor's, or Fitch, in that
order.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Short-Term Bond Fund, Intermediate Bond
Fund and Bond IMMDEX(TM) Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 4.00% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
------------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short-Term Intermediate Bond Bond IMMDEX(TM)
Bond Fund Fund Fund
Retail A Retail B Retail A Retail B Retail A Retail B
Shares Shares Shares Shares Shares Shares
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees (before
waivers)/3/ 0.60% 0.60% 0.50% 0.50% 0.30% 0.30%
Distribution and Service
(12b-1) Fees/4/ 0.00% 0.75% 0.00% 0.75% 0.00% 0.75%
Other Expenses/5/ 0.52% 0.52% 0.45% 0.45% 0.43% 0.43%
------- ------- ------- ------- ----- -----
Total Annual Fund
Operating Expenses
(before waivers) 1.12% 1.87% 0.95% 1.70% 0.73% 1.48%
Fee Waivers and Expense
Reimbursements/6/ (0.27)% (0.27)% (0.10)% (0.10)% - -
------- ------- ------- ------- ----- -----
Net Annual Fund
Operating Expenses/6/ 0.85% 1.60% 0.85% 1.60% 0.73% 1.48%
======= ======= ======= ======= ===== =====
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter, Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
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3 As a result of fee waivers, the current management fees of the Short-Term
Bond Fund and Intermediate Bond Fund are 0.33% and 0.40% of the respective
Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Funds do not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Funds not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of each Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Short-Term
Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund until October 31,
2001, so that Net Annual Fund Operating Expenses will be no more than: 0.85%
of average daily net assets for Retail A Shares of the Short-Term Bond Fund;
1.60% of average daily net assets for Retail B Shares of the Short-Term Bond
Fund; 0.85% of average daily net assets for Retail A Shares of the
Intermediate Bond Fund and 1.60% of average daily net assets for Retail B
Shares of the Intermediate Bond Fund; and 0.73% of average daily net assets
for Retail A Shares of the Bond IMMDEX(TM) Fund and 1.48% of average daily
net assets for Retail B Shares of the Bond IMMDEX(TM) Fund for the current
fiscal year. The fee waivers and expense reimbursements may be terminated at
any time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in the shares of the Fund for the time periods
indicated, reinvest all of your dividends and distributions, and then redeem
all of your shares at the end of those periods. The example also assumes that
your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Bond Fund - Retail A Shares $483 $715 $ 966 $1,682
Short-Term Bond Fund - Retail B Shares
Assuming complete redemption at end of period 663 860 1,184 1,787
Assuming no redemption 163 560 984 1,787
Intermediate Bond Fund - Retail A Shares 483 681 895 1,510
Intermediate Bond Fund - Retail B Shares
Assuming complete redemption at end of period 663 826 1,113 1,617
Assuming no redemption 163 526 913 1,617
Bond IMMDEXTM - Retail A Shares 472 624 790 1,270
Bond IMMDEXTM - Retail B Shares
Assuming complete redemption at end of period 651 768 1,008 1,378
Assuming no redemption 151 468 808 1,378
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
U.S. Govenment Securities Fund
Objective
[GRAPHIC]
The investment objective of the U.S. Government Securities Fund is to seek a
high rate of current income that is consistent with relative stability of
principal. The investment objective may be changed by the Board of Directors
without approval of Shareholders, although no change is currently anticipated.
............................................................................. 21
<PAGE>
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Principal Investment Strategies
[GRAPHIC]
The Fund normally invests at least 65% of its total assets in debt obligations
issued or guaranteed by the U.S. Government and its agencies, including U.S.
Treasury bonds, notes and bills, as well as in repurchase agreements backed by
such obligations. The Fund also invests in mortgage-backed securities issued by
U.S. Government-sponsored entities such as Ginnie Maes, Fannie Maes, and
Freddie Macs. The remaining maturity (i.e., length of time until an obligation
must be repaid) of the obligations held by the Fund will vary from one to 30
years. Under normal conditions, however, the Adviser does not expect the Fund's
average weighted maturity to exceed 10 years when adjusted for the expected
average life of any mortgage-backed securities held by the Fund.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. Fixed-income securities in which the Fund invests
are subject to credit risk, interest rate risk and maturity risk. Credit risk
is the risk that an issuer of fixed-income securities may default on its
obligation to pay interest and repay principal. Interest rate risk is the risk
that, when interest rates increase, fixed-income securities will decline in
value. Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities. Maturity risk is
the risk that, generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate changes.
Certain securities in which the Fund invests pose additional risks. The
Statement of Additional Statement (the "Additional Statement") describes risks
of collateralized mortgage obligations and mortgage- and asset-backed
securities, which are subject to extension risk and prepayment risk. Extension
risk is the risk that an issuer will exercise its right to pay principal on an
obligation held by the Fund (such as a mortgage- or asset-backed security)
later than expected. This may happen when there is a rise in interest rates.
Under such circumstances, the value of the obligation will decrease and a Fund
will also suffer from the inability to invest in higher yielding securities.
Prepayment risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Fund (such as a mortgage- or asset-backed
security) earlier than expected. This may happen when there is a decline in
interest rates. These events may make a Fund unable to recoup its initial
investment and may result in reduced yields.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations, the value of its debt securities will fall. Securities issued or
guaranteed by the U.S. Government and its agencies have historically involved
little risk of loss of principal if held to maturity. Certain U.S. government
securities, such as Ginnie Maes, are supported by the full faith and credit of
the U.S. Treasury. Others, such as Freddie Macs, are supported by the right of
the issuer to borrow from the U.S. Treasury. Other securities, such as Fannie
Maes, are supported by the discretionary authority of the U.S. Government to
purchase certain obligations of the issuers, and still others are supported by
the issuer's own credit.
Repurchase Agreements carry the risk that the other party may not fulfill its
obligations under the agreement.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
................................................................................
22
<PAGE>
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Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A and Retail B Shares compare to those of a broad-based
securities market index. The Fund began investment operations on June 2, 1988
as the Mercantile U.S. Government Securities Portfolio, a separate portfolio of
Mercantile Mutual Funds, Inc. (a "Predecessor Mercantile Portfolio"). On
November 27, 2000, the Predecessor Mercantile Portfolio was reorganized as a
new portfolio of Firstar Funds, Inc. upon the closing of reorganizations
between Firstar Funds, Inc. and each of Mercantile Funds, Inc. and Firstar
Stellar Funds (together, the "Firstar Reorganization"). The performance set
forth below is based on the performance of corresponding classes of the
Predecessor Mercantile Portfolio. The Predecessor Mercantile Portfolio was
managed by a different investment adviser for the periods shown below until
March 1, 2000. See "Management of the Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. The average annual total return
calculation reflects a maximum initial sales charge of 4.00% for the Retail A
Shares and an assumed contingent deferred sales charge for Retail B Shares (5%
maximum declining to 0% after six years). Sales charges are not reflected in
the bar chart. If these amounts were reflected, returns would be less than
those shown.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990 11.04%
1991 13.98%
1992 5.48%
1993 8.77%
1994 (2.74)%
1995 14.95%
1996 3.01%
1997 6.37%
1998 6.43%
1999 0.69%
The U.S. Government Securities Fund's total return for Retail A Shares for the
nine-month period ending September 30, 2000 was 5.84%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q3 '91 5.40%
Worst Quarter: Q1 '94 -2.60%
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 23
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A and Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (Inception date)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund
Retail A Shares -3.36% 5.32% 6.23% 6.53%
(June 2, 1988)
Lehman Brothers Intermediate
Government Bond Index 0.49% 6.93% 7.10% 7.55%
(May 31, 1988)
U.S. Government Securities Fund
Retail B Shares -4.60% -- -- 4.01%
(May 11, 1995)*
Lehman Brothers Intermediate
Government Bond Index 0.49% -- -- 6.24%
(April 30, 1995)
-------------------------------------------------------------------------
</TABLE>
* Date of initial public investment.
The Lehman Brothers Intermediate Government Bond Index is an unmanaged index,
which tracks the performance of intermediate-term U.S. Government bonds. The
Index figures do not reflect any fees or expenses. Investors cannot invest
directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the U.S. Government Securities Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 4.00% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
------------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
----------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.60% 0.60%
Distribution and Service (12b-1) Fees 0.00%/4/ 0.75%
Other Expenses/5/ 0.48% 0.48%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 1.08% 1.83%
Fee Waivers and Expense
Reimbursements/6/ (0.10)% (0.10)%
------- -------
Net Annual Fund Operating Expenses/6/ 0.98% 1.73%
======= =======
----------------------------------------------------------
</TABLE>
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth years, 2% in the fifth year,
declining to 1% in the sixth year. Thereafter, Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
................................................................................
24
<PAGE>
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[LOGO OF FIRSTAR]
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2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the U.S. Government
Securities Fund is 0.50% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.98% and 1.73%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund - Retail A
Shares $496 $720 $ 962 $1,655
U.S. Government Securities Fund - Retail B
Shares
Assuming complete redemption at end of
period 676 865 1,180 1,761
Assuming no redemption 176 565 980 1,761
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used for Retail B Shares in the hypothetical
example after year six.
--------------------------------------------------------------------------------
Aggregate Bond Fund
Objective
[GRAPHIC]
The investment objective of the Aggregate Bond Fund is to provide an annual
rate of total return, before fund expenses, comparable to the annual rate of
total return of the Lehman Brothers Aggregate Bond Index. The investment
objective may be changed by the Board of Directors without approval of
Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests substantially all of its assets in a broad range of debt
obligations, including corporate obligations and U.S. Government obligations.
Corporate obligations may include bonds, notes and debentures. U.S. Government
obligations may include U.S. Treasury obligations and obligations of certain
U.S. Government agencies. The Fund also invests in mortgage-backed securities,
including Ginnie Maes, Fannie Maes and Freddie Macs. Although the Fund invests
primarily in the debt obligations of U.S. issuers, it may from time to time
invest up to 10% of its total assets in U.S. dollar-denominated debt
obligations of foreign corporations and governments.
The Fund may only purchase investment grade debt obligations, which are those
rated in one of the four highest rating categories by one or more national
rating agencies, such as S&P's or Moody's. Under normal market conditions,
however, the Fund intends to invest at least 65% of its total assets in debt
obligations rated in one of the three highest rating categories. Unrated debt
obligations will be purchased only if they
............................................................................. 25
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
are determined by the Adviser to be at least comparable in quality at the time
of purchase to eligible rated securities. Occasionally, the rating of a
security held by the Fund may be downgraded to below investment grade. If that
happens, the Fund does not have to sell the security unless the Adviser
determines that under the circumstances the security is no longer an
appropriate investment for the Fund.
In making investment decisions, the Adviser considers a number of factors
including credit quality, the price of the security relative to that of other
securities in its sector, current yield, maturity, yield to maturity,
anticipated changes in interest rates and other economic factors, liquidity,
and the overall quality of the investment.
The remaining maturity (i.e., length of time until an obligation must be
repaid) of the obligations held by the Fund will vary from less than one year
to 30 years. The Fund's average weighted maturity will vary from time to time
depending on current market and economic conditions and the Adviser's
assessment of probable changes in interest rates.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. Fixed-income securities in which the Fund invests
are subject to credit risk, interest rate risk and maturity risk. Credit risk
is the risk that an issuer of fixed-income securities may default on its
obligation to pay interest and repay principal. Interest rate risk is the risk
that, when interest rates increase, fixed-income securities will decline in
value. Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities. Maturity risk is
the risk that, generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate changes.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to extension risk and
prepayment risk. Extension risk is the risk that an issuer will exercise its
right to pay principal on an obligation held by the Fund (such as a mortgage-
or asset-backed security) later than expected. This may happen when there is a
rise in interest rates. Under such circumstances, the value of the obligation
will decrease and the Fund will also suffer from the inability to invest in
higher yielding securities. Prepayment risk is the risk that an issuer will
exercise its right to pay principal on an obligation held by the Fund (such as
a mortgage- or asset-backed security) earlier than expected. This may happen
when there is a decline in interest rates. These events may make a Fund unable
to recoup its initial investment and may result in reduced yields.
The Fund's investments in foreign debt securities are subject to foreign risks.
Foreign debt securities involve special risks not typically associated with
U.S. securities. The foreign debt securities held by the Fund may underperform
other types of securities, and they may not increase or may decline in value.
Foreign investments may be riskier than U.S. investments because of factors
such as foreign government restrictions, changes in currency exchange rates,
incomplete financial information about the issuers of securities, and political
or economic instability. Foreign securities may be more volatile and less
liquid than U.S. stocks.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
................................................................................
26
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A and Retail B Shares compare to those of a broad-based
securities market index. The Fund began investment operations on June 15, 1988
as the Mercantile Government & Corporate Bond Portfolio, a separate portfolio
of Mercantile Mutual Funds, Inc. (a "Predecessor Mercantile Portfolio"). On
November 27, 2000, the Predecessor Mercantile Portfolio was reorganized as a
new portfolio of Firstar Funds, Inc. upon the closing of reorganizations
between Firstar Funds, Inc. and each of Mercantile Mutual Funds, Inc. and
Firstar Stellar Funds (together, the "Firstar Reorganization"). The performance
set forth below is based on the performance of corresponding classes of the
Predecessor Mercantile Portfolio. The Predecessor Mercantile Portfolio was
managed by a different investment adviser for the periods shown below until
March 1, 2000. See "Management of the Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. The average annual total return calculation reflects a maximum
initial sales charge of 4.00% for the Retail A Shares and an assumed contingent
deferred sales charge for Retail B Shares (5% maximum declining to 0% after six
years). Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart. If these amounts were reflected, returns would be less than
those shown.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
90 6.46
91 15.23
92 5.78
93 9.07
94 -2.92
95 16.73
96 1.83
97 8.03
98 8.68
99 -2.01
The Aggregate Bond Fund's total return for Retail A Shares for the nine-month
period ending September 30, 2000 was 6.65%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '95 5.60%
Worst Quarter: Q 1 '96 -2.79%
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 27
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A and Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (Inception date)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Bond Fund -
Retail A Shares -5.92% 5.61% 6.08% 6.47%
(June 15, 1988)
Lehman Brothers Aggregate Bond -0.82% 7.73% 7.70% 8.34%
Index (May 31, 1988)
Aggregate Bond Fund -
Retail B Shares -7.28% -- -- 5.05%
(March 7, 1995)*
Lehman Brothers Aggregate Bond -0.82% -- -- 7.04%
Index (February 28, 1995)
</TABLE>
--------------------------------------------------------------------------------
* Date of initial public investment.
The Lehman Brothers Aggregate Bond Index is a widely-recognized unmanaged index
made up of Lehman Brothers' Government/Credit Bond Index, its Mortgage Backed
Securities Index and its Asset Backed Securities Index. The Index figures do
not reflect any fees or expenses. Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Aggregate Bond Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 4.00% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
------------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
----------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.50% 0.50%
Distribution and Service (12b-1) Fees 0.00%/4/ 0.75%
Other Expenses/5/ 0.49% 0.49%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 0.99% 1.74%
Fee Waivers and Expense
Reimbursements/6/ (0.06)% (0.06)%
------- -------
Net Annual Fund Operating Expenses/6/ 0.93% 1.68%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth years, 2% in the fifth year,
declining to 1% in the sixth year. Thereafter, Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
................................................................................
28
<PAGE>
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[LOGO OF FIRSTAR]
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2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the Aggregate Bond
Fund is 0.44% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed,
in the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.93% and 1.68%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Bond Fund - Retail A Shares $491 $697 $ 919 $1,559
Aggregate Bond Fund - Retail B Shares
Assuming complete redemption at end of
period 671 842 1,138 1,665
Assuming no redemption 171 542 938 1,665
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used for Retail B Shares in the hypothetical
example after year six.
Strategic Income Fund
Objective
[GRAPHIC]
The investment objective of the Strategic Income Fund is to generate high
current income. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund attempts to achieve its investment goal by investing its assets in a
core group of securities as shown in the box to the right. The Adviser's
strategy is to spread the investment portfolio over several securities
categories to reduce the impact of any drastic market movements affecting one
category. With that in mind, the Fund invests approximately 40% of its assets in
short to long-term, investment grade U.S. government and corporate fixed-income
securities (category 1). The Fund invests between 0% to 20% of its assets in
each of the other categories (categories 2 through 6). Overall, the Fund will
have at least 65% of its assets invested in securities that produce income.
The Fund's investment categories:
1. U.S. government & corporate fixed-income securities
2. International securities
3. Real estate investment trusts
4. Domestic equity securities
5. Money market securities
6. Mortgage and asset-backed securities
--------------------------------------------------------------------------------
............................................................................. 29
<PAGE>
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[LOGO OF FIRSTAR]
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To aid in selecting securities, the Adviser will use the following techniques:
.fundamental and quantitative analysis to select equity securities, which
includes examining price/earnings ratios, historical and projected earnings
growth rates, historical sales growth rates, historical return on equity,
market capitalization, and average daily trading volume;
.use of ratings assigned by nationally recognized statistical rating
organizations (when needed);
.credit research;
.review of issuers' historical performance;
.examination of issuers' dividend growth record;
.consideration of market trends; and
.hedging through the use of options and futures.
Domestic Fixed-Income Securities
As noted above, the Fund will invest in domestic corporate debt obligations,
obligations of the United States, and notes, bonds and discount notes of U.S.
government agencies or instrumentalities. The Adviser selects bonds based on
their potential interest rates and yield in relation to other bonds of similar
quality and maturity. The Fund will only invest in bonds which are rated Baa or
higher by Moody's or rated BBB or higher by S&P or Fitch. If the securities are
unrated, the Adviser must consider them to be of similar quality to the rated
securities before the Fund may invest in them.
U.S. Government Securities
The Fund may invest in securities issued and/or guaranteed as to the payment of
principal and interest by the U.S. government or its agencies or
instrumentalities. U.S. government securities include direct obligations of the
U.S. Treasury (such as U.S. Treasury bills, notes and bonds) and obligations
issued or guaranteed by U.S. government agencies or instrumentalities.
International Securities
The Fund may invest in international securities (including other investment
companies that invest primarily in international securities). The international
securities include equity securities of non-U.S. companies and corporate and
government fixed-income securities denominated in currencies other than U.S.
dollars. These securities may be traded domestically or abroad through various
stock exchanges, American Depository Receipts or International Depository
Receipts (ADRs or IDRs). The international fixed-income and corporate
securities include ADRs, IDRs, and government securities of other nations and
must be rated Baa or better by Moody's or BBB or better by S&P. If the
securities are unrated, the Adviser must determine that they are of similar
quality to the rated securities before the Fund may invest in them.
Real Estate Investment Trusts
The Fund may invest in equity or mortgage REITs that produce income. REITs will
be diversified by geographic location and by sector (such as shopping malls,
apartment building complexes and health care facilities). An equity REIT holds
equity positions in real estate and provides its shareholders with income from
the leasing of its properties and capital gains from any sales of properties. A
mortgage REIT specializes in lending money to developers of properties and
passes interest income to its shareholders.
A REIT (real estate investment trust) is a managed portfolio of real estate
investments.
Domestic Equity Securities
The Fund's domestic equity securities consist of high dividend paying common
and preferred stocks of U.S. companies listed on the New York or American Stock
Exchanges or traded in the over-the-counter market. The companies must have a
history of stable earnings and/or growing dividends. The Fund may also invest
in warrants and securities convertible into common stocks of these U.S.
companies.
................................................................................
30
<PAGE>
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Money Market Instruments
The Fund may invest in U.S. and foreign short-term money market instruments,
including commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's or F-1 or F-2 by Fitch, bank instruments, obligations of the U.S.
government, its agencies or instrumentalities, repurchase agreements, and other
unrated short-term instruments that the Adviser believes to be of comparable
quality to the other obligations in which the Fund may invest.
Mortgage and Asset-Backed Securities
The Fund may invest in mortgage-backed securities, adjustable rate mortgage
securities, collateralized mortgage obligations and asset-backed securities.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to market risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. The Fund is also subject to liquidity risk. Liquidity risk
is the risk that certain securities may be difficult or impossible to sell.
Fixed income securities in which the Fund invests are subject to credit risk
and interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Obligations rated in the lowest of the top
four rating categories are considered to have speculative characteristics and
are subject to greater credit and interest rate risk than higher rated
securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise react in tandem with
interest rate changes or market moves and may be leveraged. Extension risk is
the risk that an issuer will exercise its right to pay principal on an
obligation held by the Fund (such as a mortgage- or asset-backed security)
later than expected. This may happen when there is a rise in interest rates.
Under such circumstances, the value of the obligation will decrease and the
Fund will also suffer from the inability to invest in higher yielding
securities. Prepayment risk is the risk that an issuer will exercise its right
to pay principal on an obligation held by the Fund (such as a mortgage- or
asset-backed security) earlier than expected. This may happen when there is a
decline in interest rates. These events may make the Fund unable to recoup its
initial investment and may result in reduced yields.
The Fund's investments in foreign securities are subject to foreign risks.
Foreign stocks involve special risks not typically associated with U.S. stocks.
The stocks held by the Fund may underperform other types of stocks, and they
may not increase or may decline in value. Foreign investments may be riskier
than U.S. investments because of factors such as foreign government
restrictions, changes in currency exchange rates, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
The Fund is subject to futures and options on futures risks, as the Fund may
use futures and options on futures for hedging purposes only. The hedging
strategy may not be successful if the Adviser is unable to accurately predict
movements in the prices of individual securities held by the Fund or if the
strategy does not correlate well with the Fund's investments. The use of
futures and options on futures may produce a loss for the Fund, even when used
only for hedging purposes, and you could lose money because of the Fund's use
of options.
............................................................................. 31
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
The Fund is also subject to portfolio turnover risk. The Fund purchases and
sells securities to capture dividends on particular securities. The Fund will
purchase a security close to its ex-dividend date, thereby entitling the Fund
to receive the anticipated dividend. The Fund will then sell the security after
the ex-dividend date. This practice could result in the Fund experiencing an
annual turnover rate of up to 250%. High portfolio turnover rates lead to
increased costs, could cause you to pay higher taxes and could negatively
affect the performance of the Fund.
To the extent the Fund invests in REITs, it is subject to real estate
investment trust risks. Some of the risks of equity and mortgage REITs are that
they depend on management skills and are not diversified. As a result, REITs
are subject to the risk of financing either single projects or any number of
projects. REITs depend on heavy cash flow and may be subject to defaults by
borrowers and self-liquidation. Additionally, equity REITs may be affected by
any changes in the value of the underlying property owned by the trusts.
Mortgage REITs may be affected by the quality of any credit extended. The
Adviser tries to minimize these risks by selecting REITs diversified by sector
(i.e., shopping malls, apartment building complexes, health care facilities)
and geographic location. The Fund will generally be subject to risks associated
with direct ownership of real estate, such as decreases in real estate values
or fluctuations in rental income caused by a variety of factors, including
increases in interest rates, increases in property taxes and other operating
costs, casualty or condemnation losses, possible environmental liabilities and
changes in supply and demand for properties.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail B Shares from year to year; and (b) how the average annual returns of
the Fund's Retail B Shares compare to those of a broad-based securities market
index. The Fund began operations on December 12, 1994 as the Stellar Strategic
Income Fund (the "Predecessor Stellar Fund"), a separate portfolio of Firstar
Stellar Funds. On December 11, 2000, the Predecessor Stellar Fund was
reorganized as a new portfolio of Firstar Funds, Inc. upon the closing of
reorganizations between Firstar Funds, Inc. and each of Mercantile Mutual
Funds, Inc. and Firstar Stellar Funds (together, the "Firstar Reorganization").
The performance set forth below is based on the performance of a corresponding
class of the Predecessor Stellar Fund. The Fund's Retail A Shares commenced
operations on March 31, 2000. Because the Fund's Retail A Shares have less than
one calendar year's performance, no average annual returns are shown for them.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. The average annual total return
calculation reflects an assumed contingent deferred sales charge for Retail B
Shares (5% maximum declining to 0% after six years). Sales charges are not
reflected in the bar chart. If these amounts were reflected, returns would be
less than those shown.
................................................................................
32
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail B Shares)
1990
1991
1992
1993
1994
1995 13.24%
1996 5.29%
1997 9.49%
1998 (3.19)%
1999 (5.80)%
The Strategic Income Fund's total return for Retail B Shares for the nine-month
period ending September 30, 2000 was 9.58%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q2 '97 4.59%
Worst Quarter: Q1 '99 -2.72%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (December 12, 1994)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic Income Fund -
Retail B Shares -10.19% 3.40% -- 3.78%
Lehman Brothers Government/Credit
Bond Index -2.15% 7.61% -- 7.66%
</TABLE>
--------------------------------------------------------------------------------
The Lehman Brothers Government/Credit Bond Index is a widely-recognized
unmanaged index of bonds which have maturities of at least one year and are
rated investment grade or higher by Moody's, S&P or Fitch, in that order. The
Index figures do not reflect any fees or expenses. Investors cannot invest
directly in an Index.
............................................................................. 33
<PAGE>
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[LOGO OF FIRSTAR]
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Strategic Income Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 4.00% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.95% 0.95%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.54% 0.54%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 1.49% 2.24%
Fee Waivers and Expense
Reimbursements/6/ (0.04)% (0.54)%
------- -------
Net Annual Fund Operating Expenses/6/ 1.45% 1.70%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year,
declining to 1% in the sixth year. Thereafter Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the Strategic
Income Fund is 0.91% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed,
in the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year. The Fund has
contractually agreed to waive 12b-1 fees for Retail B Shares until October
31, 2001 so that such fees will not exceed 0.25% of the average daily net
assets of the Fund's Retail B Shares.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.45% and 1.70%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
................................................................................
34
<PAGE>
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[LOGO OF FIRSTAR]
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic Income Fund - Retail A Shares $542 $848 $1,177 $2,104
Strategic Income Fund - Retail B Shares
Assuming complete redemption at end of
period 672 946 1,345 2,158
Assuming no redemption 172 646 1,145 2,158
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
Tax-Exempt Intermediate Bond Fund
Objective
[GRAPHIC]
The investment objective of the Tax-Exempt Intermediate Bond Fund is to provide
current income that is substantially exempt from federal income tax and
emphasize total return with relatively low volatility of principal. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in investment-grade intermediate-term municipal
obligations issued by state and local governments exempt from federal income
tax. Except during temporary defensive periods, the Fund will invest at least
80% of its net assets in securities, the interest on which is exempt from
regular federal income and alternative minimum taxes and will invest at least
65% of its total assets in bonds and debentures. The Fund intends to maintain
an average weighted maturity between three and ten years. There is no limit on
the maturity of any individual security in the Fund, and the Fund may invest in
short-term municipal obligations and tax-exempt commercial paper.
The Adviser generally will sell a security when it, on a relative basis and in
the Adviser's opinion, will no longer help a Fund to maintain overall interest
rate sensitivity and return objectives.
In pursuing its investment objective, the Fund invests in a diversified
portfolio of municipal obligations (as defined above under "Tax-Exempt Money
Market Fund"). Municipal obligations purchased by the Fund will be:
.investment grade at the time of purchase (i.e., BBB by S&P or Fitch IBCA or
Baa by Moody's, or in the highest 4 categories by another nationally
recognized rating agency)
.unrated at the time of purchase but determined to be of comparable quality by
the Adviser
.municipal notes and other short-term obligations rated SP-1 by S&P or MIG-1 by
Moody's
.tax-exempt commercial paper rated A-1 or higher by S&P or VMIG-1 by Moody's
After purchase, a security may cease to be rated or may have its rating reduced
below the minimum rating required for purchase by the Fund. At that time, the
Adviser will consider whether to 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 if the securities exceed 5% of
the Fund's net assets.
............................................................................. 35
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Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk and tax risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Tax risk is the risk that the Fund may be
more adversely impacted by changes in tax rates and policies than other funds.
Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities.
The Fund may invest more than 25% of its total assets in municipal obligations
issued by persons located in the same state and the interest on which is paid
solely from revenues of similar projects. As a result, changes in economic,
business or political conditions relating to a particular state or types of
projects may have a disproportionate impact on the Fund's share price.
Municipal obligations which the Fund may acquire include municipal lease
obligations, which are issued by a state or local government or authority to
acquire land and a wide variety of equipment and facilities. 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.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. The average annual total return
calculation reflects a maximum initial sales charge of 4.00% for the Retail A
Shares, but for periods prior to January 10, 1995, performance does not reflect
service organization fees. If service organization fees were reflected,
performance would be reduced. Performance reflects fee waivers in effect. If
these fee waivers were not in place, the Fund's performance would be reduced.
The bar chart does not reflect the sales load applicable to Retail A and B
Shares. If the sales loads were reflected, performance would be reduced. The
Retail B Shares commenced operations on March 1, 1999. Because those shares
have less than one calendar year's performance, no average annual returns are
shown for that class in this section.
................................................................................
36
<PAGE>
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[LOGO OF FIRSTAR]
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[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991
1992
1993
1994 (1.73)%
1995 10.26%
1996 3.53%
1997 5.79%
1998 5.01%
1999 0.15%
The Tax-Exempt Intermediate Bond Fund's total return for Retail A Shares for
the nine-month period ending September 30, 2000 was 3.72%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q1 '95 3.88%
Worst Quarter: Q1 '94 -2.75%
------------------------------
</TABLE>
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (February 8, 1993)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Intermediate Bond Fund -
Retail A Shares -3.88% 4.03% -- 3.60%
Lehman Brothers 5-Year
General Obligation Bond Index 0.71% 5.81% -- 5.03%
</TABLE>
--------------------------------------------------------------------------------
The Lehman Brothers 5-year General Obligation Bond Index is a widely recognized
unmanaged index of bond prices compiled by Lehman Brothers. The Index figures
do not reflect any fees or expenses. Investors cannot invest directly in the
Index. To be included in this Index, a municipal bond must be a state or local
General Obligation bond; have a minimum credit rating of at least Baa; have
been issued as part of an offering of at least $50 million; have a minimum
amount outstanding of at least $3 million; have been issued within the last
five years; and have a maturity of four to six years.
............................................................................. 37
<PAGE>
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Tax-Exempt Intermediate Bond Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) 4.00% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.50% 0.50%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.61% 0.61%
------- -------
Total Annual Operating Expenses
(before waivers) 1.11% 1.86%
Fee Waivers and Expense
Reimbursements/6/ (0.11)% (0.11)%
------- -------
Net Annual Fund Operating Expenses/6/ 1.00% 1.75%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter, Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the Tax-Exempt
Intermediate Bond Fund is 0.39% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.00% and 1.75%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
................................................................................
38
<PAGE>
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Intermediate Bond Fund -Retail A
Shares $498 $728 $ 976 $1,687
Tax-Exempt Intermediate Bond Fund -Retail B
Shares
Assuming complete redemption at end of
period 678 874 1,195 1,793
Assuming no redemption 178 574 995 1,793
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
Missouri Tax-Exempt Bond Fund
Objective
[GRAPHIC]
The investment objective of the Missouri Tax-Exempt Bond Fund is to seek as
high a level of interest income exempt from federal income tax as is consistent
with conservation of capital. This investment objective may be changed by the
Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund normally invests at least 80% of its total assets in municipal
securities that pay interest that is exempt from federal income tax, and at
least 65% of its total assets in Missouri municipal securities, which are
securities issued by the State of Missouri and other government issuers and that
pay interest which is exempt from both federal income tax and Missouri state
income tax.
What Are Municipal Securities? State and local governments issue municipal
securities to raise money to finance public works, to repay outstanding
obligations, to raise funds for general operating expenses and to make loans to
other public institutions. Some municipal securities, known as private activity
bonds, are backed by private entities and are used to finance various non-public
projects. Municipal securities, which can be issued as bonds, notes or
commercial paper, usually have fixed interest rates, although some have interest
rates that change from time to time.
Municipal securities purchased by the Fund may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes of
the 80% requirement stated above. Under normal market conditions, the Fund's
investments in private activity bonds, together with any investments in taxable
obligations, will not exceed 20% of its total assets.
Average Weighted Maturity gives you the average time until all debt obligations,
including municipal securities, in the Fund come due or mature. It is calculated
by averaging the time to maturity of all debt obligations held by the Fund with
each maturity "weighted" according to the percentage of assets which it
represents.
.............................................................................39
<PAGE>
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[LOGO OF FIRSTAR]
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In selecting municipal securities for the Fund, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity.
The Fund will invest only in investment grade municipal securities. These are
securities which have one of the four highest ratings assigned by a national
rating agency, such as Standard & Poor's or Moody's, or are unrated securities
determined by the Adviser to be of comparable quality. Short-term municipal
securities purchased by the Fund, such as municipal notes and tax-exempt
commercial paper, will have one of the two highest ratings assigned by a
national rating agency or will be unrated securities that the Adviser has
determined to be of comparable quality. Occasionally, the rating of a security
held by the Fund may be downgraded below the minimum required rating. If that
happens, the Fund does not have to sell the security unless the Adviser
determines that under the circumstances the security is no longer an
appropriate investment for the Fund.
The remaining maturity (i.e., length of time until an obligation must be
repaid) of the obligations held by the Fund will vary from one to 30 years. The
Fund's average weighted maturity will vary from time to time depending on
current economic and market conditions and the Adviser's assessment of probable
changes in interest rates.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk, prepayment risk and tax risk. Credit risk is the risk that an issuer of
fixed income securities may default on its obligation to pay interest and repay
principal. Interest rate risk is the risk that, when interest rates increase,
fixed income securities, including municipal securities, will decline in value.
The ability of a state or local government issuer to make payments can be
affected by many factors, including economic conditions, the flow of tax
revenues and changes in the level of federal, state or local aid. Some
municipal securities are payable only from limited revenue sources or by
private entities. Prepayment risk is the risk that an issuer will exercise its
right to pay principal on an obligation paid by the Fund earlier than expected.
This may happen when there is a decline in interest rates. These events may
make the Fund unable to recoup its initial investment and may result in reduced
yields. Tax risk is the risk that the Fund may be more adversely impacted by
changes in tax rates and policies than other funds. Obligations rated in the
lowest of the top four rating categories are considered to have speculative
characteristics and are subject to greater credit and interest rate risk than
higher rated securities.
Municipal obligations which the Fund purchases may be backed by letters of
credit issued by banks and other financial institutions. Adverse developments
affecting banks could have a negative effect on the Fund's portfolio
securities.
The Fund is also subject to Missouri state-specific risks, as it may invest at
least 65% of its total assets in municipal obligations issued by entities
located in the state of Missouri and the interest on which is paid solely from
revenues of similar projects. Missouri's economy is largely comprised of
services, manufacturing (primarily defense, transportation and other durable
goods), wholesale and retail trade, and state and local government. The
exposure to these industries leaves Missouri vulnerable to an economic slowdown
associated with the business cycles of such industries. Because defense-related
business plays an important role in Missouri's economy, declining defense
appropriations, military base closings in Missouri and federal downsizing also
may continue to have an adverse impact on the State. From time to time,
Missouri's political subdivisions have encountered financial difficulties.
................................................................................
40
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Investing in the Fund has added risks because the Fund is a non-diversified
fund under the 1940 Act, subjecting the Fund to non-diversification risks.
Compared with other mutual funds, this Fund may invest a greater percentage of
its assets in a more limited number of issues concentrated in one state which,
as a result, can increase the Fund's volatility. The value of the Fund's
securities can be impacted by economic or political developments affecting
certain securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. An investment in a Fund involves risk, including the risk of losing
money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A and Retail B Shares compare to those of a broad-based
securities market index. The Fund began operations on July 15, 1988 as the
Mercantile Missouri Tax-Exempt Bond Portfolio, a separate portfolio of
Mercantile Mutual Funds, Inc. (the "Predecessor Mercantile Portfolio"). On
December 11, 2000, the Predecessor Mercantile Portfolio was reorganized as a
new portfolio of Firstar Funds, Inc. upon the closing of reorganizations
between Firstar Funds, Inc. and each of Mercantile Mutual Funds, Inc. and
Firstar Stellar Funds (together, the "Firstar Reorganization"). The performance
set forth below is based on the performance of corresponding classes of the
Predecessor Mercantile Portfolio.
The Predecessor Mercantile Portfolio commenced operations on July 15, 1988 as a
separate investment portfolio (the "Predecessor ARCH Portfolio") of The ARCH
Tax-Exempt Trust. On October 2, 1995, the Predecessor ARCH Portfolio was
reorganized as a new portfolio of Mercantile Mutual Funds, Inc. Prior to that
reorganization, the Predecessor ARCH Portfolio offered and sold shares that
were similar to the Fund's Institutional Shares. Total returns for periods
prior to October 2, 1995 reflect the performance of Institutional Shares of the
Predecessor ARCH Portfolio.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. The average annual total return
calculation reflects a maximum initial sales charge of 4.00% for the Retail A
Shares and an assumed contingent deferred sales charge for Retail B Shares (5%
maximum declining to 0% after six years). Sales charges are not reflected in
the bar chart. If these amounts were reflected, returns would be less than
those shown.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991 11.52%
1992 8.75%
1993 11.63%
1994 (5.78)%
1995 16.89%
1996 2.90%
1997 8.08%
1998 5.11%
1999 (3.08)%
The Missouri Tax-Exempt Bond Fund's total return for Retail A Shares for the
nine-month period ending September 30, 2000 was 6.17%.
............................................................................. 41
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 1 '95 7.58%
Worst Quarter: Q 1 '94 -5.57%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A and Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Missouri Tax-Exempt Bond Fund -
Retail A Shares -6.92% 4.93% -- 5.76%
(September 28, 1990)
Lehman Brothers Municipal Bond
Index -2.06% 6.91% -- 5.91%
(September 30, 1990)
Missouri Tax-Exempt Bond Fund -
Retail B Shares -8.47% -- -- 3.60%
(March 7, 1995)*
Lehman Brothers Municipal Bond
Index -2.06% 6.91% -- 7.14%
(February 28, 1995)
</TABLE>
--------------------------------------------------------------------------------
* Date of initial public investment.
The Lehman Brothers Municipal Bond Index is a widely-recognized unmanaged index
that tracks the performance of municipal bonds. The Index figures do not
reflect any fees or expenses. Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Missouri Tax-Exempt Bond Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 4.00% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees 0.45% 0.45%
Distribution and Service (12b-1)
Fees/3/ 0.00% 0.75%
Other Expenses/4/ 0.52% 0.52%
----- -----
Total Annual Fund Operating Ex-
penses/5/ 0.97% 1.72%
===== =====
</TABLE>
--------------------------------------------------------------------------------
................................................................................
42
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter, Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
4 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
5 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.97% and 1.72%, respectively, of the Fund's average daily assets for
the current fiscal year. The fee waivers and expense reimbursements may be
terminated at any time after October 31, 2001 at the discretion of the
service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Missouri Tax-Exempt Bond Fund -Retail A
Shares $495 $697 $ 915 $1,542
Missouri Tax-Exempt Bond Fund - Retail B
Shares
Assuming complete redemption at end of
period 675 842 1,133 1,649
Assuming no redemption 175 542 933 1,649
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
National Municipal Bond Fund
Objective
[GRAPHIC]
The investment objective of the National Municipal Bond Fund is to seek as high
a level of current income exempt from regular federal income tax as is
consistent with conservation of capital. The investment objective may be
changed by the Board of Directors without approval of Shareholders, although no
change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund normally invests at least 80% of its total assets in municipal
securities that pay interest which is exempt from federal income tax. Municipal
securities purchased by the Fund may include general obligation securities,
revenue securities and private activity bonds. General obligation securities
are secured by the issuer's full faith, credit and taxing power. Revenue
securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under
............................................................................. 43
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
normal market conditions, the Fund's investments in private activity bonds and
taxable obligations will not exceed 20% of its total assets.
In selecting municipal securities for the Fund, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity. The Adviser also attempts to maintain a
broad geographic diversification for the Fund, with emphasis on no particular
state.
The Fund will invest only in investment grade municipal securities. These are
securities which have one of the four highest ratings assigned by a national
rating agency, such as S&P's or Moody's or are unrated securities determined by
the Adviser to be of comparable quality. Short-term municipal securities
purchased by the Fund, such as municipal notes and tax-exempt commercial paper,
will have one of the two highest ratings assigned by a national rating agency
or will be unrated securities that the Adviser has determined to be of
comparable quality. Occasionally, the rating of a security held by the Fund may
be downgraded to below the minimum required rating. If that happens, the Fund
does not have to sell the security unless the Adviser determines that under the
circumstances the security is no longer an appropriate investment for the Fund.
The Fund's average weighted maturity will vary from time to time depending on
current economic and market conditions and the Adviser's assessment of probable
changes in interest rates. The Fund's average weighted maturity generally will
be 10 years or less.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk and tax risk. Credit risk is the risk that an issuer of fixed-income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed-income
securities will decline in value. Tax risk is the risk that the Fund may be
more adversely impacted by changes in tax rates and policies than other funds.
Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities.
The Fund is also subject to extension risk and prepayment risk. Extension risk
is the risk that an issuer will exercise its right to pay principal on an
obligation held by the Fund later than expected. This may happen when there is
a rise in interest rates. Under such circumstances, the value of the obligation
will decrease and the Fund will also suffer from the inability to invest in
higher yielding securities. Prepayment risk is the risk that an issuer will
exercise its rights to pay principal on an obligation held by the Fund earlier
than expected. This may happen when there is a decline in interest rates. These
events may make the Fund unable to recoup its initial investment and may result
in reduced yields.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. The ability of a state or local government issuer to make
payments can be affected by many factors, including economic conditions, the
flow of tax revenues and changes in the level of federal, state or local aid.
Some municipal securities are payable only from limited revenue sources or by
private entities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
................................................................................
44
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A and Retail B Shares compare to those of a broad-based
securities market index. The Fund began investment operations on November 18,
1996 as the Mercantile National Municipal Bond Portfolio, a separate portfolio
of Mercantile Mutual Funds, Inc. ( a "Predecessor Mercantile Portfolio"). On
November 27, 2000, the Predecessor Mercantile Portfolio was reorganized as a
new portfolio of Firstar Mutual Funds, Inc. upon the closing of reorganizations
between Firstar Funds, Inc. and each of Mercantile Funds, Inc. and Firstar
Stellar Funds (together, the "Firstar Reorganization"). The performance set
forth below is based on the performance of corresponding classes of the
Predecessor Mercantile Portfolio. The Predecessor Mercantile Portfolio was
managed by a different investment adviser for the periods shown below until
March 1, 2000. See "Management of the Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
The average annual total return calculation reflects a maximum initial sales
charge of 4.00% for the Retail A Shares and an assumed contingent deferred
sales charge for Retail B Shares (5% maximum declining to 0% after six years).
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart. If these amounts were reflected, returns would be less than
those shown.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991
1992
1993
1994
1995
1996
1997 9.94%
1998 5.94%
1999 (4.33)%
The National Municipal Bond Fund's total return for Retail A Shares for the
nine-month period ending September 30, 2000 was 7.24%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 3 '97 3.72%
Worst Quarter: Q 2 '99 -2.76%
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 45
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A and Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (Inception date)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National Municipal Bond Fund -
Retail A Shares -8.12% -- -- 2.31%
(November 18, 1996)
Retail B Shares -9.95% -- -- 1.94%
(November 18, 1996)
Lehman Brothers Municipal Bond
Index - 10 Year -1.25% -- -- 4.53%
(November 30, 1996)
</TABLE>
--------------------------------------------------------------------------------
The Lehman Brothers Municipal Bond Index-10 Year is a widely-recognized
unmanaged index that tracks the performance of municipal bonds with remaining
maturities of 10 years or less. The Index figures do not reflect any fees or
expenses. Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the National Municipal Bond Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 4.00% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees 0.55% 0.55%
Distribution and Service (12b-1)
Fees/3/ 0.00% 0.75%
Other Expenses/4/ 0.46% 0.46%
----- -----
Total Annual Fund Operating
Expenses/5/ 1.01% 1.76%
===== =====
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth years, 2% in the fifth year,
declining to 1% in the sixth year. Thereafter, Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
................................................................................
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4 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
5 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001 so that Net Annual Fund Operating Expenses will be no more
than 1.01% and 1.76%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National Municipal Bond Fund -
Retail A Shares $499 $709 $ 936 $1,587
National Municipal Bond Fund - Retail B
Shares
Assuming complete redemption at end of
period 679 854 1,154 1,693
Assuming no redemption 179 554 954 1,693
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used for Retail B Shares in the hypothetical
example after year six.
--------------------------------------------------------------------------------
Balanced Income Fund
Objective
[GRAPHIC]
The investment objective of the Balanced Income Fund is to provide current
income and the preservation of capital by investing in a balanced portfolio of
dividend-paying equity and fixed-income securities. This investment objective
may be changed by the Board of Directors without approval of Shareholders,
although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund selects and purchases common stocks of domestic companies that have a
history of paying dividends. The Fund selects fixed-income securities, which
the Adviser believes will provide an annual rate of total return similar to
that of the Lehman Intermediate Index. That Index is described under "Short-
Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund - Description
of Bond Indices."
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
............................................................................. 47
<PAGE>
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--------------------------------------------------------------------------------
The Fund plans to use a 50/50 method to invest its total assets - that means
50% in equity securities and 50% in fixed-income securities.
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Equity Securities 50% (no less than 20%, no more than 60%)
Fixed Income Securities 50% (no less than 40%)
</TABLE>
--------------------------------------------------------------------------------
NOTE: The actual percentage of assets invested in fixed income and equity
securities will vary from time to time, depending on the judgment of the Adviser
as to the general market and economic conditions, trends and yields, interest
rates and fiscal and monetary developments.
Equity Securities
The Fund primarily invests in common stock of domestic companies the Adviser
considers to be well managed and to have "attractive fundamental financial
characteristics." The Adviser also generally looks for companies with stock
market capitalizations over $750 million. Stock market capitalizations are
calculated by multiplying the total number of common shares outstanding by the
market price per share.
The Adviser looks for companies with attractive fundamental financial
characteristics such as:
1. low debt
2. high return on equity
3. consistent revenue and earnings per share growth over the prior three to five
years
The Fund may also acquire bonds, notes, debentures and preferred stocks
convertible into common stocks if they provide a current interest or dividend
stream, and may invest up to 5% of its net assets in other types of domestic
securities having common stock characteristics, such as rights and warrants to
purchase equity securities.
Fixed Income
The Fund may purchase the following types of fixed-income securities. There are
no maturity limitations.
.Corporate
.U.S. government agency
.Asset-backed and mortgage-backed obligations
.U.S. government
.U.S. Treasury
.Stripped U.S. government
.Money market instruments
Except for convertible securities, the Fund will purchase only debt obligations
rated investment grade by at least one rating agency or unrated obligations
deemed by the Adviser to be comparable in quality. See "Short-Term Bond Fund,
Intermediate Bond Fund and Bond IMMDEX(TM) Fund" for a description of
investment-grade securities. After purchase, a security may cease to be rated
or may have its rating reduced below the minimum rating required for purchase
by the Fund. The Adviser will consider whether to continue to hold the
security.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to market risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. Fixed-income securities in which the Fund invests are
subject to credit risk and interest rate risk. Credit risk is the risk that an
issuer of fixed income securities may default on its obligation to pay interest
and repay principal. Interest rate risk is the risk that, when interest rates
increase, fixed income securities will decline in value. In particular,
convertible securities frequently have speculative characteristics and may be
acquired without regard to minimum quality ratings. The Fund intends to invest
no more than 5% of net
................................................................................
48
<PAGE>
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assets in securities rated non-investment grade by at least one rating agency
at the time of purchase or unrated securities of comparable quality.
Convertible securities and obligations rated in the lowest of the top four
rating categories are subject to greater credit and interest rate risk than
higher rated securities. Stripped securities are subject to greater interest
rate risk than other more typical fixed income securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Extension risk is the risk that an issuer
will exercise its right to pay principal on an obligation held by a Fund (such
as a mortgage- or asset-backed security) later than expected. This may happen
when there is a rise in interest rates. Under such circumstances, the value of
the obligation will decrease and a Fund will also suffer from the inability to
invest in higher yielding securities. Prepayment risk is the risk that an
issuer will exercise its right to pay principal on an obligation held by a Fund
(such as a mortgage- or asset-backed security) earlier than expected. This may
happen when there is a decline in interest rates. These events may make a Fund
unable to recoup its initial investment and may result in reduced yields.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. The average annual total return
calculation reflects a maximum initial sales charge of 5.50% for the Retail A
Shares, but for periods prior to January 10, 1995, performance does not reflect
service organization fees. If service organization fees had been reflected,
performance would be reduced. Performance reflects fee waivers in effect. If
these fee waivers were not in place, the Fund's performance would be reduced.
Sales charges are not reflected in the bar chart. If the sales loads were
reflected, performance would be reduced. The Retail B Shares commenced
operations on March 1, 1999. Because those shares have less than one year's
performance, no average annual returns are shown for that class in this
section.
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
[GRAPH]
1990 4.54%
1991 31.92%
1992 8.74%
1993 8.60%
1994 -2.00%
1995 25.41%
1996 17.71%
1997 22.77%
1998 16.52%
1999 1.14%
The Balanced Income Fund's total return for Retail A Shares for the nine-month
period ending September 30, 2000 was 6.65%.
............................................................................. 49
<PAGE>
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--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q2 '97 10.34%
Worst Quarter: Q3 '90 -5.49%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
---------------------------------------------------
<S> <C> <C> <C>
Balanced Income Fund -
Retail A Shares -4.44% 15.17% 12.45%
S&P 500 Index 21.04% 28.86% 18.21%
Lipper Balanced Fund Index 8.98% 16.33% 12.26%
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The Lipper Balanced Fund Index is composed of the 30 largest mutual
funds whose primary objective is to conserve principal by maintaining a
balanced portfolio of stocks and bonds. The S&P 500 Index figures do not
reflect any fees or expenses. Investors cannot invest directly in the Index.
The performance of Firstar Balanced Income Fund for the period prior to
December 1, 1997 is the performance of a common trust fund managed by Firstar
Investment Research & Management Company, LLC ("FIRMCO") which operated during
the periods prior to commencement of operations of the Firstar Balanced Income
Fund using materially equivalent investment objectives, policies, guidelines
and restrictions as Firstar Balanced Income Fund. The common trust fund
transferred its assets to the Balanced Income Fund at the commencement of
operations. At the time of the transfer, the Adviser did not manage any other
collective investment or common trust funds using materially equivalent
investment objectives, policies, guidelines and restrictions to those of the
Balanced Income Fund. The common trust fund was not registered under the
Investment Company Act of 1940 (the "1940 Act"), and was not subject to certain
restrictions that are imposed by the 1940 Act and the Internal Revenue Code. If
the common trust fund had been registered under the 1940 Act, performance may
have been adversely affected. The performance of the common trust fund has been
restated to reflect Firstar Balanced Income Fund's expenses for its first year
of operations.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Balanced Income Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
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50
<PAGE>
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.75% 0.75%
Distribution and Service
(12b-1) Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.58% 0.58%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 1.33% 2.08%
Fee Waivers and Expense
Reimbursements/6/ (0.11)% (0.11)%
------- -------
Net Annual Fund Operating Expenses/6/ 1.22% 1.97%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter, Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the Balanced Income
Fund is 0.64% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.22% and 1.97%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Income Fund - Retail A Shares $667 $938 $1,228 $2,053
Balanced Income Fund - Retail B Shares
Assuming complete redemption at end of
period 700 941 1,307 2,031
Assuming no redemption 200 641 1,107 2,031
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
............................................................................. 51
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Balanced Growth Fund
Objective
[GRAPHIC]
The investment objective of the Balanced Growth Fund is to achieve a balance of
capital appreciation and current income with relatively low volatility of
capital. This investment objective may be changed by the Board of Directors
without approval of Shareholders, although no change is anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in a diversified portfolio of fixed-income and
equity securities. Equity securities are selected on the basis of their
potential for capital appreciation. The Fund selects fixed-income securities
which the Adviser believes will provide an annual rate of total return similar
to that of the Lehman Brothers Government/Credit Bond Index. That Index is
described under "Short-Term Bond Fund, Intermediate Bond Fund and Bond
IMMDEX(TM) Fund - Description of Bond Indices."
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
The Fund's policy is to invest at least 25% of the value of its total assets in
fixed-income senior securities and at least 50% and no more than 65% in equity
securities at all times.
Investment Policy
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Fixed Income at least 25%
Equity Securities at least 50% (no more than 65%)
</TABLE>
--------------------------------------------------------------------------------
NOTE: The actual percentage of assets invested in
fixed-income and equity securities will vary from
time to time, depending on the judgment of the
Adviser as to the general market and economic
conditions, trends and yields, interest rates and
fiscal and monetary developments.
Equity Securities
The Fund primarily invests in common stock of domestic and foreign companies
that the Adviser considers to be well managed and to have attractive
fundamental financial characteristics (see box on page 48 for examples of these
characteristics). The Adviser also generally looks for companies with stock
market capitalizations between $100 million and $100 billion. The Fund may also
invest from time to time a portion of its assets in companies with larger or
smaller market capitalizations.
The Fund may also acquire preferred stocks. In addition, the Fund may invest in
domestic securities convertible into common stock, such as certain bonds and
preferred stocks, and may invest up to 5% of its net assets in other types of
domestic securities having common stock characteristics, such as rights and
warrants to purchase equity securities.
Fixed Income
The Fund may purchase the following types of fixed income securities. There are
no maturity limitations.
.Corporate .U.S. Treasury
.U.S. government agency .Stripped U.S. government
.Asset-backed and .Money market instruments
mortgage-backed
obligations
.U.S. government
Except for convertible securities the Fund will only acquire debt obligations
that are rated "investment- grade" by at least one rating agency or unrated
obligations deemed by the Adviser to be comparable in quality. See "Short-Term
Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund" for a description
of investment grade securities. After purchase, a security may cease to be
rated or may have its
................................................................................
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<PAGE>
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rating reduced below the minimum rating required for purchase by the Fund. The
Adviser will consider whether to continue to hold the security.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to market risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. Fixed income securities in which the Fund invests are
subject to credit risk and interest rate risk. Credit risk is the risk that an
issuer of fixed income securities may default on its obligation to pay interest
and repay principal. Interest rate risk is the risk that, when interest rates
increase, fixed income securities will decline in value. In particular,
convertible securities frequently have speculative characteristics and may be
acquired without regard to minimum quality ratings. The Fund intends to invest
no more than 5% of net assets in securities rated non-investment grade by at
least one rating agency at the time of purchase or unrated securities of
comparable quality. Convertible securities and obligations rated in the lowest
of the top four rating categories are subject to greater credit and interest
rate risk than higher rated securities. Stripped securities are subject to
greater interest rate risk than other more typical fixed income securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise react in tandem with
interest rate changes or market moves and may be leveraged. Extension risk is
the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage- or asset-backed security) later
than expected. This may happen when there is a rise in interest rates. Under
such circumstances, the value of the obligation will decrease and a Fund will
also suffer from the inability to invest in higher yielding securities.
Prepayment risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Fund (such as a mortgage- or asset-backed
security) earlier than expected. This may happen when there is a decline in
interest rates. These events may make a Fund unable to recoup its initial
investment and may result in reduced yields.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of a Fund's
Retail A Shares from year to year, and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. The average annual total return
calculation reflects a maximum initial sales charge of 5.50% for the Retail A
Shares, but for periods prior to January 10, 1995, performance does not reflect
service organization fees. If service organization fees were reflected,
performance would be reduced. Sales charges are not reflected in the bar chart.
If the sales loads were reflected, returns would be reduced. Performance
reflects fee waivers in effect. If these fee waivers were not in place, the
Fund's performance would have been reduced. The Retail B Shares commenced
operations on March 1, 1999. Because those shares have less than one calendar
year's performance, no average annual returns are shown for that class in this
section.
............................................................................. 53
<PAGE>
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Year-by-year total return as of 12/31 each year (%)(Retail A Shares)
[GRAPH]
1990
1991
1992
1993 8.24%
1994 (4.27)%
1995 26.23%
1996 12.31%
1997 17.22%
1998 16.20%
1999 4.02%
The Balanced Growth Fund's total return for Retail A Shares for the nine-month
period ending September 30, 2000 was 11.88%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q3 '98 14.02%
Worst Quarter: Q4 '98 -8.04%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (March 30, 1992)
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Growth Fund -
Retail A Shares -1.71% 13.67% -- 10.52%
S&P 500 Index 21.04% 28.86% -- 20.78%
Lipper Balanced Fund Index 8.98% 16.33% -- 12.52%
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The Lipper Balanced Fund Index is composed of the 30 largest mutual
funds whose primary objective is to conserve principal by maintaining a
balanced portfolio of stocks and bonds. The S&P 500 Index figures do not
reflect any fees or expenses. Investors cannot invest directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Balanced Growth Fund.
................................................................................
54
<PAGE>
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Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.75% 0.75%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.52% 0.52%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 1.27% 2.02%
Fee Waivers and Expense
Reimbursements/6/ (0.05)% (0.05)%
------- -------
Net Annual Fund Operating Expenses/6/ 1.22% 1.97%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter, Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the Balanced Growth
Fund is 0.70% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.22% and 1.97%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
............................................................................. 55
<PAGE>
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Growth Fund - Retail A Shares $667 $926 $1,204 $1,995
Balanced Growth Fund - Retail B Shares
Assuming complete redemption at end of
period 700 928 1,283 1,973
Assuming no redemption 200 628 1,083 1,973
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
Growth & Income Fund
Objective
[GRAPHIC]
The investment objective of the Growth & Income Fund is to seek both reasonable
income and long-term capital appreciation. This investment objective may be
changed by the Board of Directors without approval of Shareholders, although no
change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Common Stocks
The Fund selects common stocks primarily from a universe of domestic companies
that have established dividend-paying histories. During normal market
conditions, at least 50% of the Fund's net assets will be invested in equities.
The Fund will not purchase a non-dividend paying security if immediately after
giving effect to such purchase less than 80% of the net assets of the Fund will
be invested in dividend paying securities.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
Medium- to Large-Sized Companies
The Fund generally invests in medium- to large-sized companies with stock
market capitalizations over $1 billion that the Adviser considers to be well
managed and to have attractive fundamental financial characteristics (see box
on page 48 for examples of these characteristics). The Fund may also invest a
portion of its assets in companies with smaller market capitalizations.
Other
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks, if they provide a current interest or dividend
payment.
To the extent consistent with its objective, the Fund may purchase non-
convertible debt and preferred stocks that in the opinion of the Adviser
present opportunities for capital appreciation. These obligations must be
investment grade at time of purchase or unrated but deemed comparable by the
Adviser. See "Short-Term
................................................................................
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Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund" for a description
of investment-grade securities. After purchase, a security may cease to be
rated or may have its rating reduced below the minimum rating required by the
Fund for purchase. The Adviser will consider whether to continue to hold the
security.
Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. The Fund intends to invest no more than 5% of net
assets in securities rated non-investment grade at the time of purchase or
unrated securities of comparable quality. Convertible securities and
obligations rated in the lowest of the top four rating categories have
speculative characteristics and are subject to greater credit and interest rate
risk than higher rated securities. The Fund's options and futures transactions
involve derivatives risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise not react in tandem
with interest rate changes or market moves and may be leveraged.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year, and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. The average annual total return
calculation reflects a maximum initial sales charge of 5.50% for the Retail A
Shares, but for periods prior to January 10, 1995, performance does not reflect
service organization fees. If service organization fees were reflected,
performance would be reduced. Sales charges are not reflected in the bar chart.
If the sales loads were reflected, returns would be reduced. Performance
reflects fee waivers in effect. If these fee waivers were not in place, the
Fund's performance would be reduced. The Retail B Shares commenced operations
on March 1, 1999. Because those shares have less than one calendar year's
performance, no average annual returns are shown for that class in this
section.
............................................................................. 57
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Year-by-year total return as of 12/31 each year (%)(Retail A Shares)
[GRAPH]
1990 -0.28%
1991 22.22%
1992 5.48%
1993 6.64%
1994 0.14%
1995 34.53%
1996 24.70%
1997 33.23%
1998 22.44%
1999 2.75%
The Growth & Income Fund's total return for Retail A Shares for the nine-month
period ending September 30, 2000 was 8.53%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 17.70%
Worst Quarter: Q 3 '98 -9.30%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
-----------------------------------------------
<S> <C> <C> <C>
Growth & Income Fund -
Retail A Shares -2.91% 21.59% 13.82%
S&P 500 Index 21.04% 28.56% 18.21%
Custom Index 16.88% 25.75% 16.79%
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The Custom Index is comprised of 50% of returns of the S&P 500 index
and 50% of returns of the S&P BARRA Value Index. The S&P BARRA Value Index is
an unmanaged market capitalization weighted index consisting of approximately
50% of the stocks in the S&P 500 index with low price-to-book ratios. The Index
figures do not reflect any fees or expenses. Investors cannot invest directly
in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Growth & Income Fund.
................................................................................
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Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees 0.75% 0.75%
Distribution and Service (12b-1)
Fees/3/ 0.00% 0.75%
Other Expenses/4/ 0.44% 0.44%
----- -----
Total Annual Fund Operating
Expenses/5/ 1.19% 1.94%
===== =====
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter, Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
4 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
5 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001 so that Net Annual Fund Operating Expenses will be no more
than 1.19% and 1.94%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
............................................................................. 59
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth & Income Fund - Retail A Shares $665 $907 $1,168 $1,914
Growth & Income Fund - Retail B Shares
Assuming complete redemption at end of
period 697 909 1,247 1,891
Assuming no redemption 197 609 1,047 1,891
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
Equity Income Fund
Objective
[GRAPHIC]
The investment objective of the Equity Income Fund is to seek to provide an
above-average level of income consistent with long-term capital appreciation.
This investment objective may be changed by the Board of Directors without
approval of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests primarily in the common stocks of value companies with large
market capitalizations (generally, $5 billion or higher). In selecting these
stocks, the Adviser evaluates a number of quantitative factors, including
dividend yield, current and future earnings potential compared to stock prices
and total return potential. The Adviser also examines other measures of
valuation, including cash flow, asset value and book value.
Market capitalization is a common measure of the size of a company. It is the
market price of a share of the company's stock multiplied by the number of
outstanding shares.
Under normal market conditions, the Fund invests at least 65% of its total
assets in income-producing (dividend-paying) equity securities, primarily
common stocks. These stocks generally will be listed on a national stock
exchange or will be unlisted stocks with established over-the-counter markets.
Many such stocks may offer above-average dividend yields, with corresponding
above-average levels of income, in each case as compared to the S&P 500 Index.
Value stocks are those that appear to be underpriced based on valuation
measures, such as lower price-to-earnings and price-to-book value ratios.
The Fund may emphasize, from time to time, particular companies or market
sectors, in attempting to achieve its investment objective.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk and value style investing risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. In addition, different types of equity securities tend to
shift in and out of favor depending on market and economic conditions. Value
style investing risk is the risk that the
................................................................................
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performance resulting from the Fund's "value" investment style may sometimes be
lower than that of other types of equity funds, such as those focusing more
exclusively on growth in earnings.
To the extent that the Fund emphasizes particular companies or market sectors,
such as technology, it will be especially susceptible to market sector risk.
Stocks of technology companies may be subject to greater price volatility than
stocks of companies in other sectors. Technology companies may produce or use
products or services that prove commercially unsuccessful, become obsolete or
become adversely impacted by government regulation. Technology stocks may
experience significant price movements caused by disproportionate investor
optimism or pessimism.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A and Retail B Shares compare to those of a broad-based
securities market index. The Fund began operations on February 27, 1997 as the
Mercantile Equity Income Portfolio a separate portfolio of Mercantile Mutual
Funds, Inc. (the "Predecessor Mercantile Portfolio"). On December 11, 2000, the
Predecessor Mercantile Portfolio was reorganized as a new portfolio of Firstar
Funds, Inc. upon the closing of reorganizations between Firstar Funds, Inc. and
each of Mercantile Mutual Funds, Inc. and Firstar Stellar Fund (together, the
"Firstar Reorganization"). The performance set forth below is based on the
performance of corresponding classes of the Predecessor Mercantile Portfolio.
The Predecessor Mercantile Portfolio was managed by a different investment
adviser for the periods shown below until March 1, 2000. See "Management of the
Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If the fee waivers were not in
place, performance would be reduced. Sales charges are not reflected in the bar
chart. If these amounts were reflected, returns would be less than those shown.
The average annual total return calculations reflect a maximum initial sales
charge of 5.50% for the Retail A Shares and an assumed contingent deferred
sales charge for Retail B Shares (5% maximum declining to 0% after six years).
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991
1992
1993
1994
1995
1996
1997
1998 10.82%
1999 (2.98)%
The Equity Income Fund's total return for Retail A Shares for the nine-month
period ending September 30, 2000 was 4.85%.
............................................................................. 61
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--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '97 14.36%
Worst Quarter: Q 3 '98 -8.77%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A and Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Income Fund -
Retail A Shares -8.36% -- -- 7.66%
(February 27, 1997)
Retail B Shares -7.85% -- -- 8.42%
(February 27, 1997)
Russell 1000 Value Index 7.35% -- -- 17.41%
(February 28, 1997)
S&P BARRA Value Index 12.72% -- -- 17.87%
(February 28, 1997)
</TABLE>
--------------------------------------------------------------------------------
The Russell 1000 Value Index is a widely-recognized unmanaged index that
measures the performance of the stocks in the Russell 1000 Index with less than
average growth orientation. Companies in this Index generally have low price to
book and price/earnings ratios, higher dividend yields and lower forecasted
growth values. The Russell 1000 Index consists of the 1,000 largest U.S.
companies as ranked by total market capitalization. The comparative index for
the Equity Income Fund has been changed from the Russell 1000 Value Index to
the S&P BARRA Value Index. The S&P BARRA Value Index, an unmanaged
capitalization weighted index, is a more widely-recognized index which
represents the value components of the market capitalizations reflected in the
Fund. The Index figures do not reflect any fees or expenses. Investors cannot
invest directly in an Index.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Equity Income Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.75% 0.75%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.53% 0.53%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 1.28% 2.03%
Fee Waivers and Expense
Reimbursements/6/ (0.03)% (0.03)%
------- -------
Net Annual Fund Operating Expenses/6/ 1.25% 2.00%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year,
declining to 1% in the sixth year. Thereafter, Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each
non-systematic withdrawal from a Retirement Account for which Firstar Bank,
N.A. is custodian.
3 As a result of fee waivers, the current management fee of the Equity Income
Fund is 0.72% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed,
in the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees
and all other ordinary operating expenses of the Fund not listed above; and
(2) the payment of a shareholder servicing fee to institutions under a
service plan (described below under the heading "Investing with Firstar
Funds - Shareholder Organizations") equal to up to 0.25% of the average
daily net assets of the Fund's Retail A Shares and Retail B Shares,
respectively.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be
no more than 1.25% and 2.00%, respectively, of the Fund's average daily net
assets for the current fiscal year. The fee waivers and expense
reimbursements may be terminated at any time after October 31, 2001 at the
discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Income Fund - Retail A Shares $670 $931 $1,211 $2,007
Equity Income Fund - Retail B Shares
Assuming complete redemption at end of
period 703 934 1,290 1,986
Assuming no redemption 203 634 1,090 1,986
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
............................................................................. 63
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Relative Value Fund
Objective
[GRAPHIC]
The investment objective of the Relative Value Fund is to obtain the highest
total return from a combination of income and capital appreciation. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
To achieve its objective, the Fund invests primarily in common stocks. The
stocks in which the Fund may invest include stocks that the Adviser believes
represent the best values within each industry sector. In the Adviser's
opinion, stocks with the best values present characteristics consistent with
low volatility, above average yields, and are under valued relative to the
stocks comprising the Standard & Poor's 500 Composite Stock Price Index. Under
normal circumstances, the Fund will invest at least 70% of its assets in common
stocks, which to a limited extent may include stocks of foreign issuers. To
obtain income, the Fund may invest a significant portion of its assets in
investment grade fixed-income securities such as domestic issues of corporate
debt obligations with short and intermediate terms. In this manner, the Fund
will attempt to obtain the highest total return that it can within the
constraints of its investment policies and restrictions.
The Adviser uses traditional research techniques when choosing which stocks to
invest in. The Adviser selects securities and attempts to maintain an
acceptable level of risk largely through the use of automated quantitative
measurement techniques. The Adviser considers the following "value"
characteristics when using this research technique:
.price/earnings ratios,
.dividend yield,
.book value,
.assets to liabilities ratio,
.management ownership,
.average daily trading volume, and
.credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The Adviser uses the quantitative model together with economic forecasts and
assessment of the risk and volatility of the company's industry. The Adviser
assesses the earnings and dividend growth prospects of the various companies'
stock and then considers the risk and volatility of the company's industry. The
Adviser typically invests in common stocks of companies that are in the top 25%
of their industries with regard to revenues. The Adviser also considers other
factors such as product position or market share.
Temporary Investments
To respond to adverse market, economic, political or other conditions, the Fund
may invest up to 100% of its assets in short-term temporary investments. Some
of the short-term money market instruments include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements
To the extent that the Fund engages in this temporary, defensive strategy, the
Fund may not achieve its investment objective.
Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk and value style investing risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. In addition, different types of equity securities tend to
shift in and out of favor depending on market and economic conditions. Value
style investing risk is the risk that the
................................................................................
64
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performance resulting from the Fund's "value" investment style may sometimes be
lower than that of other types of equity funds, such as those focusing more
exclusively on growth in earnings.
The Fund's investments in debt securities are subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. The Fund intends to invest no more than 5% of net
assets in securities rated non-investment grade at the time of purchase or
unrated securities of comparable quality. Convertible securities and
obligations rated in the lowest of the top four rating categories have
speculative characteristics and are subject to greater credit and interest rate
risk than higher rated securities. The Fund's options and futures transactions
involve derivatives risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise not react in tandem
with interest rate changes or market movements and may be leveraged.
The Fund's investments in foreign securities are subject to foreign risks.
Foreign stocks involve special risks not typically associated with U.S. stocks.
The stocks held by the Fund may underperform other types of stocks, and they
may not increase or may decline in value. Foreign investments may be riskier
than U.S. investments because of factors such as foreign government
restrictions, changes in currency exchange rates, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares and Retail B Shares compare to those of a broad-
based securities market index. The Fund began operations on June 5, 1991 as the
Firstar Stellar Relative Value Fund (a "Predecessor Stellar Fund") a separate
portfolio of Firstar Stellar Funds. On December 11, 2000, the Predecessor
Stellar Fund was reorganized as a new portfolio of Firstar Funds, Inc. Upon the
closing of reorganizations between Firstar Funds, Inc. and each of Mercantile
Mutual Funds, Inc. and Firstar Stellar Funds (together, the "Firstar
Reorganization"). The performance set forth below is based on the performance
of corresponding classes of the Predecessor Stellar Fund.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart. If these amounts were reflected, returns would be less than
those shown. The average annual total return calculations reflect a maximum
initial sales charge of 5.50% for the Retail A Shares and an assumed contingent
deferred sales charge for Retail B Shares (5% maximum declining to 0% after six
years).
............................................................................. 65
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[GRAPH]
Year-by-year total returnsas of 12/31 each year (%) (Retail A Shares)
1990
1991
1992 11.19%
1993 13.73%
1994 (2.63)%
1995 35.69%
1996 26.45%
1997 32.20%
1998 18.25%
1999 6.96%
The Relative Value Fund's total return for Retail A Shares for the nine-month
period ending September 30, 2000 was -3.21%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 21.33%
Worst Quarter: Q 3 '98 -12.29%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares and Retail B
Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Relative Value Fund -
Retail A Shares 2.16% 22.33% -- 15.48%
(June 5, 1991)
S&P 500 Index 21.04% 28.56% -- 19.44%
(June 5, 1991)
Lipper Growth & Income Average 11.23% 22.56% -- 16.09%
(June 5, 1991)
Relative Value Fund -
Retail B Shares 1.63% -- -- 4.98%
(March 31, 1998)
S&P 500 Index 21.04% -- -- 19.46%
(March 31, 1998)
Lipper Growth & Income Average 11.23% -- -- 7.80%
(March 31, 1998)
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is a widely-recognized unmanaged index of 500 domestic stocks
created by Standard & Poor's Corporation. The Index is heavily weighted toward
stocks with large market capitalization and represents approximately two-thirds
of the total market value of all domestic common stocks. The Lipper Growth and
Income Average is composed of the 30 largest mutual funds whose primary
objective combines growth-of-earnings and dividend income. The Index figures do
not reflect any fees or expenses. Investors cannot invest directly in an Index.
................................................................................
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Relative Value Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees 0.75% 0.75%
Distribution and Service (12b-1)
Fees/3/ 0.00% 0.75%
Other Expenses/4/ 0.47% 0.47%
----- -----
Total Annual Fund Operating
Expenses/5/ 1.22% 1.97%
===== =====
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year,
declining to 1% in the sixth year. Thereafter, Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each
non-systematic withdrawal from a Retirement Account for which Firstar Bank,
N.A. is custodian.
3 The total of all 12b-1 fees and shareholder servicing fees may not exceed,
in the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
4 "Other Expenses" includes: (1) administration fees, transfer agency fees
and all other ordinary operating expenses of the Fund not listed above; and
(2) the payment of a shareholder servicing fee to institutions under a
service plan (described below under the heading "Investing with Firstar
Funds - Shareholder Organizations") equal to up to 0.25% of the average
daily net assets of the Fund's Retail A Shares and Retail B Shares.
5 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be
no more than 1.22% and 1.97%, respectively, of the Fund's average daily net
assets for the current fiscal year. The fee waivers and expense
reimbursements may be terminated at any time after October 31, 2001 at the
discretion of the service providers.
............................................................................. 67
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Relative Value Fund - Retail A Shares $667 $916 $1,183 $1,946
Relative Value Fund - Retail B Shares
Assuming complete redemption at end of
period 700 918 1,262 1,924
Assuming no redemption 200 618 1,062 1,924
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
Equity Index Fund
Objective
[GRAPHIC]
The investment objective of the Equity Index Fund is to seek returns, before
Fund expenses, comparable to the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the S&P 500 Index. The
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Under normal market conditions, the Fund intends to invest substantially all of
its total assets in securities included in the S&P 500 Index, and in any event
the Fund will invest at least 80% of its net assets in securities included in
that index. The Fund uses the S&P 500 Index as the standard performance
comparison because it represents approximately two-thirds of the total market
value of all domestic common stocks and is well known to investors.
The S&P 500 Index consists of 500 selected common stocks, most of which are
listed on the New York Stock Exchange. Standard & Poor's selects the stocks
included in the S&P 500 Index on a market capitalization basis, and the S&P 500
Index is heavily weighted toward stocks with large market capitalizations.
Rather than using traditional methods of investment management, index funds
such as the Equity Index Fund are managed with the aid of a computer program.
The Adviser purchases and sells securities for the Fund in an attempt to
produce investment results that substantially duplicate the performance of the
common stocks of the issuers represented in the S&P 500 Index.
In general, the Fund expects to hold all of the stocks included in the S&P 500
Index. The Adviser believes that it will be able to construct and maintain the
Fund's investment portfolio so that it reasonably tracks the performance of the
S&P 500 Index by using a capitalization weighting and sector balancing
technique.
The Adviser believes the quarterly performance of the Fund and the S&P 500
Index will be within +0.3% under normal market conditions. The Adviser believes
that through the application of a capitalization weighting and sector balancing
technique that it will be able to construct and maintain the Fund's investment
portfolio so that it reasonably tracks the performance of the S&P 500 Index. In
the event the performance of the Fund is not comparable to the performance of
the S&P 500 Index, the Board of
................................................................................
68
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--------------------------------------------------------------------------------
Directors will examine the reasons for the deviation and the availability of
corrective measures. These measures would include additional fee waivers by the
Adviser and Administrator or adjustments to the Adviser's portfolio management
practices. If substantial deviation in the Fund's performance continued for
extended periods, it is expected the Board of Directors would consider possible
changes to the Fund's investment objective.
The Fund may invest in futures contracts. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell an asset in the
future at an agreed upon price. The Fund may invest in futures contracts and
options on futures contracts for hedging purposes, to have fuller exposure to
price movements in a stock or bond index, to increase total return or to
maintain liquidity to meet potential shareholder redemptions, invest cash
balances or dividends or minimize trading costs. In addition, the Fund may
purchase and sell futures and related options (based only on the S&P 500 Index)
to maintain cash reserves while simulating full investment in the stocks
underlying the S&P 500 Index, to keep substantially all of its assets exposed
to the market (as represented by the S&P 500 Index), and to reduce transaction
costs.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. Your
investment follows the large-cap portion of the U.S. stock market, as measured
by the S&P 500 Index, during upturns as well as downturns. Because of its
indexing strategy, the Fund cannot take steps to reduce market volatility or to
lessen the effects of a declining market. Whenever large-cap stocks perform
less than mid- or small-cap stocks, the Fund may under-perform funds that have
exposure to those segments. Further, the Fund will not necessarily dispose of a
security in response to adverse events affecting the issuer of a security (such
as adverse credit factors or failure to pay dividends).
If a large number of shareholders were to redeem shares, however, the Adviser
may be forced to reduce the number of issuers represented in the portfolio.
This could have an adverse effect on the accuracy with which the Fund matches
the performance of the S&P 500 Index.
The Adviser may be required to sell common stock if the issuer is eliminated
from the S&P 500 Index. Such sales may result in:
.lower prices, or
.losses, that may not have been incurred if the Adviser did not have to
purchase or sell the securities.
The Fund's futures transactions involve derivatives risk. Derivatives risk is
the risk of loss from transactions which may be more sensitive to or otherwise
not react in tandem with interest rate changes or market moves and may be
leveraged. Futures contracts could cause the Fund to track the Index less
closely if they don't perform as expected.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Standard & Poor's makes no representation or warranty regarding the
advisability of investing in index funds or the ability of the S&P 500 Index to
track general stock market performance.
............................................................................. 69
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Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year, and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. The average annual total return
calculation reflects a maximum initial sales charge of 5.50% for the Retail A
Shares, but for periods prior to January 10, 1995, performance does not reflect
service organization fees. If service organization fees were reflected,
performance would be reduced. Sales charges are not reflected in the bar chart.
If the sales loads were reflected, returns would be reduced. Performance
reflects fee waivers in effect. If these fee waivers were not in place, the
Fund's performance would be reduced. The Retail B Shares commenced operations
on March 1, 1999. Because those shares have less than one year's performance,
no average annual returns are shown for that class in this section.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990 (3.29)%
1991 29.96%
1992 6.97%
1993 9.11%
1994 1.02%
1995 36.65%
1996 22.35%
1997 32.29%
1998 28.40%
1999 20.10%
The Equity Index Fund's total return for Retail A Shares for the nine-month
period ending September 30, 2000 was -1.71%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 21.44%
Worst Quarter: Q 3 '90 -13.60%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
--------------------------------------------
<S> <C> <C> <C>
Equity Index Fund -
Retail A Shares 13.49% 26.38% 16.90%
S&P 500 Index 21.04% 28.56% 18.21%
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. Index figures do not reflect any fees or expenses. Investors cannot
invest directly in the Index.
................................................................................
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Equity Index Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.25% 0.25%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.42% 0.42%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 0.67% 1.42%
Fee Waivers and Expense
Reimbursements/6/ (0.05)% (0.05)%
------- -------
Net Annual Fund Operating Expenses/6/ 0.62% 1.37%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year,
declining to 1% in the sixth year. Thereafter, Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each
non-systematic withdrawal from a Retirement Account for which Firstar Bank,
N.A. is custodian.
3 As a result of fee waivers, the current management fee of the Equity Index
Fund is 0.20% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed,
in the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees
and all other ordinary operating expenses of the Fund not listed above; and
(2) the payment of a shareholder servicing fee to institutions under a
service plan (described below under the heading "Investing with Firstar
Funds - Shareholder Organizations") equal to up to 0.25% of the average
daily net assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be
no more than 0.62% and 1.37%, respectively, of the Fund's average daily net
assets for the current fiscal year. The fee waivers and expense
reimbursements may be terminated at any time after October 31, 2001 at the
discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes your investment
has a 5% return each year and that the
............................................................................. 71
<PAGE>
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--------------------------------------------------------------------------------
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Index Fund - Retail A Shares $610 $748 $898 $1,334
Equity Index Fund - Retail B Shares
Assuming complete redemption at end of
period 639 744 971 1,304
Assuming no redemption 139 444 771 1,304
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
Large Cap Core Equity Fund
Objective
[GRAPHIC]
The Large Cap Core Equity Fund (formerly Growth Fund) seeks capital
appreciation through investment in securities of large-sized companies. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Equity Securities
During normal market conditions, the Fund invests at least 65% of total assets
in equity securities of large-sized companies. Most of these equity securities
are publicly traded common stocks of companies incorporated in the U.S.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
Large-Sized Companies
The Fund generally invests in large-sized companies with stock market
capitalizations over $3 billion that the Adviser considers to be well-managed
and to have attractive fundamental financial characteristics (see box on page
48 for examples of these characteristics). The Fund may also invest a portion
of its assets in companies with market capitalizations below $3 billion.
Other
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks, if, in the Adviser's opinion, they present
opportunities for capital appreciation.
To the extent consistent with its objective, the Fund may purchase non-
convertible debt and preferred stocks that, in the opinion of the Adviser,
present opportunities for capital appreciation. These obligations must be
investment grade at time of purchase or unrated but deemed comparable by the
Adviser. See "Short-Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM)
Fund" for a description of investment grade securities. After purchase, a
security may cease to be rated or may have its rating reduced below the minimum
rating required by the Fund for purchase. The Adviser will consider whether to
continue to hold the security.
................................................................................
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Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. The Fund intends to invest no more than 5% of net
assets in securities rated non-investment grade at the time of purchase, or
unrated securities of comparable quality. Convertible securities and
obligations rated in the lowest of the top four rating categories have
speculative characteristics, and are subject to greater credit and interest
rate risk than higher rated securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. The average annual total return
calculation reflects a maximum initial sales charge of 5.50% for the Retail A
Shares, but for periods prior to January 10, 1995, performance does not reflect
service organization fees. If service organization fees were reflected,
performance would be reduced. Sales charges are not reflected in the bar chart.
If the sales loads were reflected, returns would be reduced. Performance
reflects fee waivers in effect. If these fee waivers were not in place, the
Fund's performance would be reduced. The Retail B Shares commenced operations
on March 1, 1999. Because those shares have less than one year's performance,
no average annual returns are shown for that class in this section.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991
1992
1993 9.98%
1994 (5.34)%
1995 29.72%
1996 17.85%
1997 27.63%
1998 30.16%
1999 14.03%
The Large Cap Core Equity Fund's total return for Retail A Shares for the nine-
month period ending September 30, 2000 was 9.69%.
............................................................................. 73
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--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 23.97%
Worst Quarter: Q 3 '98 -11.18%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (December 29, 1992)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Core Equity Fund -
Retail A Shares 7.77% 21.33% -- 15.53%
S&P 500 Index 21.04% 28.56% -- 21.53%
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The Index figures do not reflect any fees or expenses. Investors cannot
invest directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Large Cap Core Equity Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees 0.75% 0.75%
Distribution and Service (12b-1)
Fees/3/ 0.00% 0.75%
Other Expenses/4/ 0.44% 0.44%
----- -----
Total Annual Fund Operating
Expenses/5/ 1.19% 1.94%
===== =====
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year,
declining to 1% in the sixth year. Thereafter, Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each
non-systematic withdrawal from a Retirement Account for which Firstar Bank,
N.A. is custodian.
3 The total of all 12b-1 fees and shareholder servicing fees may not exceed,
in the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
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--------------------------------------------------------------------------------
4 "Other Expenses" includes: (1) administration fees, transfer agency fees
and all other ordinary operating expenses of the Fund not listed above; and
(2) the payment of a shareholder servicing fee to institutions under a
service plan (described below under the heading "Investing with Firstar
Funds - Shareholder Organizations") equal to up to 0.25% of the average
daily net assets of the Fund's Retail A Shares and Retail B Shares.
5 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund
until October 31, 2001 so that Net Annual Fund Operating Expenses will be
no more than 1.19% and 1.94%, respectively, of the Fund's average daily net
assets for the current fiscal year. The fee waivers and expense
reimbursements may be terminated at any time after October 31, 2001 at the
discretion of the service providers.
Expense Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Core Equity Fund -
Retail A Shares $665 $907 $1,168 $1,914
Large Cap Core Equity Fund -
Retail B Shares
Assuming complete redemption at end of
period 697 909 1,247 1,891
Assuming no redemption 197 609 1,047 1,891
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
Large Cap Growth Fund
Objective
[GRAPH]
The investment objective of the Large Cap Growth Fund is to maximize capital
appreciation. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPH]
The Fund attempts to achieve its investment goal by investing at least 65% of
the value of its total assets in growth-oriented large capitalization domestic
equity securities. "Growth-oriented large capitalization" securities are
securities of U.S. companies that have market capitalization of $1.5 billion or
more and, based on traditional research techniques, the Fund's Adviser believes
have earnings growth potential superior to the S&P 500. The Fund will maximize
the amount of capital appreciation that it can within the constraints of its
investment policies and restrictions.
The Adviser selects securities and attempts to maintain an acceptable level of
risk largely through proprietary fundamental research and "bottom-up" stock
selection. The Adviser considers the following factors when assessing a
particular security:
. price/earnings ratios,
. historical and projected earnings growth rates,
. historical sales growth rates,
. historical return on equity,
. market capitalization,
What are "growth-oriented" securities?
Securities of U.S. companies with market capitalization of $1.5 billion or
greater that show superior growth in earnings and revenues.
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.average daily trading volume, and
.credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The Adviser uses fundamental research together with economic forecasts and
assessment of the risk and volatility of the company's industry.
The Fund's domestic equity securities usually consist of U.S. common and
preferred stocks and warrants of companies with market capitalization of $1.5
billion or greater. The stocks are listed on the New York or American Stock
Exchanges or traded in the over-the-counter market.
To a limited degree, the Fund may also invest in: bonds, notes, debentures and
preferred stocks convertible into common stocks, if, in the Adviser's opinion,
they present opportunities for capital appreciation.
Temporary Investments
To respond to adverse market, economic, political or other conditions, the Fund
may invest up to 100% of its assets in U.S. and foreign short-term money market
instruments. The Fund may invest up to 35% of its assets in these securities to
maintain liquidity. Some of the short-term money market instruments include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements
To the extent the Fund engages in this temporary, defensive strategy, the Fund
may not achieve its investment objective.
The Fund may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. Convertible securities and obligations rated in the
lowest of the top four rating categories have speculative characteristics, and
are subject to greater credit and interest rate risk than higher rated
securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise react in tandem with
interest rate changes or market movements and may be leveraged. Extension risk
is the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage- or asset-backed security) later
than expected. This may happen when there is a rise in interest rates. Under
such circumstances, the value of the obligation will decrease and a Fund will
also suffer from the inability to invest in higher yielding securities.
Prepayment risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Fund (such as a mortgage- or asset-backed
security) earlier than expected. This may happen when there is a decline in
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interest rates. These events may make a Fund unable to recoup its initial
investment and may result in reduced yields.
The Fund's investments in foreign securities are subject to foreign risks.
Foreign stocks involve special risks not typically associated with U.S. stocks.
The stocks held by the Fund may underperform other types of stocks, and they
may not increase or may decline in value. Foreign investments may be riskier
than U.S. investments because of factors such as foreign government
restrictions, changes in currency exchange rates, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
To the extent the Fund invests in REITs, it is subject to real estate
investment trust risks. Some of the risks of equity and mortgage REITs are that
they depend on management skills and are not diversified. As a result, REITs
are subject to the risk of financing either single projects or any number of
projects. REITs depend on heavy cash flow and may be subject to defaults by
borrowers and self-liquidation. Additionally, equity REITs may be affected by
any changes in the value of the underlying property owned by the trusts.
Mortgage REITs may be affected by the quality of any credit extended. The
Adviser tries to minimize these risks by selecting REITs diversified by sector
(i.e., shopping malls, apartment building complexes, health care facilities)
and geographic location. The Fund will generally be subject to risks associated
with direct ownership of real estate, such as decreases in real estate values
or fluctuations in rental income caused by a variety of factors, including
increases in interest rates, increases in property taxes and other operating
costs, casualty or condemnation losses, possible environmental liabilities and
changes in supply and demand for properties.
The Fund is subject to futures and options on futures risks, as the Fund may
use futures and options on futures for hedging purposes only. The hedging
strategy may not be successful if the Adviser is unable to accurately predict
movements in the prices of individual securities held by the Fund or if the
strategy does not correlate well with the Fund's investments. The use of
futures and options on futures may produce a loss for the Fund, even when used
only for hedging purposes and you could lose money because of the Fund's use of
options.
The Fund's holdings are subject to small and midcap stock risks. Small and
medium-size companies often have narrower markets and more limited managerial
and financial resources than larger, more established companies. As a result,
their performance can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund's portfolio.
To the extent that the Fund emphasizes particular companies or market sectors,
such as technology, it will be especially susceptible to the risks associated
with investments in the companies or market sectors.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail B Shares from year to year; and (b) how the average annual returns of
the Fund's Retail B Shares compare to those of a broad-based securities market
index. The Fund began operations on December 12, 1994 as the Firstar Stellar
Growth Equity Fund (the "Predecessor Stellar Fund"), a separate portfolio of
Firstar Stellar Funds. On December 11, 2000, the Predecessor Stellar Fund was
reorganized as a new portfolio of Firstar Funds, Inc. upon the closing of
reorganizations between Firstar Funds, Inc. and each of Mercantile Mutual
Funds, Inc. and Firstar Stellar Funds (together, the "Firstar Reorganization").
The performance set forth below is based on the
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performance of a corresponding class of the Predecessor Stellar Fund. The
Fund's Retail A Shares commenced operations on March 31, 2000. Because the
Fund's Retail A Shares have less than one year's performance, no average annual
returns are shown for them.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart. If these amounts were reflected, returns would be less than
those shown. The average annual total return calculations reflect an assumed
contingent deferred sales charge for Retail B Shares (5% maximum declining to
0% after six years).
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail B Shares)
1990
1991
1992
1993
1994
1995 27.37%
1996 23.35%
1997 25.28%
1998 28.05%
1999 25.42%
The Large Cap Growth Fund's total return for Retail B Shares for the nine-month
period ending September 30, 2000 was 4.46%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 23.49%
Worst Quarter: Q 3 '98 -10.87%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Growth Fund - Retail B
Shares 20.42% 25.80% -- 26.41%
(December 12, 1994)
S&P 500 Index 21.04% 28.56% -- 28.58%
(December 12, 1994)
S&P BARRA Growth Index 28.25% 33.64% -- 33.44%
(November 30, 1994)
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is a widely-recognized unmanaged index of 500 domestic stocks
created by Standard & Poor's Corporation. The Index is heavily weighted toward
stocks with large market capitalizations and represents approximately two-
thirds of the total market value of all domestic common stocks. The S&P BARRA
Growth Index, an unmanaged market capitalization weighted index, is replacing
the S&P 500 as the Fund's performance benchmark. The S&P BARRA Growth Index is
composed of the stocks in the S&P 500 with the highest valuations and, in the
adviser's view, the greatest growth opportunities. This benchmark
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is more closely aligned to the management of the Large Cap Growth Fund, which
seeks appreciation by investing primarily in fast growing large cap securities.
The Index figures do not reflect any fees or expenses. Investors cannot invest
directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Large Cap Growth Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.95% 0.95%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.48% 0.48%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 1.43% 2.18%
Fee Waivers and Expense
Reimbursements/6/ (0.04)% (0.04)%
------- -------
Net Annual Fund Operating Expenses/6/ 1.39% 2.14%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year,
declining to 1% in the sixth year. Thereafter, Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each
non-systematic withdrawal from a Retirement Account for which Firstar Bank,
N.A. is custodian.
3 As a result of fee waivers, the current management fee of the Large Cap
Growth Fund is 0.91% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed,
in the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees
and all other ordinary operating expenses of the Fund not listed above; and
(2) the payment of a shareholder servicing fee to institutions under a
service plan (described below under the heading "Investing with Firstar
Funds - Shareholder Organizations") equal to up to 0.25% of the average
daily net assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be
no more than 1.39% and 2.14%, respectively, of the Fund's average daily net
assets for the current fiscal year. The fee waivers and expense
reimbursements may be terminated at any time after October 31, 2001 at the
discretion of the service providers.
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Growth Fund -
Retail A Shares $684 $974 $1,285 $2,165
Large Cap Growth Fund -
Retail B Shares
Assuming complete redemption at end of
period 717 978 1,365 2,145
Assuming no redemption 217 678 1,165 2,145
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
International Value Fund
Objective
[GRAPHIC]
The investment objective of the International Value Fund (formerly
International Equity Fund) is to seek capital appreciation through investing in
foreign securities which the Sub-Adviser believes are undervalued. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund's policy under normal market conditions is to invest at least 65% of
its total assets in foreign common stocks, convertible securities, rights to
purchase equity securities, and warrants. Under normal market conditions, at
least 80% of assets will be invested in three countries other than the U.S.
Hansberger Global Investors, Inc. (the "Sub-Adviser" or "HGI") chooses
securities based on a long-term investment perspective. The Sub-Adviser seeks
opportunities to invest in many countries and believes that this international
search provides flexibility to shift portfolio investments not only from company
to company and industry to industry, but also country to country, in search of
undervalued securities.
The Sub-Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Sub-Adviser may sell for reasons relating
to valuation when for example a security's price has reached a target specified
by the Sub-Adviser, and the Sub-Adviser believes potential increases in price
are limited.
The Fund generally invests in common stocks, but may also invest in preferred
stocks and certain rated or unrated debt securities when the Sub-Adviser
believes there's a potential for appreciation. The Fund may also invest in
warrants or rights to subscribe to or purchase such securities, and sponsored
or unsponsored:
.American Depository Receipts
.European Depository Receipts
.Global Depository Receipts, and
.other depository receipts
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American Depository Receipts are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issues by a foreign
issuer. American Depository Receipts may be listed on a national securities
exchange or may trade in the over-the-counter market. American Depository
Receipts are denominated in U.S. dollars. The underlying securities may be
denominated in a foreign currency.
The Fund may also invest in:
.closed-end investment companies holding foreign securities
.options on securities and securities indices
.futures contracts and related options
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest for the
long-term and are not seeking to speculate on short-term stock market
movements. The Fund's value is expected to be volatile as a result of its
investment in foreign securities.
The Fund is subject to market risk. The Fund's investments in foreign
securities, ADRs, EDRs and GDRs are subject to foreign risks. In unsponsored
ADR programs, the issuer may not be directly involved in arranging its
securities to be traded in the form of depository receipts. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the Depository Receipts. 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.
The Fund's investments in convertible securities are subject to credit risk.
Convertible securities frequently have speculative characteristics and may be
acquired without regard to minimum quality ratings. The Fund intends to invest
no more than 5% of net assets in securities rated non-investment grade (or
equivalent rating by an agency recognized in the local market) at the time of
purchase (or unrated securities deemed to be of comparable quality).
Convertible securities and obligations rated in the lowest of the top four
rating categories are subject to greater credit and interest rate risk than
higher rated securities.
The emerging country securities in which the Fund may invest are subject to
significant risk and will not be required to meet any minimum rating standard.
The Fund's investments in options and futures involve derivatives risk. This is
the risk of loss from transactions which may be more sensitive to or otherwise
not react in tandem with interest rate changes or market moves and may be
leveraged.
Secondary markets generally do not exist for forward foreign currency
contracts, and there is no assurance that the Fund will be able to close out a
forward currency contract or close it out at a favorable price.
Warrants are options to purchase equity securities at a specific price valid
for a specific period of time. The purchase of warrants involves the risk that
the Fund could lose the purchase value of the 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.
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An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year, and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. The average annual total return
calculation reflects a maximum initial sales charge of 5.50% for the Retail A
Shares, but for periods prior to January 10, 1995, performance does not reflect
service organization fees. If service organization fees were reflected,
performance would be reduced. Sales charges are not reflected in the bar chart.
If the sales loads were reflected, returns would be reduced. Performance
reflects fee waivers in effect. If these fee waivers were not in place, the
Fund's performance would be reduced. The Retail B Shares commenced operations
on March 1, 1999. Because those shares have less than one year's performance,
no average annual returns are shown for that class in this section.
Effective September 2, 1997, Hansberger Global Investors, Inc. became
investment Sub-Adviser to the Fund.
Year-by-year return as of 12/31 (%) (Retail A Shares)
[GRAPH]
1990
1991
1992
1993
1994
1995 4.27%
1996 4.70%
1997 -10.71%
1998 -9.69%
1999 29.72%
The International Value Fund's total return for Retail A Shares for the nine-
month period ending September 30, 2000 was -13.91%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '99 14.87%
Worst Quarter: Q 3 '98 -21.10%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5 Since inception
1 Year Years 10 Years (April 28, 1994)
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Value Fund -
Retail A Shares 22.57% 1.54% -- 0.58%
MSCI/EAFE Index 26.96% 12.83% -- 11.21%
</TABLE>
--------------------------------------------------------------------------------
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The Morgan Stanley Capital International Europe, Australia and Far East Index
("MSCI/EAFE") is a widely recognized unmanaged index composed of 20 European
and Pacific Basin countries. The Index figures do not reflect any fees or
expenses. Investors cannot invest directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the International Value Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
--------------------------------------------------------
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 1.34% 1.34%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses (before waivers)/5/ 0.67% 0.67%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 2.01% 2.76%
Fee Waivers and Expense
Reimbursements/6/ (0.19)% (0.19)%
------- -------
Net Annual Fund Operating Expenses/6/ 1.82% 2.57%
======= =======
</TABLE>
--------------------------------------------------------------------------------
/1/ A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year,
declining to 1% in the fifth year. Thereafter, Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
/2/ A fee of $12.00 is charged for each wire redemption and $15.00 for each
non-systematic withdrawal from a Retirement Account for which Firstar Bank,
N.A. is custodian.
/3/ As a result of fee waivers, the current management fee of the International
Value Fund is 1.15% of the Fund's average daily net assets.
/4/ The total of all 12b-1 fees and shareholder servicing fees may not exceed,
in the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
/5/ "Other Expenses" includes: (1) administration fees, transfer agency fees
and all other ordinary operating expenses of the Fund not listed above; and
(2) the payment of a shareholder servicing fee to institutions under a
service plan (described below under the heading "Investing with Firstar
Funds - Shareholder Organizations") equal to up to 0.25% of the average
daily net assets of the Fund's Retail A Shares and Retail B Shares.
/6/ Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be
no more than 1.82% and 2.57%, respectively, of the Fund's average daily net
assets for the current fiscal year. The fee waivers and expense
reimbursements may be terminated at any time after October 31, 2001 at the
discretion of the service providers.
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Value Fund -
Retail A Shares $725 $1,128 $1,555 $2,741
International Value Fund -
Retail B Shares
Assuming complete redemption at end of
period 760 1,137 1,640 2,638
Assuming no redemption 260 837 1,440 2,638
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
International Growth Fund
Objective
[GRAPHIC]
The investment objective of the International Growth Fund (formerly Core
International Equity Fund) is to provide capital growth consistent with
reasonable investment risk. The investment objective may be changed by the
Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Sub-Adviser
FIRMCO has appointed Clay Finlay Inc. ("Clay Finlay" or the "Sub-Adviser") as
sub-adviser to assist in the day-to-day management of the Fund.
Principal Investment Strategies
[GRAPHIC]
The Fund invests primarily in foreign common stocks, most of which will be
denominated in foreign currencies. Under normal market conditions, the Fund
invests substantially all (at least 80%) of its total assets in the securities
of companies that derive more than 50% of their gross revenues outside the
United States or have more than 50% of their assets outside the United States.
Under normal market conditions, the Fund invests in equity securities from at
least three foreign countries. Generally, at least 50% of the Fund's total
assets will be invested in securities of companies located either in the
developed countries of Western Europe or in Japan. The Fund also may invest in
other developed countries in the Far East and in countries with emerging
markets or economies.
By investing in various foreign stocks, the Fund attempts to achieve broad
diversification and to take advantage of differences between economic trends
and the performance of securities markets in different countries, regions and
geographic areas. In selecting stocks, the Sub-Adviser determines which
companies represent the best values relative to their long-term growth
prospects and local markets through the use of a screening tool which focuses
on valuation ranges. The Sub-Adviser focuses on companies with steady,
sustainable earnings growth rates that sell at a multiple lower than the
average for that growth rate in the local market. The Sub-Adviser also uses
fundamental analysis by evaluating balance sheets, market share and strength of
management.
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Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest for the
long-term and are not seeking to speculate on short-term stock movements. The
Fund's value is expected to be volatile as a result of its investment in
foreign securities.
The Fund is subject to market risk and management risk. Market risk is the risk
that the value of the securities in which the Fund invests may go up or down in
response to the prospects of individual companies and/or general economic
conditions. Management risk is the risk that the evaluation by the investment
adviser of the rewards and risks presented by all securities purchased by the
Fund and how they advance the Fund's investment objectives may prove to be
inaccurate. The Fund's investments in foreign securities are subject to foreign
risk. Foreign stocks involve special risks not typically associated with U.S.
stocks. The stocks held by the Fund may underperform other types of stocks, and
they may not increase or may decline in value. Foreign investments may be
riskier than U.S. investments because of factors such as foreign government
restrictions, changes in currency exchange rates, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks. Foreign risks will normally be greatest when the Fund invests in issues
located in emerging countries. The governments and economies of emerging
countries feature greater instability than those of more developed countries.
Such investments tend to fluctuate in price more widely and to be less liquid
than other foreign investments. The Fund is also subject to currency risk which
is the potential for price fluctuations in the dollar value of the foreign
securities which the Fund holds because of changing currency exchange rates.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A and Retail B Shares compare to those of a broad-based
securities market index.
On November 27, 2000, the Mercantile International Equity Portfolio (a
"Predecessor Mercantile Portfolio"), a portfolio of Mercantile Mutual Funds,
Inc., reorganized into the Firstar International Growth Fund (formerly Firstar
Core International Equity Fund). At that time, the Firstar International Growth
Fund adopted an investment objective and certain non-fundamental investment
policies and restrictions that are substantially the same as those of the
Predecessor Mercantile Portfolio. The Predecessor Mercantile Portfolio began
operations on April 4, 1994. The performance set forth below is based on the
performance of corresponding classes of the Predecessor Mercantile Portfolio.
The Predecessor Mercantile Portfolio was managed by a different investment
adviser for the periods shown below until March 1, 2000. See "Management of the
Funds" for more information.
............................................................................. 85
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--------------------------------------------------------------------------------
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart. If these amounts were reflected, returns would be less than
those shown. The average annual total return calculations reflect a maximum
initial sales charge of 5.50% for the Retail A Shares and an assumed contingent
deferred sales charge for Retail B Shares (5% maximum declining to 0% after six
years).
Year-by-year total returns as of 12/31 each year (%)(Retail A Shares)
[GRAPH]
1990
1991
1992
1993
1994
1995 9.41%
1996 9.98%
1997 4.68%
1998 17.42%
1999 50.47%
The International Growth Fund's total return for Retail A Shares for the nine-
month period ending September 30, 2000 was -10.29%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q4 '99 27.41%
Worst Quarter: Q3 '98 -17.12%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A and Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Growth Fund -
Retail A Shares 42.22% 16.03% -- 13.78%
(May 2, 1994)
EAFE Index 26.96% 12.83% -- 11.21%
(April 30, 1994)
International Growth Fund -
Retail B Shares 44.31% -- -- 18.05%
(March 6, 1995)*
EAFE Index 26.96% -- -- 14.28%
(February 28, 1995)
</TABLE>
--------------------------------------------------------------------------------
* Date of initial public investment.
The Morgan Stanley Capital International Europe, Australia and Far East Index,
or EAFE Index, is an unmanaged index consisting of companies in Australia, New
Zealand, Europe and the Far East. The Index figures do not reflect any fees or
expenses. Investors cannot invest directly in an Index.
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the International Growth Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 1.00% 1.00%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.57% 0.57%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 1.57% 2.32%
Fee Waivers and Expense
Reimbursements/6/ (0.06)% (0.06)%
------- -------
Net Annual Fund Operating Expenses/6/ 1.51% 2.26%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter, Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the International
Growth Fund is 0.94% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.51% and 2.26%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
............................................................................. 87
<PAGE>
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--------------------------------------------------------------------------------
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Growth Fund -
Retail A Shares $695 $1,013 $1,352 $2,309
International Growth Fund -
Retail B Shares
Assuming complete redemption at end of
period 729 1,018 1,434 2,291
Assuming no redemption 229 718 1,234 2,291
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used for Retail B Shares in the hypothetical
example after year six.
--------------------------------------------------------------------------------
MidCap Index Fund
Objective
[GRAPHIC]
The investment objective of the MidCap Index Fund is to seek returns, before
Fund expenses, comparable to the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the S&P MidCap 400 Index. The
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Under normal market conditions, the Fund intends to invest substantially all of
its total assets in securities included in the S&P MidCap 400 Index, and in any
event the Fund will invest at least 80% of its net assets in securities
included in that index. The Fund uses the S&P MidCap 400 Index as the standard
performance comparison because it is composed of 400 selected common stocks of
medium-size domestic companies with market capitalizations between
approximately $148 million and $13 billion.
The S&P MidCap 400 Index is an unmanaged, capitalization-weighted index of
common stocks representing all major industries in the mid-range of the U.S.
stock market.
Rather than using traditional methods of investment management, index funds
such as the Firstar MidCap Index Fund are managed with the aid of a computer
program. The Adviser purchases and sells securities for the Fund in an attempt
to produce investment results that substantially duplicate the performance of
the common stocks of the issuers represented in the S&P MidCap 400 Index.
The Fund does not expect to hold all of the stocks included in the S&P MidCap
400 Index at any particular time; however, the Adviser believes it will be able
to construct and maintain the Fund's investment portfolio so that it reasonably
tracks the performance of the S&P MidCap 400 Index by using a capitalization
weighting and sector balancing technique.
The Adviser believes the quarterly performance of the Fund and the S&P MidCap
400 Index will be within (+/-)0.3% under normal market conditions. The Adviser
believes that through the application of a capitalization weighting and sector
balancing technique it will be able to construct and maintain the Fund's
investment portfolio so it reasonably tracks the performance of the S&P MidCap
400 Index. In the event
................................................................................
88
<PAGE>
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the performance of the Fund is not comparable to the performance of the S&P
MidCap 400 Index, the Board of Directors will examine the reasons for the
deviation and the availability of corrective measures. These measures would
include additional fee waivers by the Adviser and Administrator or adjustments
to the Adviser's portfolio management practices. If substantial deviation in
the Fund's performance continued for extended periods, it is expected the Board
of Directors would consider possible changes to the Fund's investment
objective.
The Fund may invest in futures contracts. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell an asset in the
future at an agreed upon price. The Fund may invest in futures contracts and
options on futures contracts for hedging purposes, to have fuller exposure to
price movements in a stock or bond index, to increase total return or to
maintain liquidity to meet potential shareholder redemptions, invest cash
balances or dividends or minimize trading costs. In addition, the Fund may
purchase and sell futures and related options (based only on the S&P MidCap 400
Index) to maintain cash reserves while simulating full investment in the stocks
underlying the S&P MidCap 400 Index, to keep substantially all of its assets
exposed to the market (as represented by the S&P MidCap 400 Index), and to
reduce transaction costs.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which the Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. Your
investment follows the mid-cap portion of the U.S. stock market, as measured by
the S&P MidCap 400 Index, during upturns as well as downturns. Because of its
indexing strategy, the Fund cannot take steps to reduce market volatility or to
lessen the effects of a declining market. Whenever mid-cap stocks underperform
large- or small-cap stocks, the Fund may underperform funds that have exposure
to those segments. Further, the Fund will not necessarily dispose of a security
in response to adverse events affecting the issuer of a security (such as
adverse credit factors or failure to pay dividends) if disposal would not be
consistent with the Fund's indexing strategy.
The Adviser may be required to sell common stock if the issuer is eliminated
from the S&P MidCap 400 Index. Such sales may result in:
.lower prices, or
.losses that may not have been incurred if the Adviser did not have to sell the
securities.
The Fund's futures transactions involve derivatives risk. Derivatives risk is
the risk of loss from transactions which may be more sensitive to or otherwise
not react in tandem with interest rate changes or market moves and may be
leveraged. Futures contracts could cause the Fund to track the Index less
closely if they don't perform as expected.
The Fund's ability to duplicate the performance of the S&P MidCap 400 Index
will depend to some extent on the size and timing of cash flows into and out of
the Fund, as well as the Fund's expenses.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves investment risks,
including the risk that you may lose money.
Standard & Poor's makes no representation or warranty regarding the
advisability of investing in index funds or the ability of the S&P MidCap 400
Index to track general stock market performance.
............................................................................. 89
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--------------------------------------------------------------------------------
There is no performance information in this section for the Fund because it
commenced operations on November 4, 1999.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses you may pay if you buy and hold
Retail A and Retail B Shares of the Midcap Index Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.25% 0.25%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.60% 0.60%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 0.85% 1.60%
Fee Waivers and Expense
Reimbursements/6/ (0.10)% (0.10)%
------- -------
Net Annual Fund Operating Expenses/6/ 0.75% 1.50%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth years, 2% in the fifth year,
declining to 1% in the sixth year. Thereafter, Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the MidCap Index
Fund is 0.15% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a Shareholder Servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.75% and 1.50% , respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
................................................................................
90
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes your investment
has a 5% return each year and that the Fund's operating expenses remain the
same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MidCap Index Fund - Retail A Shares $622 $797 $ 986 $1,532
MidCap Index Fund - Retail B Shares
Assuming complete redemption at end of
period 653 795 1,061 1,504
Assuming no redemption 153 495 861 1,504
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
MidCap Core Equity Fund
Objective
[GRAPH]
The MidCap Core Equity Fund (formerly Special Growth Fund) seeks capital
appreciation. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPH]
Equity Securities/Potential Price Appreciation
The Fund selects securities based on their potential for price appreciation.
During normal market conditions, the Fund invests at least 65% of total assets
in equity securities of medium-sized companies. Most of these equity securities
are publicly traded common stocks of companies incorporated in the U.S.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
Medium-Sized Companies
The Fund generally invests in medium-sized companies with stock market
capitalizations between $700 million and $10 billion that the Adviser considers
to be well-managed and to have attractive fundamental financial characteristics
(see box on page 48 for examples of these characteristics). If the market
capitalization of a company in which the Fund has invested increases above $10
billion, the Fund may continue to hold the security. The Fund may also invest a
portion of its assets in companies with smaller or larger market
capitalizations.
Other
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks, and may invest up to 5% of net assets in other
types of securities having common stock characteristics, such as rights and
warrants to purchase equity securities.
............................................................................. 91
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The Fund may purchase non-convertible debt and preferred stocks that, in the
opinion of the Adviser, present opportunities for capital appreciation. These
obligations must be investment-grade at time of purchase or unrated but deemed
comparable by the Adviser. See "Short-Term Bond Fund, Intermediate Bond Fund
and Bond IMMDEX(TM) Fund" for a description of investment grade securities.
After purchase, a security may cease to be rated or may have its rating reduced
below the minimum rating required by the Fund for purchase. The Adviser will
consider whether to continue to hold the security.
Principal Risks
[GRAPH]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume risk in search of
long-term capital appreciation. The Adviser believes, however, that there is
greater potential for price appreciation among medium-sized companies in which
the Fund invests, since they tend to be less widely followed by other
securities analysts and thus may be more likely to be undervalued by the
market.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Convertible securities frequently have
speculative characteristics and may be acquired without regard to minimum
quality ratings. The Fund intends to invest no more than 5% of net assets in
securities rated non-investment grade at the time of purchase or unrated
securities of comparable quality. Convertible securities and obligations rated
in the lowest of the top four rating categories are subject to greater credit
and interest rate risk than higher rated securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year, and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. The average annual total return
calculation reflects a maximum initial sales charge of 5.50% for the Retail A
Shares, but for periods prior to January 10, 1995, performance does not reflect
service organization fees. If service organization fees were reflected,
performance would be reduced. Sales charges are not reflected in the bar chart.
If the sales loads were reflected, returns would be reduced. Performance
reflects fee waivers in effect. If fee waivers were not in place, the Fund's
performance would be reduced. The Retail B Shares commenced operations on March
1, 1999. Because those shares have less than one year's performance, no average
annual returns are shown for that class in this section.
................................................................................
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<PAGE>
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Year-by-year total return as of 12/31 each year (%)(Retail A Shares)
[GRAPH]
1990 1.00%
1991 57.96%
1992 7.22%
1993 8.02%
1994 (2.01)%
1995 29.63%
1996 18.60%
1997 17.13%
1998 4.64%
1999 2.28%
The MidCap Core Equity Fund's total return for Retail A Shares for the nine-
month period ending September 30, 2000 was 31.74%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q4 '99 24.27%
Worst Quarter: Q3 '98 -19.68%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5
1 Year Years 10 Years
--------------------------------------------------
<S> <C> <C> <C>
MidCap Core Equity Fund -
Retail A Shares -3.35% 12.74% 12.67%
S&P 500 Index 21.04% 28.56% 18.21%
S&P MidCap 400 Index 14.72% 23.05% --
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The S&P MidCap 400 Index is a capitalization weighted index that
represents the aggregate market value of the common equity of 400 stocks chosen
by S&P with a median capitalization of approximately $700 million and measures
the performance of the mid-range sector of the U.S. stock market. The Index
figures do not reflect any fees or expenses. Investors cannot invest directly
in the Index.
............................................................................. 93
<PAGE>
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A Shares and Retail B Shares of the MidCap Core Equity Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
------------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail A Retail B
Shares Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.75% 0.75%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses (before waivers)/5/ 0.46% 0.46%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 1.21% 1.96%
Fee Waivers and Expense
Reimbursements/6/ (0.01)% (0.01)%
------- -------
Net Annual Fund Operating Expenses/6/ 1.20% 1.95%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter, the Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the MidCap Core
Equity Fund is 0.74% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.20% and 1.95%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MidCap Core Equity Fund - Retail A Shares $666 $912 $1,177 $1,934
MidCap Core Equity Fund - Retail B Shares
Assuming complete redemption at end of
period 698 914 1,256 1,912
Assuming no redemption 198 614 1,056 1,912
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
Small Cap Index Fund
Objective
[GRAPHIC]
The investment objective of the Small Cap Index Fund is to provide investment
results that, before deduction of operating expenses, approximate the price and
yield performance of U.S. common stocks with smaller stock market
capitalizations, as represented by the S&P SmallCap 600 Index. The investment
objective may be changed by the Board of Directors without approval of
Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund uses an "indexing" strategy through the use of sophisticated computer
models to approximate the investment performance of the S&P SmallCap 600 Index.
The Fund will invest at least 80% of its total assets in securities listed in
the S&P SmallCap 600 Index and typically will hold all 600 stocks represented
in the Index. Under certain circumstances, however, the Fund may
not hold all 600 stocks in the Indexing is a
Index because of shareholder strategy whereby
activity or changes in the Index. the Fund attempts
In general, each stock's to weight its
percentage weighting in the Fund securities to
is based on its weighting in the match those of a
S&P SmallCap 600 Index. When broadly-based
stocks are removed from or added securities index
to the Index, those changes are in an attempt to
reflected in the Fund. The Fund approximate the
periodically "rebalances" its index's
holdings as dictated by changes in performance.
shareholder purchase and
redemption activity and in the
composition of the S&P SmallCap 600 Index.
To the extent that, from time to time, the stocks in a particular market
sector, such as technology, comprise a significant portion of the S&P SmallCap
600 Index, those stocks will be represented in substantially the same
proportion in the Fund.
Under normal market conditions, it is expected that the quarterly performance
of the Fund, before expenses, will track the performance of the S&P SmallCap
600 Index within a .95 correlation coefficient.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which the Fund invests may go up or down in response to the
prospects of individual companies and/or general economic
............................................................................. 95
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conditions. Your investment follows the small-cap portion of the U.S. stock
market, as measured by the S&P SmallCap 600 Index, during upturns as well as
downturns. Because of its indexing strategy, the Fund cannot take steps to
reduce market volatility or to lessen the effects of a declining market.
Whenever small-cap stocks underperform large- or mid-cap stocks, the Fund may
underperform funds that have exposure to those segments. Further, the Fund will
not necessarily dispose of a security in response to adverse events affecting
the issuer of a security (such as adverse credit factors or failure to pay
dividends) if disposal would not be consistent with the Fund's indexing
strategy.
The Adviser may be required to sell common stock if the issuer is eliminated
from the S&P SmallCap 600 Index. Such sales may result in:
.lower prices, or
.losses that may not have been incurred if the Adviser did not have to sell the
securities.
The Fund's ability to duplicate the performance of the S&P SmallCap 600 Index
will depend to some extent on the size and timing of cash flows into and out of
the Fund, as well as the Fund's expenses.
To the extent that stocks in a particular market sector, such as technology,
comprise a significant portion of the S&P Small Cap 600 Index and,
correspondingly, the Fund's holdings, the Fund will be especially susceptible
to market sector risk. Stock of technology companies may be subject to greater
price volatility than stocks of companies in other sectors. Technology
companies may produce or use products or services that prove commercially
unsuccessful, become obsolete or become adversely impacted by government
regulation. Technology stocks may experience significant price movements caused
by disproportionate investor optimism or pessimism.
The Fund's holdings are subject to small cap stock risks. Small capitalization
stocks involve greater risks than those associated with larger, more
established companies. These factors increase risk and may result in more
significant losses than other Firstar Funds. By typically investing in all 600
stocks in the Index, the Fund remains broadly diversified, which may reduce
some of this risk. Small company stocks may be subject to more abrupt or
erratic price movements. Also, securities of small-cap companies are less
liquid, and are subject to liquidity risk. Liquidity risk is the risk that
certain securities may be difficult or impossible to sell at a desirable time
and price. There normally is less publicly available information concerning
these securities. They may be subject to wide fluctuations in market value. The
trading market for any given security may be sufficiently thin as to make it
difficult for the Fund to dispose of a substantial block of such securities.
These securities are less liquid than other more widely traded securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves investment risks,
including the risk that you may lose money.
Standard & Poor's makes no representation or warranty regarding the
advisability of investing in index funds or the ability of the S&P SmallCap 600
Index to track general stock market performance.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The Fund began operations on December 30, 1998 as the Mercantile Small
Cap Equity Index Portfolio, a separate portfolio of Mercantile Mutual Funds,
Inc. (the "Predecessor Mercantile Portfolio"). On December 11, 2000, the
Predecessor Mercantile Portfolio was reorganized as a new portfolio of Firstar
Funds, Inc. upon the closing of reorganizations between Firstar Funds, Inc. and
each of Mercantile Mutual Funds, Inc. and Firstar Stellar Funds (together, the
"Firstar Reorganization"). The performance set forth below is based on the
................................................................................
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performance of a corresponding class of the Predecessor Mercantile Portfolio.
As of the date of this Prospectus, the Fund has not offered Retail B shares.
Because those shares have less than one calendar year's performance, no average
annual returns are shown for them. The Predecessor Mercantile Portfolio was
managed by a different investment adviser for the period shown below until
March 1, 2000. See "Management of the Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
effect, the Fund's performance would be reduced. Sales charges are not
reflected in the bar chart. If these amounts were reflected, returns would be
less than those shown. The average annual total return calculations reflect a
maximum initial sales charge of 5.50% for the Retail A Shares.
Year-by-year total return as of 12/31 each year (%)(Retail A Shares)
[GRAPH]
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999 7.66%
The Small Cap Index Fund's total return for Retail A Shares for the nine-month
period ending September 30, 2000 was 12.00%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q2 '99 15.13%
Worst Quarter: Q1 '99 -10.88%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Index Fund -
Retail A Shares 1.70% -- -- 4.19%
(December 30, 1998)
S&P SmallCap 600 Index 12.40% -- -- 12.40%
(December 31, 1998)
</TABLE>
--------------------------------------------------------------------------------
The S&P SmallCap 600 Index is a widely-recognized unmanaged index that tracks
the performance of 600 domestic companies traded on the New York Stock
Exchange, the American Stock Exchange and Nasdaq. This Index is heavily
weighted with the stocks of small companies with market capitalizations that
currently range between $28 million and $4.2 billion. S&P does not endorse any
stock in the S&P SmallCap 600 Index and is not a sponsor of, or affiliated in
any way with, the Fund. The Index figures do not reflect any fees or expenses.
Investors cannot invest directly in an Index.
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Small Cap Index Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.40% 0.40%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.59% 0.59%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 0.99% 1.74%
Fee Waivers and Expense
Reimbursements/6/ (0.06)% (0.06)%
------- -------
Net Annual Fund Operating Expenses/6/ 0.93% 1.68%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter, Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the Small Cap Index
Fund is 0.34% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares, respectively.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.93% and 1.68%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Index Fund - Retail A Shares $640 $842 $1,061 $1,690
Small Cap Index Fund - Retail B Shares
Assuming complete redemption at end of
period 671 842 1,138 1,666
Assuming no redemption 171 542 938 1,666
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
Small Cap Core Equity Fund
Objective
[GRAPHIC]
The investment objective of the Small Cap Core Equity Fund (formerly Emerging
Growth Fund) is to seek capital appreciation. The investment objective may be
changed by the Board of Directors without approval of Shareholders, although no
change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund selects securities the Adviser believes have above-average prospects
for capital appreciation. During normal market conditions, the Fund invests at
least 65% of total assets in equity securities. These equity securities may be
listed on a national securities exchange or may be unlisted securities with or
without an established over-the-counter market.
The Fund also invests in stocks the Adviser believes are undervalued or to a
limited extent in initial public offerings (IPOs) of new companies that
demonstrate the potential for price appreciation. The Adviser selects stocks
based on a number of factors, including historical and projected earnings,
asset value, potential for price appreciation and earnings growth, and quality
of the products manufactured or services offered.
Small-Sized Companies
The Fund generally invests at least 65% of its total assets in small- to
medium-sized companies with market capitalizations between $100 million and $2
billion. The Fund may also invest a portion of its assets in larger companies
that the Adviser believes offer improved growth possibilities because of
rejuvenated management, product changes or other developments likely to
stimulate earnings or asset growth.
The Fund may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume an above-average
level of market risk in search of long-term capital appreciation. The Adviser
believes, however, that there is greater potential for price appreciation among
small-sized companies in which the Fund invests, since they tend to be less
widely followed by other securities analysts and thus may be more likely to be
undervalued by the market.
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The Fund is subject to market risk, management risk and small-cap stock risk.
Market risk is the risk that the value of the securities in which a Fund
invests may go up or down in response to the prospects of individual companies
and/or general economic conditions. In addition, different types of equity
securities tend to shift in and out of favor depending on market and economic
conditions. Management risk is the risk than the evaluation by the investment
adviser of the rewards and risks presented by all securities purchased by the
Fund and how they advance the Fund's investment objectives may prove to be
inaccurate. Small-cap stock risk refers to the fact that small capitalization
stocks involve greater risks than those associated with larger, more
established companies. Small company stocks may be subject to more abrupt or
erratic price movements, for reasons including that the stocks are traded in
lower volume and that the issuers are more sensitive to changing conditions and
have less certain growth prospects. Also, there are fewer market makers for
these stocks and wider spreads between quoted bid and asked prices in the over-
the-counter market for these stocks. Small cap stocks tend to be less liquid,
particularly during periods of market disruption. There normally is less
publicly available information concerning these securities. Small companies in
which the Fund may invest have limited product lines, markets or financial
resources, or may be dependant on a small management group. In particular,
investments in unseasoned companies present risks considerably greater than
investments in more established companies.
To the extent that the Fund emphasizes particular companies or market sectors,
such as technology, it will be especially susceptible to sector/technology
risk. Stocks of technology companies may be subject to greater price volatility
than stocks of companies in other sectors. Technology companies may produce or
use products or services that prove commercially unsuccessful, become obsolete
or become adversely impacted by government regulation. Technology stocks may
experience significant price movements caused by disproportionate investor
optimism or pessimism.
The Fund's performance results may reflect periods of above-average performance
attributable to investing a portion of its assets in the securities of
companies offering shares in IPOs. It is possible that the above-average
performance of such companies may not be repeated in the future.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A and Retail B Shares compare to those of a broad-based
securities market index.
On November 27, 2000, the Mercantile Small Cap Equity Portfolio (a "Predecessor
Mercantile Portfolio"), a portfolio of Mercantile Mutual Funds, Inc.
reorganized into the Firstar Small Cap Core Equity Fund. At that time, the
Firstar Small Cap Core Equity Fund adopted an investment objective and certain
non-fundamental investment policies and restrictions that are substantially the
same as those of the Predecessor Mercantile Portfolio. The Predecessor
Mercantile Portfolio began operations on May 6, 1992. The performance set forth
below is based on the performance of corresponding classes of the Predecessor
Mercantile Portfolio. The Predecessor Mercantile Portfolio was managed by a
different investment adviser for the periods shown below until March 1, 2000.
See "Management of the Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Performance reflects fee waivers in effect. If these fee waivers
were not in place, the Fund's performance would be reduced. Remember, past
performance is not indicative of future results. Sales charges are not
reflected in the bar chart. If these amounts were reflected, returns would be
less than those shown. The average annual total return calculations reflect a
maximum initial sales charge of 5.50% for Retail A Shares and an assumed
contingent deferred sales charge for Retail B Shares (5% maximum declining to
0% after six years).
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Year-by-year total return as of 12/31 each year (%)(Retail A Shares)
[GRAPH]
1990
1991
1992
1993 23.58%
1994 2.26%
1995 17.14%
1996 10.50%
1997 20.51%
1998 (8.07)%
1999 16.70%
The Small Cap Core Equity Fund's total return for Retail A Shares for the nine-
month period ending September 30, 2000 was 24.77%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q4 '92 18.56%
Worst Quarter: Q3 '98 -24.80%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A and Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Core Equity Fund -
Retail A Shares 10.30% 9.61% -- 11.66%
(May 6, 1992)
Russell 2000 Index 21.26% 16.69% -- 14.80%
(April 30, 1992)
S&P SmallCap 600 12.40% 17.04% -- 15.07%
(April 30, 1992)
Wilshire Next 1750 Index 25.32% 18.74% -- 16.20%
(April 30, 1992)
Small Cap Core Equity Fund -
Retail B Shares 11.05% -- -- 9.20%
(March 6, 1995)*
Russell 2000 Index 21.26% -- -- 16.61%
(February 28, 1995)
S&P SmallCap 600 12.40% -- -- 17.03%
(February 28, 1995)
Wilshire Next 1750 Index 25.32% -- -- 18.55%
(February 28, 1995)
</TABLE>
--------------------------------------------------------------------------------
* Date of initial public investment.
The Russell 2000 Index is an unmanaged index comprised of the 2,000 smallest of
the 3,000 largest U.S. companies based on market capitalization. The S&P
SmallCap 600 Index is a capitalization weighted index that measures the
performance of selected U.S. stocks with small market capitalizations. The
Wilshire Next 1750 Index is an unmanaged index, which shows the next largest
1,750 companies after the Top 750 of the Wilshire 5000 Stock Index. The Index
figures do not reflect any fees or expenses. Investors cannot invest directly
in an Index. Prior to November 27, 2000, the S&P SmallCap 600 and Wilshire Next
1750 Index were the performance benchmarks of the Fund. The Russell 2000 Index
was the performance benchmark of the Predecessor Mercantile Portfolio. The S&P
SmallCap 600 Index has been selected as the sole performance benchmark for the
Fund as the market capitalization of the Index is closely aligned with that of
the Fund.
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Small Cap Core Equity Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.75% 0.75%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.48% 0.48%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 1.23% 1.98%
Fee Waivers and Expense
Reimbursements/6/ (0.02)% (0.02)%
------- -------
Net Annual Fund Operating Expenses/6/ 1.21% 1.96%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter, Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the Small Cap Core
Equity Fund is 0.73% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service provides have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.21% and 1.96% , respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Core Equity Fund - Retail A
Shares $667 $917 $1,187 $1,955
Small Cap Core Equity Fund - Retail B
Shares
Assuming complete redemption at end of
period 699 919 1,265 1,933
Assuming no redemption 199 619 1,065 1,933
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used for Retail B Shares in the hypothetical
example after year six.
--------------------------------------------------------------------------------
Science & Technology Fund
Objective
[GRAPHIC]
The investment objective of the Science & Technology Fund is to maximize growth
and capital appreciation by investing in equity securities of companies in the
science and technology industry. This investment objective may be changed by
the Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund seeks to achieve its investment objective by investing primarily in
equity securities of companies in the science and/or technology sectors. Under
normal market conditions, the Fund will invest at least 65% of the value of its
total assets in common stock, preferred stocks and warrants of companies of any
size principally engaged in science and technology business activities. The
Fund is a non-diversified investment company. The Fund considers science and
technology sectors to include companies whose primary business is to provide
goods or services in the fields of science (i.e., medical and health) or
technology (i.e., computers and communications). Such companies include those
that:
.make or sell products used in health care;
.make or sell medical equipment and devices and related technologies;
.make or sell software or information-based services and consulting,
communications and related services;
.design, manufacture or sell electronic components and systems;
.research, design, develop, manufacture or distribute products, processes or
services that relate to hardware technology within the computer industry;
.develop, produce or distribute products or services in the computer, semi-
conductor, electronics, communications, health care and biotechnology sectors;
and
.engage in the development, manufacturing or sale of communications services or
communications equipment.
The Adviser believes that because of rapid advances in technology and science,
an investment in companies with business operations in these areas will offer
substantial opportunities for long-term capital appreciation. It is important
to note that prices of common stocks of even the best managed, most profitable
corporations are subject to market risk, which means their stock prices can
decline.
............................................................................ 103
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The Adviser's overall stock selection for the Fund is not based on the
capitalization or size of the company but rather on an assessment of the
company's fundamental prospects. The Fund may invest in small, medium or large
size companies. The Adviser will select securities while attempting to maintain
an acceptable level of risk largely through the use of proprietary fundamental
research and "bottom-up" stock selection. The Adviser will consider the
following factors when assessing a particular security:
.price/earnings ratios,
.historical and projected earnings growth rates,
.historical sales growth rates,
.historical return on equity,
.market capitalization,
.average daily trading volume, and
.credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The Adviser uses fundamental research together with economic forecasts and
assessments of the risk and volatility of the company's industry. To a limited
degree, the Fund may invest in foreign securities and options and futures for
hedging purposes.
The Fund may also participate in the initial public offering (IPO) market, and
a portion of the Fund's returns may have been attributable to its investments
in IPOs.
Temporary Investments
To respond to adverse market, economic, political or other conditions, the Fund
may invest up to 100% of its assets in high quality U.S. short-term money
market instruments. The Fund may invest up to 35% of its assets in these
securities to maintain liquidity. Some of these short-term money market
instruments include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements (collateralized by U.S. Treasury obligations and U.S.
government agencies)
To the extent the Fund engages in this temporary, defensive strategy, the Fund
may not achieve its investment objective.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume market risk,
industry risk and non-diversification risk in search of long-term capital
appreciation. Market risk is that risk that the value of the securities in
which a Fund may invest may go up or down in response to the prospects of
individual companies. Because the Fund invests in a particular industry it is
subject to industry risk, the risk that a group of related stocks will decline
in price due to industry specific developments. Companies in the same or
similar industries may share common characteristics and are more likely to
react to industry specific market or economic developments. Non-diversification
risk is the risk that, because more of the Fund's assets may be concentrated in
the common stock of any single issuer, the value of the Fund's shares may be
more susceptible to adverse developments affecting any single issuer, and more
susceptible to greater losses because of these developments than shares of a
more diversified fund.
The Fund is subject to science and technology concentration risks. Science and
technology related companies face special risks such as competitive pressures
and technological obsolescence and may be subject to greater governmental
regulation than many other industries.
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Technology and technology related companies may be subject to short product
cycles and aggressive pricing which may increase their volatility. For example,
their products or services may not prove commercially successful or may become
obsolete quickly. The value of the Fund's shares may be susceptible to factors
affecting the science and technology areas and to greater risk and market
fluctuation than an investment in a fund that invests in a broader range of
portfolio securities not concentrated in any particular industry. Furthermore,
companies within the science and technology industries face greater risks of
competition from new market entrances and increased research and development
costs. Additionally, companies in these areas are dependent upon consumer and
business acceptance as new technologies evolve.
The Fund is also subject to IPO risk. IPOs may not be consistently available to
the Fund for investing, particularly as the Fund's asset base grows. As the
Fund's assets continue to grow, the effect of the Fund's investments in IPOs on
its total returns likely will decline, which could reduce the Fund's total
returns.
The Fund is subject to futures and options on futures risks, as the Fund may
use futures and options on futures for hedging purposes only. The hedging
strategy may not be successful if the Adviser is unable to accurately predict
movements in the prices of individual securities held by the Fund or if the
strategy does not correlate well with the Fund's investments. The use of
futures and options on futures may produce a loss for the Fund, even when used
only for hedging purposes and you could lose money because of the Fund's use of
options.
The Fund's holdings are subject to small and midcap stock risks. Small and
medium-size companies often have narrower markets and more limited managerial
and financial resources than larger, more established companies. As a result,
their performance can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund's portfolio.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Because the Fund has been in existence for less than one calendar year, no
performance information for the Fund is included in this Prospectus. The Fund
began operations on August 9, 1999 as the Firstar Stellar Science & Technology
Fund (the "Predecessor Stellar Fund"), a separate portfolio of Firstar Stellar
Funds. On December 11, 2000, the Predecessor Stellar Fund was reorganized as a
new portfolio of Firstar Funds, Inc. upon the closing of reorganizations
between Firstar Funds, Inc. and each of Mercantile Mutual Funds, Inc. and
Firstar Stellar Funds (together, the "Firstar Reorganization").
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the Science & Technology Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees 1.05% 1.05%
Distribution and Service (12b-1)
Fees/3/ 0.00% 0.75%
Other Expenses/4/ 0.51% 0.51%
----- -----
Total Annual Fund Operating
Expenses/5/ 1.56% 2.31%
===== =====
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter, Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
4 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares, respectively.
5 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares of the Fund until
October 31, 2001 so that Net Annual Fund Operating Expenses will be no more
than 1.56% and 2.31%, respectively, of the Fund's average daily net assets
for the current fiscal year. The fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Science & Technology Fund - Retail A Shares $700 $1,016 $1,353 $2,304
Science & Technology Fund - Retail B Shares
Assuming complete redemption at end of
period 734 1,021 1,435 2,286
Assuming no redemption 234 721 1,235 2,286
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
MicroCap Fund
The MicroCap Fund is currently closed to new investors. Please see the
"Purchasing Shares" section below for additional information.
Objective
[GRAPHIC]
The investment objective of the MicroCap Fund is capital appreciation. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Common Stocks/Potential Price Appreciation
The Fund selects securities based on their potential for price appreciation.
Most of the securities the Fund holds will be common stocks of companies
incorporated in the U.S.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
Micro Capitalization Companies
At least 65% of the Fund's total assets will be invested in equity and debt
securities of micro capitalization companies that, in general, the Adviser
considers to be well managed and to have attractive fundamental financial
characteristics (see box on page 48 for examples of these characteristics).
Micro capitalization companies are those with capitalizations at the time of
purchase below the median market capitalization of the Russell 2000 Index,
which is currently approximately $481 million. The Fund may invest up to 35% of
its assets at the time of purchase in companies in excess of the median market
capitalization of the Russell 2000 Index. If the market capitalization of a
company in which the Fund has invested increases above the median market
capitalization of the Russell 2000 Index, the Fund may continue to hold the
security.
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The Adviser believes that there is greater potential for price appreciation
among small-sized companies in which the Fund invests, since they tend to be
less widely followed by other securities analysts and thus may be more likely
to be undervalued by the market.
The Fund intends to invest no more than 5% of net assets in securities rated
non-investment grade at the time of purchase (or unrated securities of
comparable quality).
Other
The Fund may invest up to 25% of total assets in the securities of foreign
issuers, either directly or through sponsored American Depository Receipts.
American Depository Receipts are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. American Depository Receipts may be listed on a national securities
exchange or may trade in the over-the-counter market. American Depository
Receipts are denominated in U.S. dollars. The underlying securities may be
denominated in a foreign currency.
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks.
The Fund may purchase non-convertible debt and preferred stocks that, in the
opinion of the Adviser, present opportunities for capital appreciation. These
obligations must be investment grade at time of purchase or be unrated but
deemed comparable by the Adviser. See "Short-Term Bond Fund, Intermediate Bond
Fund and Bond IMMDEX(TM) Fund" for a description of investment-grade
securities. After purchase, a security may cease to be rated or may have its
rating reduced below the minimum rating required by the Fund for purchase. The
Adviser will consider whether to continue to hold the security.
The Fund may acquire securities of unseasoned companies (companies with less
than three years' of continuous operation) when the Adviser believes the
investments offer possibilities of attractive capital appreciation, but will
not invest more than 20% of the value of its total assets in the securities of
unseasoned companies.
The Fund may also participate in the initial public offering (IPO) market, and
a substantial portion of the Fund's returns have been attributable to its
investments in IPOs.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume an above-average
level of market risk in search of long-term capital gain. Market risk is the
risk that the value of the securities in which a Fund invests may go up or down
in response to the prospects of individual companies and/or general economic
conditions. The Fund's expenses in a year may exceed income. There can be no
assurance the investment objective of the Fund will be realized or the value of
the Fund's investments will not decline in value. You should consider the Fund
to be a long-term investment and not a vehicle for seeking short-term profits
and income.
The Fund's investments in debt securities are subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. Obligations rated in the lowest of the top four
rating categories are subject to greater credit and interest rate risk than
higher rated securities.
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The Fund's holdings are subject to micro cap stock risks. Micro capitalization
stocks involve greater risks than those associated with larger, more
established companies. Small company stocks may be subject to more abrupt or
erratic price movements. Also securities of micro cap companies are less
liquid, and are subject to liquidity risk. Liquidity risk is the risk that
certain securities may be difficult or impossible to sell at a desirable time
and price. There normally is less publicly available information concerning
these securities. In addition, the Fund's investments in unseasoned companies
present risks considerably greater than investments in more established
companies. Further, the securities in which the Fund invests will often be
traded only in the over-the-counter market or on a regional securities
exchange, may be listed only in the quotation service commonly known as the
"pink sheets," and may not be traded every day or in the volume typical of
trading on a national securities exchange. They may be subject to wide
fluctuations in market value. The trading market for any given security may be
sufficiently thin as to make it difficult for the Fund to dispose of a
substantial block of such securities. These securities are less liquid than
other more widely traded securities. The disposition by the Fund of portfolio
securities to meet redemptions or otherwise may require the Fund to sell these
securities at a discount from market prices or during periods when, in the
Adviser's judgment, such disposition is not desirable or to make many small
sales over a lengthy period of time.
The Fund's investments in foreign securities and American Depository Receipts
are subject to foreign risks. Foreign risks, which are not typically associated
with domestic issuers, result from less government regulation, less public
information and less economic, political and social stability. The Fund will
also be subject to the risk of negative foreign currency fluctuations. Foreign
risks will normally be greatest when the Fund invests in issuers located in
emerging countries.
The Fund is also subject to IPO risk. IPOs may not be consistently available to
the Fund for investing, particularly as the Fund's asset base grows. As the
Fund's assets continue to grow, the effect of the Fund's investment in IPOs on
its total returns likely will decline, which could reduce the Fund's total
returns.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
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Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year, and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
The average annual total return calculation reflects a maximum initial sales
charge of 5.50% for the Retail A Shares. Sales charges are not reflected in the
bar chart. If the sales loads were reflected, returns would be reduced.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. The Retail B Shares commenced
operations on March 1, 1999. Because those shares have less than one year's
performance, no average annual returns are shown for that class in this
section.
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
[GRAPH]
90
91
92
93
94
95
96 56.8
97 13.63
98 -2.73
99 136.23
The MicroCap Fund's total return for Retail A Shares for the nine-month period
ending September 30, 2000 was 30.58%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q4 '99 70.70%
Worst Quarter: Q3 '98 -30.87%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (August 1, 1995)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
MicroCap Fund -
Retail A Shares 123.31% -- -- 41.39%
Russell 2000 Index 21.26% -- -- 14.06%
</TABLE>
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The Russell 2000 Index, an unmanaged index, consists of the smallest 2,000
companies in a group of 3,000 U.S. companies in the Russell 3000 Index, as
ranked by total market capitalization. The Index figures do not reflect any
fees or expenses. Investors cannot invest directly in the Index.
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A and Retail B Shares of the MicroCap Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price) 5.50% None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None 5.00%/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Retail
A Shares B Shares
--------------------------------------------------------
<S> <C> <C>
Management Fees(before waivers)/3/ 1.50% 1.50%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75%
Other Expenses/5/ 0.44% 0.44%
------- -------
Total Annual Fund Operating Expenses
(before waivers) 1.94% 2.69%
Fee Waivers and Expense
Reimbursements/6/ (0.01)% (0.01)%
------- -------
Net Annual Fund Operating Expenses/6/ 1.93% 2.68%
======= =======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third year and fourth year, 2% in the fifth year,
declining to 1% in the sixth year. Thereafter, Retail B Shares convert to
Retail A Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the MicroCap Fund
is 1.49% of the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a Service
Plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares and Retail B Shares until October 31,
2001, so that Net Annual Fund Operating Expenses will be no more than 1.93%
and 2.68%, respectively, for the current fiscal year. The fee waivers and
expense reimbursements may be terminated at any time after October 31, 2001
at the discretion of the service providers.
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MicroCap Fund - Retail A Shares $735 $1,125 $1,538 $2,869
MicroCap Fund - Retail B Shares
Assuming complete redemption at end of
period 771 1,134 1,624 2,675
Assuming no redemption 271 834 1,424 2,675
</TABLE>
--------------------------------------------------------------------------------
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
Types of Investment Risk
The principal risks of investing in each Fund are described previously in this
Prospectus. The following list provides more detail about some of those risks,
along with information on additional types of risks which may apply to the
Funds. Risks associated with particular types of investments each Fund makes
are described in this section and in the Additional Statement referred to on
the back cover.
General Risks Of Investing In Each Of The Funds
[GRAPHIC]
Complete Investment Program - All Funds
An investment in a single Fund, by itself, does not constitute a complete
investment plan.
Credit Risk - Money Market Funds, Bond Funds, Balanced Funds, and any other
Fund to the extent that it invests in fixed-income securities
An issuer of fixed-income securities may default on its obligation to pay
interest and repay principal. Also, changes in the financial strength of an
issuer or changes in the credit rating of a security may affect its value.
Credit risk includes "counterparty risk" - the risk that the other party to a
transaction will not fulfill its contractual obligation. This risk applies, for
example, to repurchase agreements into which each Fund may enter.
Securities rated below investment grade are particularly subject to credit
risk. These securities are predominantly speculative and are commonly referred
to as "junk bonds." To the extent a Fund purchases or holds convertible or
other securities that are below investment grade, a greater risk exists as to
the timely repayment of the principal of, and the timely payment of interest or
dividends on, such securities.
Derivatives Risk - All Funds
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 a Fund's investments in options, futures, swaps, structured securities and
other derivative instruments which may be leveraged. A Fund may use derivatives
to: increase yield; hedge against
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a decline in principal value; invest with greater efficiency and lower cost
than is possible through direct investment; adjust the Fund's duration; or
provide daily liquidity.
Hedging is the use of one investment to offset the effects of another
investment. To the extent that a derivative is used as a hedge against an
opposite position that the Fund also holds, a loss generated by the derivative
should be substantially offset by gains on the hedged investment, and vice
versa. While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains. Hedging also involves correlation risk -the risk that changes
in the value of a hedging instrument may not match those of the asset being
hedged.
Investment by the Short-Term Bond Fund, Intermediate Bond Fund, U.S. Government
Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM) Fund, Strategic Income
Fund and Large Cap Growth Fund in collateralized mortgage obligations and
mortgage- and asset-backed securities are subject to derivatives risk.
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.
Interest Rate Risk - Money Market Funds, Bond Funds, Balanced Funds and any
other Fund to the extent that it invests in fixed-income securities
When interest rates increase, fixed-income securities tend to decline in value
and when interest rates decrease, fixed-income securities tend to increase in
value. A change in interest rates could cause the value of your investment to
change. Fixed-income securities with longer maturities are more susceptible to
interest rate fluctuations than those with shorter maturities. Therefore, the
risk of interest rate fluctuation is greater in the case of the Bond IMMDEX(TM)
Fund and the Tax-Exempt Intermediate Bond Fund than in the case of the Money
Market Funds or the Short-Term Bond Market Fund. Changes in interest rates may
also extend or shorten the duration of certain types of instruments, such as
asset-backed securities, thereby affecting their value and the return on your
investment.
Stripped securities in which the Short-Term Bond Fund, Intermediate Bond Fund,
Bond IMMDEX(TM) Fund and Strategic Income Fund may invest and zero coupon
securities in which the Short-Term Bond Fund, Intermediate Bond Fund, Bond
IMMDEX(TM) Fund and Strategic Income Fund may invest are subject to greater
interest rate risk than may of the more typical fixed income securities.
Liquidity Risk - All Funds
Certain securities may be difficult or impossible to sell at the time and price
that the Fund would like. A Fund may have to lower the price, sell other
securities instead or forego an investment opportunity, any of which could have
a negative effect on fund management or performance. This risk applies, for
example, to: variable and floating rate demand notes, variable amount demand
securities and restricted securities which the Funds may purchase, short-term
funding agreements which the Money Market Fund may purchase, the guaranteed
investment contracts which the Short-Term Bond Fund, Intermediate Bond Fund and
Bond IMMDEX(TM) Fund may purchase and the futures contracts in which the Short-
Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund and Strategic
Income Fund, Growth & Income Fund, Equity Index Fund, Large Cap Growth Fund,
International Value Fund, International Growth Fund, Science & Technology Fund
and MicroCap Fund may engage. Illiquid securities also include repurchase
agreements and time deposits with notice/termination dates of greater than
seven days and certain unlisted over-the-counter options and other securities
traded in the U.S. but which are subject to trading restrictions because they
are not registered under the Securities Act of 1933. There may be no active
secondary market for these securities. Each Fund may invest up to 15% of its
net assets at the time of purchase in securities that are illiquid, except that
each Money Market Fund may invest up to 10% of its net assets at the time of
purchase in securities that are illiquid. A domestically traded security which
is not registered under the Securities Act of 1933 will not be considered
illiquid if the Adviser (or Sub-Adviser) determines an adequate investment
............................................................................ 113
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trading market exists for that security. Because illiquid and restricted
securities may be difficult to sell at an acceptable price, they may be subject
to greater volatility and may result in a loss to a Fund.
Management Risk - All Funds
A strategy which the Adviser (or Sub-Adviser) uses may fail to produce the
intended results. The particular securities and types of securities a Fund
holds may underperform other securities and types of securities. There can be
no assurance a Fund will achieve its investment objective. The Adviser and each
Sub-Adviser may not change certain investment practices of the Fund without a
shareholder vote. These policies of each Fund, which may not be changed without
a shareholder vote, are described in the Additional Statement.
Market Risk - All Funds
The value of the securities in which a Fund invests may go up or down in
response to the prospects of individual companies and/or general economic
conditions. Price changes may be temporary or last for extended periods. Each
Fund's performance results may reflect periods of above average performance
attributable to its investment in certain securities during the initial public
offering, the performance of a limited number of the securities in the Fund, or
other non-recurring factors. It is possible that the performance may not be
repeated in the future.
Nonprincipal Strategy Risks - All Funds
This Prospectus describes each Fund's principal investment strategies, and the
types of securities in which each Fund principally invests. Each Fund may, from
time to time, make other types of investments and pursue other investment
strategies in support of its overall investment goal. These supplemental
investment strategies - and the risks involved - are described in detail in the
Additional Statement, which is referred to on the back cover of this
Prospectus.
Portfolio Turnover Risk - All Funds
The Adviser and Sub-Advisers will not consider the portfolio turnover rate a
limiting factor in making investment decisions for a Fund. A high rate of
portfolio turnover (100% or more) involves correspondingly greater expenses
which must be borne by a Fund and its shareholders. It may also result in
higher short-term capital gains taxable to shareholders. See "Financial
Highlights" for the Funds' historical portfolio turnover rates. The Money
Market Funds may have high portfolio turnover, but brokerage commissions are
not normally paid on Money Market instruments. Portfolio turnover is not
expected to have a material effect on the Money Market Funds' net investment
income.
Valuation Risk - All Funds
This is a risk that a Fund has valued certain securities at a higher or lower
price than the Fund can sell them.
Additional Risks Which Apply to Investment in Certain of the Funds
[GRAPHIC]
Extension Risk - Money Market Funds, Short-Term Bond Fund, Intermediate Bond
Fund, U.S. Government Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM)
Fund, Strategic Income Fund, National Municipal Bond Fund, Balanced Funds and
Large Cap Growth Fund
This is the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a municipal security, mortgage- or asset-
backed security) later than expected. This may happen when there is a rise in
interest rates. These events may lengthen the duration and potentially reduce
the value of these securities.
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Foreign Risks - Aggregate Bond Fund; Strategic Income Fund; Relative Value
Fund; Large Cap Growth Fund; International Value Fund; International Growth
Fund; Small Cap Core Equity Fund; and each other Fund - other than the Ohio
Tax-Exempt Money Market Fund, U.S. Treasury Money Market Fund, U.S. Government
Money Market Fund and Missouri Tax-Exempt Bond Fund - to the extent it invests
in foreign securities
When a Fund invests in foreign securities, it will be subject to special risks
not typically associated with domestic issuers resulting from less government
regulation, less public information and less economic, political and social
stability. Foreign securities, and in particular foreign debt securities, are
sensitive to changes in interest rates. In addition, investment in securities
of foreign governments involves the risk that foreign governments may default
on their obligations or may otherwise not respect the integrity of their debt.
A Fund which invests in foreign securities will also be subject to the
diplomatic risk that an adverse change in the diplomatic relations between the
U.S. and another country might reduce the value or liquidity of investments.
Future political and economic developments, the possible imposition of
withholding taxes on dividend income, the possible seizure or nationalization
of foreign holdings, the possible establishment of exchange controls or freezes
on the convertibility of currency, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks may be
subject to less stringent reserve requirements, and to different accounting,
auditing and recordkeeping requirements.
Foreign risks will normally be greatest when a Fund invests in issuers located
in emerging markets. Securities issued in emerging market countries, in
particular, may be more sensitive to certain economic changes and less liquid.
These countries are located in the Asia/Pacific region, Eastern Europe, Latin
and South America and Africa. In general, the securities markets of these
countries are less liquid, are subject to greater price volatility, have
smaller market capitalizations and have problems with securities registration
and custody. In addition, because the securities settlement procedures are less
developed in these countries, a Fund may be required to deliver securities
prior to receiving payment and also be unable to complete transactions during
market disruptions. As a result of these and other risks, investments in these
countries generally present a greater risk of loss to a Fund.
Investment in foreign securities also involves higher costs than investment in
U.S. securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments.
Each of the Funds, other than the money market funds, may invest in foreign
currency denominated securities. A Fund which invests in foreign currency
denominated securities will also be subject to the risk of negative foreign
currency rate fluctuations. A change in the exchange rate between U.S. dollars
and foreign currency may reduce the value of an investment made in a security
denominated in that foreign currency. The International Value Fund and
International Growth Fund may hedge against foreign currency risk, and the
other Funds may do so on unsettled trades, but none of the Funds is required to
do so.
The International Value Fund also may invest in obligations of foreign
countries and political entities ("sovereign debt") which may trade at a
substantial discount from face value. An issuer of sovereign debt may be
unwilling or unable to repay interests and principal as due. The Fund may
purchase Brady Bonds as part of its investment in sovereign debt of countries
that have restructured or are restructuring their sovereign debt pursuant to
the Brady Plan. The Brady Plan is an initiative announced by former U.S.
Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations
to restructure their external debt. Investments in Brady Bonds can be viewed as
speculative.
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European Currency Unification - International Value Fund; International Growth
Fund; and each other Fund - other than the Ohio Tax - Exempt Money Market Fund,
U.S. Government Money Market Fund, U.S. Treasury Money Market Fund and the
Missouri Tax-Exempt Bond Fund - to the extent it invests in foreign securities
Many European countries have adopted a single European currency, the euro. On
January 1, 1999, the euro became legal tender for all countries participating
in the Economic and Monetary Union ("EMU"). A new European Central Bank has
been created to manage the monetary policy of the new unified region. On the
same date, the exchange rates were irrevocably fixed between the EMU member
countries. National currencies will continue to circulate until they are
replaced by euro coins and bank notes by the middle of 2002.
This change is likely to significantly impact the European capital markets in
which a Fund invests and may result in a Fund facing additional risks in
pursuing its investment objective. These risks, which include, but are not
limited to, uncertainty as to proper tax treatment of the currency conversion,
volatility of currency exchange rates as a result of the conversion,
uncertainty as to capital market reaction, conversion costs that may affect
issuer profitability and creditworthiness, and lack of participation by some
European countries, may increase the volatility of a Fund's net asset value per
share.
Initial Public Offering (IPO) Risk - Equity Funds
The Equity Funds may participate in the IPO market. IPOs may have a magnified
performance impact on a Fund with a small asset base. IPOs may not be
consistently available to the Funds for investing, particularly as the Funds'
asset bases grow. The impact of IPOs on a Fund's performance likely will
decrease as the Fund's asset size increases, which could reduce the Fund's
total returns.
Prepayment Risk - Money Market Funds, Short-Term Bond Fund, Intermediate Bond
Fund, U.S. Government Securities Fund, Aggregate Bond Fund, Bond IMMDEXtm Fund,
Strategic Income Fund, National Municipal Bond Fund, Balanced Funds, Large Cap
Growth Fund, International Growth Fund and Small Cap Core Equity Fund
This is the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage- or asset-backed security)
earlier than expected. This may happen when there is a decline in interest
rates. These events may make a Fund unable to recoup its initial investment and
may result in reduced yields.
Securities Lending - All Funds other than the Ohio Tax-Exempt Money Market
Fund, Missouri Tax-Exempt Bond Fund and Relative Value Fund
To obtain interest income, the Fund may lend its securities to broker-dealers,
banks or institutional borrowers pursuant to agreements requiring that the
loans be continuously secured by collateral equal at all times in value to at
least the market value of the securities loaned. There is the risk that, when
lending portfolio securities, the securities may not be available to the Fund
on a timely basis. Therefore, the Fund may lose the opportunity to sell the
securities at a desirable price. Additionally, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition of the
securities may be delayed pending court action.
Small and MidCap Stock Risk - MidCap Index Fund, MidCap Core Equity Fund, Small
Cap Index Fund, Small Cap Core Equity Fund, Science & Technology Fund and
MicroCap Fund
Smaller and medium capitalization stocks involve greater risks than those
associated with larger, more established companies. Small and medium company
stocks may be subject to more abrupt or erratic price movements, for reasons
including that the stocks are traded in lower volume and that the issuers are
more sensitive to changing conditions and have less certain growth prospects.
Also, there are fewer market makers
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for these stocks and wider spreads between quoted bid and asked prices in the
over-the-counter market for these stocks. Small and medium cap stocks tend to
be less liquid, particularly during periods of market disruption. There
normally is less publicly available information concerning these securities.
Small and medium companies in which the Funds may invest may have limited
product lines, markets or financial resources, or may be dependent on a small
management group. In particular, investments in unseasoned companies present
risks considerably greater than investments in more established companies.
Tax Risk - Tax-Exempt Money Market Fund, Ohio Tax-Exempt Money Market Fund,
U.S. Treasury Money Market Fund, Tax-Exempt Intermediate Bond Fund, Missouri
Tax-Exempt Bond Fund and National Municipal Bond Fund
These Funds may be more adversely impacted by changes in tax rates and policies
than the other Funds. Because interest income on municipal obligations is
normally not subject to regular federal income taxation, the attractiveness of
municipal obligations in relation to other investment alternatives is affected
by changes in federal income tax rates applicable to, or the continuing federal
income tax-exempt status of, such interest income. Any proposed or actual
changes in such rates or exempt status, therefore, can significantly affect the
demand for and supply, liquidity and marketability of municipal obligations,
which could in turn affect a Fund's ability to acquire and dispose of municipal
obligations at desirable yield and price levels.
Investment in tax-exempt securities poses additional risks. In many cases, the
Internal Revenue Service has not ruled on whether the interest received on a
tax-exempt obligation is tax-exempt, and accordingly, purchases of these
securities are based on the opinion of bond counsel to the issuers at the time
of issuance. The Fund and the Adviser rely on these opinions and will not
review the basis for them.
Temporary Investment Risk - All Funds other than the Index Funds
Each of the Funds may, for temporary defensive purposes, invest a percentage of
its total assets, without limitation, in cash or various short-term instruments
(except for the MicroCap Fund, which may invest up to 30% of its assets in
money market instruments for temporary defensive purposes). This may occur for
example, when a Fund is attempting to respond to adverse market, economic,
political or other conditions. In particular, the U.S. Treasury Money Market
Fund may temporarily hold cash; the Tax-Exempt Money Market Fund, Ohio Tax-
Exempt Money Market Fund, Tax-Exempt Intermediate Bond Fund and Missouri Tax-
Exempt Bond Fund may, from time to time, hold uninvested cash reserves or
invest in short-term taxable money market obligations (taxable obligations
purchased by each Fund normally will not exceed 20% of total assets at the time
of purchase); and the International Value Fund and International Growth Fund
may invest in money market securities denominated in U.S. or foreign currency.
When a Fund's assets are invested in these instruments, the Fund may not be
achieving its investment objective.
Additional Risks Which Apply to Particular Types of Securities
[GRAPHIC]
Government Obligations - Money Market Funds other than the Tax-Exempt Money
Market Fund and Ohio Tax-Exempt Money Market Fund, Short-Term Bond Fund,
Intermediate Bond Fund, U.S. Government Securities Fund, Aggregate Bond Fund,
Bond IMMDEX(TM) Fund, Strategic Income Fund and Balanced Funds
In addition to U.S. Treasury obligations, the Funds may invest in other
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities. No assurance can be given that the U.S. government will
provide financial support to U.S. government-sponsored agencies or
instrumentalities when it is not obligated to do so by law.
Mortgage-Backed and Asset-Backed Securities - Short-Term Bond Fund,
Intermediate Bond Fund, U.S. Government Securities Fund, Aggregate Bond Fund,
Bond IMMDEX(TM) Fund, Strategic Income Fund, Balanced Funds and Large Cap
Growth Fund
Each of these Funds may purchase residential and commercial mortgage-backed as
well as other asset-backed securities (i.e., securities backed by credit card
receivables, automobile loans or other assets). In addition to
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credit and market risk, mortgage- and asset-backed securities involve
prepayment risk because the underlying assets (loans) may be prepaid at any
time. The value of these securities may also change because of actual or
perceived changes in the creditworthiness of the originator, the servicing
agent, the financial institution providing the credit support, or the
counterparty. 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. The relative
payment rights of certain types of mortgage-backed securities may make them
subject to greater volatility and interest rate risk than other types of
mortgage-backed securities. In addition, non-mortgage asset-backed securities
involve certain risks not presented by mortgage-backed securities. Primarily,
these securities do not have the benefit of the same security interest in the
underlying collateral. Credit card receivables are generally unsecured, and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws. Automobile receivables are subject to the risk that the
trustee for the holders of the automobile receivables may not have an effective
security interest in all of the obligations backing the receivables. In times
of financial stress, the secondary market for asset-backed securities 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.
Municipal Securities - Ohio Tax-Exempt Money Market Fund, Missouri Tax-Exempt
Bond Fund and National Municipal Bond Fund
Each of these Funds may purchase municipal securities including general
obligation securities, revenue securities and private activity bonds. The
ability of a Fund to achieve its investment objective is dependent upon the
ability of issuers of municipal securities to meet their continuing obligations
for the payment of principal and interest. Although the National Municipal Bond
Fund may invest 25% or more of its net assets in (i) municipal securities whose
issuers are in the same state, (ii) municipal securities the interest on which
is paid solely from revenues of similar projects, and (iii) private activity
bonds, the Fund does not presently intend to do so unless in the opinion of the
Adviser the investment is warranted. To the extent that a Fund's assets are
invested in municipal securities the issuers of which are in the same state or
that are payable from the revenues of similar projects or in private activity
bonds, the Fund will be subject to the peculiar risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
Borrowings, Reverse Repurchase Agreements - All Funds
Each Fund may borrow money to the extent allowed (as described in the
Additional Statement) to meet shareholder redemptions from banks and each Fund
other than the National Municipal Bond Fund may enter into reverse repurchase
agreements. These strategies involve leveraging. If the securities held by a
Fund decline in value while these transactions are outstanding, the net asset
value of the Fund's outstanding shares will decline in value by proportionately
more than the decline in value of the securities. In addition, reverse
repurchase agreements involve the risks that the interest income earned by 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 will decline below the price the Fund is obligated to pay to repurchase
the securities, and that the securities may not be returned to the Fund.
Short Sales - MicroCap Fund
Short selling is the selling of securities which have been borrowed on the
expectation that the market price will drop. These transactions may result in
gains if a security's price declines, but may result in losses if a security's
price does not decline in price.
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Options - Short-Term Bond Fund, Intermediate Bond Fund, U.S. Government
Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM) Fund, Strategic Income
Fund, Balanced Funds and Equity Funds
An option is a type of derivative instrument that gives the holder the right
(but not the obligation) to buy (a "call") or sell (a "put") an asset in the
future at an agreed upon price prior to the expiration date of the option.
Options can be used to manage exposure to certain markets, enhance income or
hedge against a decline in value of portfolio securities. Options may relate to
particular securities or various stock or bond indices and may or may not be
listed on a national securities exchange and issued by the Options Clearing
Corporation. Purchasing options is a specialized investment technique which
entails a substantial risk of a complete loss of the amount paid as premiums to
the writer of the option.
The value of options can be highly volatile, and their use can result in loss
if the Adviser or Sub-Adviser is incorrect in its expectation of price
fluctuations. The successful use of options for hedging purposes also depends
in part on the ability of the Adviser or Sub-Adviser to manage future price
fluctuations and the degree of correlation between the options and securities
markets.
The Funds, other than the U.S. Government Securities Fund, Aggregate Bond Fund,
International Value Fund, International Growth Fund and Small Cap Core Equity
Fund may purchase put and call options in an amount not to exceed 5% of their
respective net assets. The U.S. Government Securities Fund, Aggregate Bond
Fund, International Growth Fund and Small Cap Core Equity Fund may purchase put
and call options in an amount not to exceed 10% of their respective net assets.
The International Value Fund may purchase put and call options without limit.
The Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund,
Strategic Income Fund and International Value 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 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.
In addition, each Fund may write call options on securities and on various
stock or bond indices. Each Fund may write a call option only if the option is
covered. A Fund may cover a call option by owning the security underlying the
option or through other means which would allow for immediate satisfaction of
its obligation. Such options will be listed on a national securities exchange.
The aggregate value of the Fund's assets subject to options written by the
Short-Term Bond Fund, Intermediate Bond Fund, U.S. Government Securities Fund,
Aggregate Bond Fund, Bond IMMDEX(TM) Fund, Growth & Income Fund, Equity Index
Fund, International Growth Fund, MidCap Index Fund, MidCap Core Equity Fund,
Small Cap Core Equity Fund and MicroCap Fund will not exceed 5%, 5%, 5%, 25%,
25%, 25%, 5%, 25%, 5%, 5%, 5% and 5%, respectively, of the value of its net
assets during the current year. The International Value Fund and International
Growth 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. During the current year the aggregate value of the International Value
Fund's assets subject to options written by the Fund will not exceed 5% of the
value of its net assets. In order to close out an option position, a Fund will
be required to enter into a "closing purchase transaction" (the purchase of a
call option on a security or an index with the same exercise price and
expiration date as the call option which it previously wrote on the same
security or index).
The Balanced Funds, International Value Fund, International Growth Fund, MidCap
Core Equity Fund, Small Cap Core Equity Fund, and the MicroCap Fund, and may
invest in warrants. Warrants are
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options to purchase equity securities at a specific price valid for a specific
period of time. The purchase of warrants involves the risk that the Fund could
lose the purchase value of the 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.
The International Value Fund may also write (i.e., sell) covered put options on
securities and various securities indices. The writer of a put incurs an
obligation to buy the security underlying the option from the put's purchaser
at the exercise price at any time on or before the termination date, at the
purchaser's election (certain options the Fund writes will be exercisable by
the purchaser only on a specific date). Generally, a put is "covered" if the
Fund maintains cash, U.S. government securities or other liquid high grade debt
obligations equal to the exercise price of the option or if the Fund holds a
put on the same underlying security with a similar or higher exercise price. By
writing a covered put option on a security, the Fund receives a premium for
writing the option; however the Fund assumes the risk that the value of the
security will decline before the exercise date, in which event, the Fund may
incur a loss in excess of the premium received when the put is exercised.
Risks associated with the use of options on securities include (i) imperfect
correlation between the change in market value of the securities the Fund holds
and the prices of options relating to the securities purchased or sold by the
Fund; and (ii) the possible lack of a liquid secondary market for an option.
The Additional Statement includes additional information relating to option
trading practices and related risks.
Futures Contracts and Related Options - Short-Term Bond Fund, Intermediate Bond
Fund, U.S. Government Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM)
Fund, Strategic Income Fund, Balanced Funds and Equity Funds
A futures contract is a type of derivative instrument that obligates the holder
to buy or sell an asset in the future at an agreed upon price. For example, a
futures contract may obligate a Fund, at maturity, to take or make delivery of
certain domestic or foreign securities, the cash value of a securities index or
a stated quantity of a foreign currency. The International Growth Fund may
invest in futures but may not invest in options. When a Fund purchases an
option on a futures contract, it has the right to assume a position as a
purchaser or seller of a futures contract at a specified exercise price during
the option period. When a Fund sells an option on a futures contract it becomes
obligated to purchase or sell a futures contract if the option is exercised.
Futures contracts and options present the following risks: imperfect
correlation between the change in market value of a Fund's securities and the
price of futures contracts and options; the possible inability to close a
futures contract when desired; losses due to unanticipated market movements
which are potentially unlimited; and the possible inability of the investment
management team to correctly predict the direction of securities prices,
interest rates, currency exchange rates and other economic factors. The Funds
(other than the U.S. Government Securities Fund and Aggregate Bond Fund) may
buy and sell futures contracts and related options on foreign exchanges or
boards of trade (which do not offer the same protections as U.S. exchanges).
Each Fund's commodities transactions must constitute bona fide hedging or other
permissible transactions pursuant to regulations promulgated by the Commodities
and Futures Trading Commission ("CFTC"). In addition, a Fund may not engage in
such transactions if the sum of the amount of initial margin deposits and
premiums paid for unexpired commodity options, other than for bona fide hedging
transactions, would exceed 5% of the liquidation value of its assets, after
taking into account unrealized profits and unrealized losses on such contracts
it has entered into; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the percentage limitation. Pursuant to SEC requirements, a Fund
may be required to segregate cash or high quality money
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market instruments in connection with its commodities transactions in an amount
generally equal to the value of the underlying commodity. Firstar Funds (the
"Company") intends to comply with the regulations of the CFTC exempting the
Fund from registration as a "commodity pool operator."
The Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund,
Strategic Income Fund, Growth & Income Fund, International Growth Fund and
Small Cap Core Equity 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, International Value
Fund, MidCap Index Fund and Small Cap Index Fund intend to limit their
transactions in futures contracts so that not more than 10%, 25%, 10% and 10%
of each Fund's respective net assets are at risk. For a more detailed
description of futures contracts and futures options, including a discussion of
the limitations imposed by federal tax law, see Appendix B to the Additional
Statement.
Guaranteed Investment Contracts and Zero Coupon Securities - Short-Term Bond
Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund, and Strategic Income Fund
The Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund, and
Strategic Income Fund may purchase guaranteed investment contracts ("GICs")
issued by highly rated U.S. insurance companies, and zero coupon securities.
GICs are subject to liquidity risk, which is the risk that certain securities
may be difficult or impossible to sell at a desirable time and price.
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Investing With Firstar Funds
This section describes for you the procedures for opening an account and how to
buy, sell or exchange Fund shares.
Share Classes Available
The Firstar Funds offer two classes of Shares in the Money Market Funds, Retail
A Shares and Institutional Shares (except that the Money Market Fund and
Institutional Money Market Fund each offer only one class of Shares), and four
classes of Shares in the Non-Money Market Funds; Retail A, Retail B, Y and
Institutional (except that the Global Equity Fund only offers Y and
Institutional Shares). This prospectus offers only Retail A Shares of the Money
Market Funds and Retail A and Retail B Shares of the Non-Money Market Funds.
Other share classes are subject to different fees and expenses (which affect
performance), and are entitled to different services. Information regarding
those other share classes may be obtained by calling the number on the back
cover of this prospectus.
Retail A Shares
.Initial sales charge of 5.50% or less (but no initial sales charge for Money
Market Funds)
.No deferred sales charge
.Reduced sales charge for larger investments. See "Sales Charges and Waivers"
for more information
.Available to any investor who does not qualify to purchase Institutional or Y
shares
Retail B Shares
.No initial sales charge
.Deferred sales charge - Maximum of 5% for redemptions during the first year,
4% in the second year, 3% in the third and fourth year, 2% in the fifth year,
1% in the sixth year and 0% thereafter
.Converts to Retail A shares after six years
.Available to any investor who does not qualify to purchase Institutional or Y
shares
A securities dealer, broker, financial institution or other industry
professional ("Shareholder Organization") may charge transaction or other fees
for providing administrative or other services in connection with investments
in Fund shares.
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Sales Charges and Waivers
Initial Sales Charges - for Retail A Shares of Funds other than Money Market
Funds:
The public offering price for Retail A Shares is the net asset value of the
Retail A Shares purchased plus any applicable front-end sales charge. A sales
charge will not be assessed on Retail A Shares purchased through reinvestment
of dividends or capital gains distributions. The sales charge is as follows:
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<TABLE>
<CAPTION>
Shareholder
Organization
Sales Charge as a Sales Charge as a Reallowance as a
Amount of Transaction Percentage of Percentage of Percentage of Offering
at Offering Price Offering Price Net Asset Value Price
----------------------------------------------------------------------------------------------
Equity Funds Bond Funds Equity Funds Bond Funds Equity Funds Bond Funds
<S> <C> <C> <C> <C> <C> <C>
Less than
$50,000 5.50% 4.00% 5.82% 4.17% 5.00% 3.75%
$50,000 to
$99,999 4.50% 3.50% 4.71% 3.63% 4.00% 3.25%
$100,000
to
$249,999 3.50% 3.00% 3.63% 3.09% 3.00% 2.75%
$250,000
to
$499,999 2.50% 2.50% 2.56% 2.56% 2.00% 2.25%
$500,000
to
$999,999 2.00% 2.00% 2.04% 2.04% 1.50% 1.75%
$1,000,000
and above 0.50% 0.50% 0.50% 0.50% 0.40% 0.40%
</TABLE>
--------------------------------------------------------------------------------
You only pay a sales charge when you buy shares. The Distributor may reallow
the entire sales charge to certain shareholder organizations and the amount
reallowed may change periodically. To the extent that 90% or more of the sales
charge is reallowed, shareholder organizations may be deemed to be underwriters
under the Act.
Reducing Your Sales Charges and Waivers - Retail A Shares
To qualify for a reduction of, or exception to the sales charge, you must
notify your shareholder organization or the Distributor at the time of purchase
or exchange. The reduction in sales charge is subject to confirmation of your
holdings through a check of records. Firstar Funds may modify or terminate
quantity discounts at any time.
Waivers - Retail A Shares
You may purchase Retail A Shares without a sales charge if:
.you are an employee, director, retiree or registered representative of
Firstar Corporation or its affiliates or of Firstar Funds;
.you are a spouse, parent, in-law, sibling or child of an individual who
falls within the preceding category;
.you make any purchase for your medical savings account for which Firstar
Corporation or an affiliate serves in a custodial capacity;
.you purchase through certain external organizations that have entered into a
service agreement with Firstar Funds or its affiliates;
.you are part of an employer-sponsored qualified retirement plan administered
by Firstar with assets of less than $1 million at the time Firstar begins
plan administration, provided such administration commenced on or after June
18, 1999;
.you purchase through certain broker-dealers who have agreed to provide
certain services with respect to shares of the Funds. Check with your
broker-dealer to see if you qualify for this exemption; or
.you received shares of a Fund as part of the Firstar-Stellar Reorganization,
Firstar-Mercantile Reorganization and/or Firstar-Select Reorganization and,
prior to the reorganization, you qualified to purchase shares without a
sales load at net asset value and you have continuously owned shares of the
Fund since that reorganization.
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Reducing Your Sales Charges - Retail A Shares
.Right of Accumulation - Existing Equity, Balanced and Bond Fund shares can be
combined with new purchases for purposes of calculating reduced sales charges.
.Letter of Intent--Fund shares purchased in a 13-month period qualify for the
same reduced sales charge as if purchased all at once. You may obtain a
reduced sales charge by means of a written Letter of Intent which expresses
your non-binding commitment to invest in the aggregate $100,000 or more in
Equity, Balanced or Bond Fund Retail A Shares. Any investments you make during
the period receive the discounted sales charge based on the full amount of
your investment commitment. The Additional Statement includes details about
the Letter of Intent.
For purposes of applying the Rights of Accumulation and Letter of Intent
privileges, the sales charge schedule applies to the combined purchases made by
any individual and/or spouse purchasing securities for his, her or their own
account, or the aggregate investments of a trustee or other fiduciary or IRA
for the benefit of the persons previously listed.
Contingent Deferred Sales Charge - Retail B Shares
The public offering price for Retail B Shares is the net asset value of the
Retail B Shares purchased. Although investors pay no front-end sales charge on
purchases of Retail B Shares, such Shares are subject to a contingent deferred
sales charge at the rates set forth below if they are redeemed within six years
of purchase.
The amount of any contingent deferred sales charge an investor must pay depends
on the number of years that elapse between the purchase date and the date such
Retail B Shares are redeemed. Solely for purposes of this determination, all
payments during a month will be aggregated and deemed to have been made on the
first day of the month.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Years Contingent Deferred Sales Charge
Elapsed Since Purchase (as % of dollar amount subject to the charge)
----------------------------------------------------------------------
<S> <C>
Less than one 5.00%
At least one but less
than two 4.00%
At least two but less
than three 3.00%
At least three but less
than four 3.00%
At least four but less
than five 2.00%
At least five but less
than six 1.00%
At least six None
----------------------------------------------------------------------
</TABLE>
The contingent deferred sales charge on Retail B Shares is based on the lesser
of the net asset value of the Shares on the redemption date or the original
cost of the Shares being redeemed. As a result, no sales charge is imposed on
any increase in the net asset value of an investor's Retail B Shares. In
addition, a contingent deferred sales charge will not be assessed on Retail B
Shares purchased through reinvestment of dividends or capital gains
distributions.
When a shareholder redeems his or her Retail B Shares, the redemption request
is processed to minimize the amount of the contingent deferred sales charge
that will be charged. Retail B Shares are redeemed first from those shares that
are not subject to a contingent deferred sales charge (that is, Retail B Shares
that were acquired through reinvestment of dividends or distributions or that
qualify for other deferred sales charge exemptions, if any) and after that from
the Retail B Shares that have been held the longest.
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Shareholder organizations will receive commissions in connection with sales of
Retail B Shares. A commission equal to 5% of the amount invested is paid to
authorized dealers.
The contingent deferred sales charge a shareholder may pay upon redemption is
remitted to the Distributor or other party, which may use such amounts to
defray the expenses associated with the distribution-related services involved
in selling Retail B Shares.
Waivers - Retail B Shares
Certain types of redemptions may also qualify for an exemption from the
contingent deferred sales charge. If you think you may be eligible for a
contingent deferred sales charge waiver listed below, be sure to notify your
shareholder organization or the Distributor at the time Retail B Shares are
redeemed. The contingent deferred sales charge with respect to Retail B Shares
is not assessed on:
.exchanges described under "Exchange of Shares";
.redemptions in connection with shares sold for certain retirement
distributions or because of disability or death;
.redemptions effected pursuant to a Fund's right to liquidate a shareholder's
account if the aggregate net asset value of Retail B Shares held in the
account is less than the minimum account size set forth under "Redeeming
Shares--Additional Transaction Information--Accounts Below the Minimum
Balance";
.redemptions in connection with the combination of a Fund with any other
investment company registered under the 1940 Act by merger, acquisition of
assets, or by any other transaction; or
.redemptions resulting from certain tax-free returns from IRAs of excess
contribution.
.you received shares of a Fund as part of the Firstar-Stellar Reorganization,
Firstar-Mercantile Reorganization and/or Firstar-Select Reorganization and,
prior to the reorganization, you qualified to redeem your shares without a
sales load at net asset value and you have continuously owned shares of the
Fund since that reorganization.
In addition to the foregoing exemptions, no contingent deferred sales charge
will be imposed on redemptions made pursuant to the Firstar Funds' Systematic
Withdrawal Plan. The Funds reserve the right to limit such redemptions without
a contingent deferred sales charge, on an annual basis, to 12% of the value of
your Retail B Shares on the redemption date. See the Additional Statement for
more information.
Conversion - Retail B Shares
Retail B Shares will automatically convert into Retail A Shares of the same
Fund six years after the beginning of the calendar month in which the purchase
date occurred. If you acquire Retail B Shares of a Fund by exchange from Retail
B Shares of another Fund, your Retail B Shares will convert into Retail A
Shares of that Fund based on the date of the initial purchase.
If you acquire Retail B Shares through reinvestment of distributions, your
Retail B Shares will convert into Retail A Shares at the earlier of two dates--
either six years after the beginning of the calendar month in which the
purchase date occurred (based on the date of the initial purchase of the shares
on which the distribution was paid) or the date of conversion of the most
recently purchased Retail B Shares that were not acquired through reinvestment
of dividends or distributions. For example, if a shareholder makes a one-time
purchase of Retail B Shares of a Fund and subsequently acquires additional
Retail B Shares of that Fund only through reinvestment of dividends and/or
distributions, all of such shareholder's Retail B Shares of that Fund,
including those acquired through reinvestment, will convert to Retail A Shares
of such fund on the same date.
Upon conversion, the converted shares will be relieved of the distribution and
shareholder servicing fees borne by Retail B Shares, although they will be
subject to the shareholder servicing fees borne by Retail A Shares.
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Reinstatement Privilege
If you sell shares of a Firstar Fund you may reinvest some or all of the
proceeds in the Retail A Shares of any Firstar Fund within 60 days without a
sales charge, as long as you notify the transfer agent or your shareholder
organization at the time you reinvest. You may be subject to taxes as a result
of a redemption. Consult your tax adviser concerning the results of a
redemption or reinvestment.
How to Decide Whether to Buy Retail A or Retail B Shares
The decision as to which type of Shares to purchase depends on the amount you
invest, the intended length of the investment and your personal situation.
Retail A Shares - If you are making an investment of an amount that qualifies
for a reduced sales charge, you may consider purchasing Retail A Shares.
Retail B Shares - If you plan to hold your investment for a significant period
of time and would prefer not to pay an initial sales charge, you might consider
purchasing Retail B Shares. By not paying a front-end sales charge, your entire
purchase in Retail B Shares is invested from the time you make your initial
investment. However, the distribution and service fee paid by Retail B Shares
will cause your Retail B Shares (until conversion to Retail A Shares) to have a
higher expense ratio and thus lower performance and lower dividend payments (to
the extent dividends are paid) than Retail A Shares.
Shareholder Organizations - Retail A and B Shares
Non-Money Market Funds
The Non-Money Market Funds have adopted a distribution and service plan for
Retail A Shares. The Non-Money Market Funds also have adopted a service plan
for Retail A Shares, under which the Funds may pay service fees for shareholder
services to Retail A shareholders. Under either of these plans, shareholder
organizations may be entitled to receive fees from a Fund at an annual rate of
up to 0.25% of the average daily net asset value of the Retail A Shares covered
by their respective agreements for distribution and/or shareholder support
services, as the case may be. Fees under both these plans will not exceed, in
the aggregate, the annual rate of 0.25% of a Fund's average daily net assets
for Retail A Shares.
Shareholder support services may include:
.assisting investors in processing purchase, exchange and redemption requests
.processing dividend and distribution payments from the Fund
.providing information periodically to customers showing their positions in
Fund shares
.providing sub-accounting
.forwarding sales literature and advertising
The Funds have adopted a distribution and service plan for Retail B Shares.
Under the distribution and service plan for Retail B Shares, the Distributor is
entitled to receive fees at an annual rate of up to 0.75% of the average daily
net asset value of Retail B Shares for distribution services with respect to
Retail B Shares. Also under the distribution and service plan for Retail B
Shares, shareholder organizations may be entitled to receive fees from a Fund
at an annual rate of up to 0.25% of the average daily net asset value of Retail
B Shares covered by their agreement for shareholder liaison services.
Shareholder liaison services may include responding to customers' inquiries and
providing information on their investments, and other personal and account
maintenance services within NASD Rules.
The Funds also have adopted a service plan for Retail B Shares, under which a
Fund may pay service fees for shareholder services (as listed above) to Retail
B shareholders. Under the service plan for Retail B Shares, shareholder
organizations may be entitled to receive fees from the Fund at an annual rate
of up to 0.25% of the average daily net asset value of Retail B Shares covered
by their agreement.
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Money Market Funds
The Money Market Funds have adopted a distribution and service plan for the
Retail A Shares. These Funds also have adopted a service plan under which these
Funds may pay service fees for shareholder services to Retail A shareholders.
Under either of these plans, shareholder organizations may be entitled to
receive fees from a Fund at an annual rate of up to 0.25% of the average daily
net asset value of the shares covered by their respective agreements for
distribution and/or shareholder support services, as the case may be.
Additional Information
Distribution fees are regulated by Rule 12b-1 under the Investment Company Act
of 1940 and are subject to the NASD Conduct Rules. Because these fees are paid
out of a Fund's assets on an ongoing basis, over time, these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges.
Payments to shareholder organizations, including affiliates of the Adviser,
under the plans, and to the Distributor under the distribution and service
plans for Retail B Shares are not tied directly to their own out-of-pocket
expenses and therefore may be used as they elect (for example, to defray their
overhead expenses), and may exceed their direct and indirect costs.
Under these plans, a Fund may enter into agreements with shareholder
organizations, including affiliates of the Adviser (such as Firstar Investment
Services, Inc.). The 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. Investors
should read this Prospectus in light of such fee schedules and under the terms
of their shareholder organizations' agreements with Firstar. 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.
Conflict-of-interest restrictions may apply to the receipt of compensation paid
by Firstar to a shareholder organization in connection with the investment of
fiduciary funds in Fund shares. Institutions, including banks regulated by the
Comptroller of the Currency and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult legal counsel before entering into
agreements with Firstar.
Purchasing Shares
The MicroCap Fund currently is closed to new investors. However, this Fund will
continue to accept additional share purchases from existing shareholders in
existing accounts or new accounts of which an existing shareholder is a full or
partial owner. The Fund will also accept purchases through reinvestment of
dividend and capital gain distributions. The Fund may open to new investors in
the future at the discretion of the Adviser based on various factors, including
assets under management and current investment opportunities.
Shares of the Funds are offered and sold on a continuous basis by the
distributor for the Funds, Quasar Distributors, LLC (the "Distributor"), an
affiliate of the Adviser. The Distributor is a registered broker-dealer with
offices at 615 East Michigan Street, Milwaukee, Wisconsin 53202.
Minimum Investments
The minimum initial investment in a Fund for Retail A Shares and Retail B
Shares is $1,000. The minimum subsequent investment is $50. The minimum initial
investment will be waived if you participate in the Periodic Investment Plan.
The maximum investment for the MicroCap Fund is $5,000,000.
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Additional Information
Buying Shares
Purchase requests for a Money Market Fund received in proper form prior to the
times listed below on a business day for the Funds will generally be processed
on the same day.
.Ohio Tax-Exempt Money Market Fund - 9:00 a.m. Central time
.Money Market Fund, Tax-Exempt Money Market Fund and U.S. Government Money
Market Fund - 11:30 a.m. Central time
.U.S. Treasury Money Market Fund - 1:00 p.m. Central time
In order for a purchase request for a Money Market Fund to be processed on the
same day at the times listed above, payment must be received in immediately
available funds wired to the transfer agent by the close of business. All
checks received will be processed at that day's closing price.
Purchase requests for the Money Market Funds accompanied by a check or wire
payment which are received at or after the times listed above, and purchase
requests accompanied by a check or wire payment for any Non-Money Market Fund,
will be executed the same day, at that day's closing price provided that
payment is received by the close of a regular trading hours. Orders received
after 3:00 p.m. Central time and orders for which payment is not received by
the close of regular trading hours on the New York Stock Exchange (normally
3:00 p.m. Central time) will be executed on the next business day after receipt
of both order and payment in proper form.
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Through a Shareholder Organization
[GRAPHIC]
Opening an Account
Contact your Shareholder Organization
By Mail
[GRAPHIC]
Complete an application and mail it along with a check payable to Firstar
Funds, P.O. Box 3011, Milwaukee, WI 53201-3011:
For overnight delivery mail to;
615 E. Michigan St., Milwaukee, WI 53202.
Automatically
[GRAPHIC]
Call 1-800-677-FUND to obtain a purchase application, which includes
information for a Periodic Investment Plan or ConvertiFund(R) Account.
By Wire
[GRAPHIC]
Call 1-800-677-FUND prior to sending the wire in order to obtain a confirmation
number and to ensure prompt and accurate handling of funds. Ask your bank to
transmit immediately available funds by wire in the amount of your purchase to:
Firstar Bank, N.A.
ABA # 0420-00013
Firstar Mutual Funds Securities, LLC
Account # 112-952-137
for further credit to [name of Fund]
[name /title on the account].
The Fund and its transfer agent are not responsible for the consequences of
delays resulting from the banking or Federal Reserve Wire system, or from
incomplete wiring instructions.
Internet
[GRAPHIC]
www.firstarfunds.com
Not available
By Telephone Exchange
[GRAPHIC]
Call 1-800-677-FUND to exchange from another Firstar Fund account with the same
registration including name, address and taxpayer ID number.
Through a Shareholder Organization
Adding to an Account
Contact your Shareholder Organization
By Mail
Make your check payable to Firstar Funds. Please include your sixteen-digit
account number on your check and mail it to the address at the left.
Automatically
Complete a Periodic Investment Plan Application to automatically purchase more
shares.
Open a ConvertiFund(R) account to automatically invest proceeds from one
account to another account of the Firstar Funds.
By Wire
Call 1-800-677-FUND prior to sending the wire in order to obtain a confirmation
number and to ensure prompt and accurate handling of funds. Ask your bank to
transmit immediately available funds by wire as described at the left. Please
include your sixteen-digit account number. The Fund and its transfer agent are
not responsible for the consequences of delays resulting from the banking or
Federal Reserve Wire system, or from incomplete wiring instructions.
Internet
www.firstarfunds.com
Use Firstar Funds Direct to exchange from another Firstar Fund account with the
same registration including name, address and taxpayer ID number.
Purchase additional shares using an electronic funds transfer from your banking
institution for payment.
Call 1-800-677-FUND to authorize this service.
By Telephone Exchange
Call 1-800-677-FUND to exchange from another Firstar Fund account with the same
registration including name, address and taxpayer ID number.
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Please Note: All checks must be drawn on a bank located within the United
States and must be payable in U.S. dollars to Firstar Funds. A $25 fee will be
imposed by the Funds' transfer agent if any check used for investment in an
account or any Periodic Investment Plan purchase does not clear, and the
investor involved will be responsible for any loss incurred by a Fund. Prior to
the transfer agent receiving a completed application, investors may make an
initial investment. However, redemptions will not be paid until the transfer
agent has received the completed application.
Additional Information on Buying Shares
.The Funds will not accept payment in cash or third party checks for the
purchase of shares.
.Federal regulations require that each investor provide a Social Security
number or other certified taxpayer identification number upon opening or
reopening an account. The Funds reserve the right to reject applications
without such a number or an indication that a number has been applied for. If
a number has been applied for, the number must be provided and certified
within sixty days of the date of the application. Any accounts opened without
a proper number will be subject to backup withholding at a rate of 31% on all
liquidations and dividend and capital gain distributions.
.Payment for shares of a Fund in the amount of $1,000,000 or more may, at the
discretion of the Adviser, be made in the form of securities that are
permissible investments for the respective Fund.
The Funds may authorize one or more brokers and other shareholder organizations
to accept on their behalf purchase, redemption and exchange orders, and may
authorize such shareholder organizations to designate other intermediaries to
accept purchase, redemption and exchange orders on the Funds' behalf. In these
cases, a Fund will be deemed to have received an order when an authorized
shareholder organization or intermediary accepts the order, and customer orders
will be priced at the Fund's net asset value next computed after they are
accepted by a shareholder organization or intermediary. Shareholder
organizations and intermediaries will be responsible for transmitting accepted
orders to the Funds within the period agreed upon by them. Shareholders should
contact their shareholder organization or intermediaries to learn whether they
are authorized to accept orders for Funds.
It is the responsibility of shareholder organizations to transmit orders and
payment for the purchase of shares by their customers to the transfer agent on
a timely basis and to provide account statements in accordance with the
procedures previously stated.
Redeeming Shares
Selling Shares
Redemption requests for a Money Market Fund received by the transfer agent by
phone on a business day for the Funds prior to the times listed below generally
will be processed at those times.
.Ohio Tax-Exempt Money Market Fund - 9:00 a.m. Central time
.Money Market Fund, Tax-Exempt Money Market Fund and U.S. Government Money
Market Fund -11:30 a.m. Central time
.U.S. Treasury Money Market Fund - 1:00 p.m. Central time
Redemption requests for the Money Market Funds received at or after the times
listed above on a business day for the Funds be executed the same day, at that
day's closing price. Orders received after 3:00 p.m. Central time will be
execute on the next business day.
Redemption requests for Non-Money Market Funds received by the transfer agent
before 3:00 p.m. Central time on a business day for the Funds will be executed
the same day, at that day's closing price. Orders received after 3:00 p.m.
Central time will be executed on the next business day.
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Through a Shareholder Organization
[GRAPHIC]
Contact your Shareholder Organization
By Phone
[GRAPHIC]
Call 1-800-677-FUND with your account name, sixteen digit account number and
amount of redemption (minimum $500). Redemption proceeds will only be sent to a
shareholder's address or bank account of a commercial bank located within the
United States as shown on the transfer agent's records. (Available only if
telephone redemptions have been authorized on the account application and if
there has been no change of address by telephone within the preceding 15 days).
By Mail
Mail your instructions to the Firstar Funds, P.O. Box 3011, Milwaukee, WI
53201-3011 (via overnight delivery to 615 E. Michigan Street, Milwaukee, WI
53202). Include the number of shares or the amount to be redeemed, your
sixteen-digit account number and Social Security number or other taxpayer
identification number. Your instructions must be signed by all persons required
to sign for transactions exactly as their names appear on the account. If the
redemption amount exceeds $50,000, or if the proceeds are to be sent elsewhere
than the address of record, or the address of record has been changed by
telephone within the preceding 15 days, each signature must be guaranteed in
writing by either a commercial bank that is a member of the FDIC, a trust
company, a credit union, a savings association, a member firm of a national
securities exchange or other eligible guarantor institution.
Internet
www.firstarfunds.com
[GRAPHIC]
Use Firstar Funds Direct to redeem up to $25,000. Call 1-800-677-FUND to
authorize this service.
Automatically
[GRAPHIC]
Call 1-800-677-FUND for a Systematic Withdrawal Plan application ($5,000
account minimum and $50 minimum per transaction).
Guarantees must be signed by an eligible guarantor institution and "Signature
Guaranteed" must appear with the signature.
The Funds may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees and guardians. A redemption
request will not be deemed to be properly received until the transfer agent
receives all required documents in proper form as specified above. Purchases of
additional Retail A Shares concurrently with withdrawals could be
disadvantageous because of the sales charge involved in the additional
purchases.
Additional Transaction Information
Telephone Requests
In order to arrange for telephone redemptions after you have opened your
account or to change the bank or account designated to receive redemption
proceeds, send a written request to Firstar Mutual Fund Services, LLC ("FMFS")
or contact your shareholder organization. Each shareholder of the account must
sign the request. The Funds may request further documentation from
corporations, executors, administrators, trustees and guardians.
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The Funds reserve the right to refuse a telephone redemption if they believe it
is advisable to do so. Procedures for redeeming shares by telephone may be
modified or terminated by the Funds at any time upon notice to shareholders.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If a shareholder is unable to contact the
transfer agent by telephone, shares may also be redeemed by delivering the
redemption request to the transfer agent.
In an effort to prevent unauthorized or fraudulent purchase and redemption
requests by telephone, Firstar employs reasonable procedures to confirm that
such instructions are genuine. Among the procedures used to determine
authenticity, investors electing to transact by telephone will be required to
provide their account number (unless opening a new account). All telephone
transactions will be recorded and, except for transactions in Money Market
Funds, confirmed in writing. Statements of accounts shall be conclusive if not
objected to in writing within 10 days after transmitted by mail. Firstar Funds
may implement other procedures from time to time. If reasonable procedures are
not implemented, Firstar Funds may be liable for any loss due to unauthorized
or fraudulent transactions. In all other cases, the shareholder is liable for
any loss for unauthorized transactions.
Check Redemption
You may request on the purchase application or by written request that a Fund
provides Redemption Checks ("Checks"). Checks may be made payable in the amount
of $250 or more. Any Checks drawn on a joint account will only require one
signature. There is no charge for the use of the Checks; however, the transfer
agent will impose a $25 charge for stopping payment of a Check upon your
request, or if the transfer agent cannot honor a Check due to insufficient
funds or other valid reason. Because dividends on each Fund accrue daily,
Checks may not be used to close an account, as a small balance is likely to
result.
Checks are not available for Non-Money Market Funds, IRAs or other retirement
plans for which Firstar acts as custodian.
Certificates
Certificates are only issued upon shareholder request. If certificates have
been issued, the transfer agent must receive the certificates, properly
endorsed or accompanied by a properly executed stock power and accompanied by
signature guarantees, prior to a redemption request.
Additional Redemption Information
The Funds will make payment for redeemed shares typically within one or two
business days, but no later than the seventh day after receipt by the transfer
agent of a request in proper form as specified above, except as provided by SEC
rules. However, if any portion of the shares to be redeemed represents an
investment made by check, the Funds will delay the payment of the redemption
proceeds until the transfer agent is reasonably satisfied that the check has
been collected, which may take up to twelve days from the purchase date. An
investor must have filed a purchase application before any redemption requests
can be paid.
Accounts Below the Minimum Balance
If your account falls below $1,000, other than due to market fluctuations, the
Funds may redeem your account. The Fund will impose no charge and will give you
sixty days written notice and an opportunity to raise the account balance prior
to any redemption. A Fund, in certain cases, may make payment for redemption in
securities. Investors would bear any brokerage or other transaction costs
incurred in converting the securities so received to cash. See the Additional
Statement for more information on involuntary redemptions.
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Exchanging Shares
Generally, any share class of a Firstar Fund is exchangeable for the same share
class of another Firstar Fund, provided you are eligible to purchase that share
class or Fund at the time of the exchange. Retail B Shares of a Non-Money
Market Fund may be exchanged for Retail A Shares of a Money Market Fund.
However, such shares may not then be exchanged for Retail A Shares of a Non-
Money Market Fund.
Unless you qualify for a sales charge exemption, an initial sales charge will
be imposed on the exchange if the shares of the Fund being acquired have an
initial sales charge and the shares being redeemed were purchased without a
sales charge. Retail B Shares acquired in an exchange and Retail A Shares of a
money market fund acquired in an exchange for Retail B Shares will be subject
to a contingent deferred sales charge upon redemption in accordance with this
Prospectus. For purposes of computing the contingent deferred sales charge, the
length of time of ownership will be measured from the date of the original
purchase of Retail B Shares.
Telephone exchange privileges automatically apply to each shareholder of record
unless the transfer agent receives written instructions canceling the
privilege.
Firstar Funds reserves the right to terminate the exchange privilege of any
party who requests more than four exchanges within a calendar year. Firstar
Funds may do so with prior notice based on a consideration of both the number
of exchanges and the time period over which those exchange requests have been
made, together with the level of expense to the Funds or other adverse effects
which may result from the additional exchange requests.
For federal income tax purposes, an exchange of shares is a taxable event and,
accordingly, an investor may realize a capital gain or loss. Before making an
exchange request, an investor should consult a tax or other financial adviser
to determine the tax consequences of a particular exchange. No exchange fee is
currently imposed by Firstar Funds on exchanges, however, Firstar Funds
reserves the right to impose a charge in the future. In addition, shareholder
organizations may charge a fee for providing administrative or other services
in connection with exchanges. The Fund reserves the right to reject any
exchange request with prior notice to a shareholder and the exchange privilege
may be modified or terminated at any time. At least sixty days' notice will be
given to shareholders of any material modification or termination except where
notice is not required under SEC regulations. Also keep in mind:
.Exchanges are available only in states where exchanges may be legally made.
.The minimum amount which may be exchanged is $1,000.
.If any portion of the shares to be exchanged represents an investment made by
check, a Fund will delay the acquisition of new shares in an exchange until
the transfer agent is reasonably satisfied that the check has been collected,
which may take up to twelve days from the purchase date.
.It may be difficult to make telephone exchanges in times of drastic economic
or market changes. If this happens, you may initiate transactions in your Fund
accounts by mail or as otherwise described in this Prospectus.
Additional Shareholder Services
[GRAPHIC]
Shareholder Reports
Shareholders will be provided with a report showing portfolio investments and
other information at least semiannually; and after the close of the Fund's
fiscal year with an annual report containing audited financial statements. To
eliminate unnecessary duplication, only one copy of shareholder reports will be
sent to shareholders with the same mailing address. Shareholders may request
duplicate copies free of charge.
Account statements will be mailed to Money Market Shareholders monthly,
summarizing all transactions. For all other funds, account statements will be
mailed after each purchase, reinvestment of dividends and redemption.
Statements of accounts shall be conclusive if not objected to in writing within
10 days after transmitted by mail. Generally, a Fund does not send statements
for funds held in brokerage, retirement or other similar accounts.
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Firstar Funds Website (www.firstarfunds.com)
[GRAPHIC]
The site offers educational information and interactive financial planning
tools as well as product-specific information.
Generally, Shareholders can request purchases, exchanges and redemptions of
Fund shares online via the Internet after an account is opened. Redemption
requests of up to $25,000 will be accepted through the Internet. Payment for
shares purchased online must be made by electronic funds transfer from your
banking institution. To authorize this service, call FMFS at 1-800-677-FUND.
Firstar Funds and their agents will not be responsible for any losses resulting
from unauthorized on-line transactions when procedures are followed which are
designed to confirm that the on-line transaction request is genuine. Statements
of accounts shall be conclusive if not objected to in writing within 10 days
after transmitted by mail. During periods of significant economic or market
change, it may be difficult to reach the Funds on-line. If this happens, you
may initiate transactions in your Fund accounts by mail or as otherwise
described in the prospectus.
Automated Teleresponse Service
Shareholders using a touch-tone(R) telephone can access information on the
Funds twenty-four hours a day, seven days a week. When calling FMFS at 1-800-
677-FUND, shareholders may choose to use the automated information feature or,
during regular business hours (8:00 a.m. to 7:00 p.m. Central time, Monday
through Friday), speak with a Firstar Funds representative.
Retirement Plans
The Fund offers individual retirement accounts including Traditional, Roth,
SIMPLE and SEP IRAs. For details concerning Retirement Accounts (including
service fees), please call FMFS at 1-800-677-FUND.
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Additional Information
Dividends, Capital Gains Distributions and Taxes
Reinvested dividends and distributions receive the same tax treatment as those
paid in cash.
Dividends and Capital Gains Distributions
Dividends from net investment income, including net realized gains
and losses, if any, earned on the investments held by the Money
Market Funds, are declared on each business day on the shares that
are outstanding immediately after 11:30 a.m. Central time (9:00 a.m.
Central time for the Ohio Tax-Exempt Money Market Fund and 1:00 p.m.
Central time for the U.S. Treasury Money Market Fund) on the
declaration date.
Dividends from net investment income of the Bond Funds are declared and paid
monthly. Dividends from net investment income of the Balanced Income, Balanced
Growth, Growth & Income, Equity Income, Relative Value Equity Index, MidCap
Index and Small Cap Index Funds are declared and paid quarterly. Dividends from
net investment income of the Large Cap Core Equity, Large Cap Growth,
International Value, International Growth, MidCap Core Equity, Small Cap Core
Equity, Science & Technology and MicroCap Funds are declared and paid annually.
Any capital gains are distributed annually. A shareholder's dividends and
capital gains distributions will be reinvested automatically in additional
shares unless the Fund is notified that the shareholder elects to receive
distributions in cash.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
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Federal Taxes
Each Fund contemplates declaring as dividends each year all, or substantially
all, of its taxable income, including its net capital gain (the excess of long-
term capital gain over short-term capital loss). Distributions attributable to
the net capital gain of a Fund will be taxable to you as long-term capital
gain, regardless of how long you have held your Shares. Other Fund
distributions will generally be taxable as ordinary income. You will be subject
to income tax on these distributions regardless of whether they are paid in
cash or reinvested in additional Shares. You will be notified annually of the
tax status of distributions to you.
In the case of any Fund other than a Money Market Fund, you should note that if
you purchase Shares just prior to a capital gain distribution, the purchase
price will reflect the amount of the upcoming distribution, but you will be
taxable on the entire amount of the distribution received, even though, as an
economic matter, the distribution simply constitutes a return of capital. This
is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the Shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held Shares.) Any loss
realized on Shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends that were received on
the Shares. Additionally, any loss realized on a sale or redemption of shares
of a Fund may be disallowed under "wash sale" rules to the extent the shares
disposed of are replaced with other shares of a Fund within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of,
such as pursuant to a dividend reinvestment in shares of a Fund. If disallowed,
the loss will be reflected in an adjustment to the basis of shares acquired.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, Shares held in an IRA (or other tax-
qualified plan) will not be currently taxable.
A Fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the Fund receives from U.S. domestic
corporations may be eligible, in the hands of the corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations.
The International Value Fund and International Growth Fund. It is expected that
the International Value Fund and International Growth Fund will be subject to
foreign withholding taxes with respect to dividends or interest received from
sources in foreign countries. The International Value Fund and International
Growth Fund may make an election to treat a proportionate amount of such taxes
as constituting a distribution to each Shareholder, which would allow each
Shareholder either: (1) to credit such proportionate amount of taxes against
U.S. federal income tax liability; or (2) to take such amount as an itemized
deduction.
The Tax-Exempt Money Market Fund, Ohio Tax-Exempt Money Market Fund, Tax-Exempt
Intermediate Bond Fund, National Municipal Bond Fund and Missouri Tax-Exempt
Bond Fund. It is expected that the Tax-Exempt Money Market Fund, Ohio Tax-
Exempt Money Market Fund, Tax-Exempt Intermediate Bond Fund, Missouri Tax-
Exempt Bond Fund and National Municipal Bond Fund will distribute dividends
derived from interest earned on Exempt Securities, and these "exempt interest
dividends" will be exempt income for Shareholders for federal income tax
purposes. However, distributions, if any, derived from net capital gains will
generally be taxable to you as capital gains. Particularly in the case of the
Missouri Tax-Exempt Bond Fund, some dividends will be taxable, such as
dividends that are attributable to gains on bonds that are acquired at a
"market discount," and distributions of short- and long-term capital gains. It
is expected that the Tax-Exempt Intermediate Bond Fund may pay such capital
gains distributions from time to time. Dividends, if any, derived from taxable
interest income will be taxable to you as ordinary income.
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Interest on indebtedness incurred by a Shareholder to purchase or carry shares
of the Tax-Exempt Funds generally will not be deductible for federal income tax
purposes.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Exempt Funds may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest
dividends will also be considered along with other adjusted gross income in
determining whether any Social Security or railroad retirement payments
received by you are subject to federal income taxes.
If you receive an exempt-interest dividend with respect to any Share and the
Share is held by you for six months or less, any loss on the sale or exchange
of the Share will be disallowed to the extent of such dividend amount.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different United States federal income tax
treatment. You should consult your tax adviser for further information
regarding federal, state, local and/or foreign tax consequences relevant to
your specific situation.
State and Local Taxes
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply, however, to the portions of each
Fund's distributions, if any, that are attributable to interest on Federal
securities or interest on securities of the particular state or localities
within the state. Shareholders should consult their tax advisers regarding the
tax status of distributions in their state and locality.
Management Of The Funds
Advisory Services
Firstar Investment Research & Management Company, LLC ("FIRMCO"), a Wisconsin
Limited Liability Company and subsidiary of Firstar Corporation, a bank holding
company, serves as investment adviser to each Fund. FIRMCO, with principal
offices at Firstar Center, 777 East Wisconsin Avenue, 8th Floor, Milwaukee,
Wisconsin 53202, has provided investment advisory services since 1986. FIRMCO
currently has $32.3 billion in assets under management.
Firstar Corporation has agreed to permit the Company to use the name "Firstar
Funds" and expansions thereof on a non-exclusive and royalty-free basis in
connection with mutual fund management and distribution services within the
United States, its territories and possessions. This agreement may be
terminated by Firstar Corporation under specified circumstances, including if
no affiliate of Firstar Corporation is serving as investment adviser for any
portfolio offered by the Company.
Subject to the general supervision of the Board of Directors and in accordance
with the respective investment objective and policies of each Fund, the Adviser
manages each Fund's portfolio securities and maintains records relating to such
purchases and sales (except for the International Value and International
Growth Funds). Subject to the general supervision of the Board of Directors and
in accordance with the respective investment objectives and policies of the
International Value and International Growth Funds, the Adviser is responsible
for each Fund's investment program, general investment criteria and policies.
The Adviser has retained Hansberger Global Investors, Inc. ("HGI") as Sub-
Adviser for the International Value Fund. HGI, a Delaware corporation founded
in 1994, with its principal office at 515 East Las Olas Boulevard, Suite 1300,
Fort Lauderdale, Florida 33301, currently has $3.2 billion in assets under
management. HGI is a wholly-owned subsidiary of Hansberger Group, Inc. Subject
to the oversight and
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supervision of the Fund's Board of Directors and Adviser, HGI formulates and
implements a continuous investment program for the International Value Fund.
The Adviser has retained Clay Finlay Inc. ("Clay Finlay") as Sub-Adviser for
the International Growth Fund. Clay Finlay is a New York corporation founded in
1982, with its principal office at 200 Park Avenue, 56th Floor, New York, NY
10166 and, as of June 30, 2000, had $5.7 billion in assets under management.
Clay Finlay is a wholly-owned subsidiary of Old Mutual plc, a South African
financial services company. Subject to the oversight and supervision of the
Fund's Board of Directors and Adviser, Clay Finlay formulates and implements a
continuous investment program for the International Growth Fund.
The Adviser (or Sub-Adviser for the International Value Fund and International
Growth Fund, respectively) is authorized to allocate purchase and sale orders
for portfolio securities to shareholder organizations, including, in the case
of agency transactions, shareholder organizations which are affiliated with the
Adviser (or Sub-Advisers), to take into account the sale of Fund shares if the
Adviser (or Sub-Adviser for the International Value Fund or International
Growth Fund, respectively) believes that the quality of the transaction and the
amount of the commission are comparable to what they would be with other
qualified brokerage firms.
FIRMCO is entitled to receive from the Funds contractual fees calculated daily
and payable monthly, at the annual rate (as a percentage of such Fund's average
daily net assets) as follows:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount
Fund Before Waivers
----------------------------------------------------
<S> <C>
Money Market Fund 0.50%
Tax-Exempt Money Market Fund 0.50%
Ohio Tax-Exempt Money Market Fund 0.50%
U.S. Government Money Market Fund 0.50%
U.S. Treasury Money Market Fund 0.44%
Short-Term Bond Fund 0.60%
Intermediate Bond Fund 0.50%
U.S. Government Securities Fund 0.60%
Aggregate Bond Fund 0.50%
Bond IMMDEX(TM) Fund 0.30%
Strategic Income Fund 0.95%
Tax-Exempt Intermediate Bond Fund 0.50%
Missouri Tax-Exempt Bond Fund 0.45%
National Municipal Bond Fund 0.55%
Balanced Income Fund 0.75%
Balanced Growth Fund 0.75%
Growth & Income Fund 0.75%
Equity Income Fund 0.75%
Relative Value Fund 0.75%
Equity Index Fund 0.25%
Large Cap Core Equity Fund 0.75%
Large Cap Growth Fund 0.95%
International Value Fund 1.34%
International Growth Fund 1.00%
MidCap Index Fund 0.25%
MidCap Core Equity Fund 0.75%
Small Cap Index Fund 0.40%
Small Cap Core Equity Fund 0.75%
Science & Technology Fund 1.05%
MicroCap Fund 1.50%
----------------------------------------------------
</TABLE>
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HGI is entitled to a fee, payable by the Adviser, for its services and expenses
incurred with respect to the International Value Fund. The fee is computed
daily and paid monthly at the following annual rates (as a percentage of the
Fund's average daily net assets): 0.75% on the Fund's first $25 million, 0.50%
of the next $75 million and 0.35% of the Fund's average daily net assets in
excess of $100 million.
Clay Finlay is entitled to a fee, payable by the Adviser, for its services and
expenses incurred with respect to the International Growth Fund. The fee is
computed daily and paid monthly at the following annual rates (as a percentage
of the Fund's average daily net assets): 0.75% of the first $50 million of the
Fund's average daily net assets; plus 0.50 % of the next $50 million of average
daily net assets; plus 0.25% of average daily net assets in excess of $100
million.
For the fiscal year ended October 31, 1999, the Adviser received from each Fund
a fee, calculated daily and payable monthly, at the following annual rates (as
a percentage of the Fund's average daily net assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Fee Paid
----------------------------------------------
<S> <C>
Money Market Fund 0.38%
Tax Exempt Money Market Fund 0.49%
U.S. Government Money Market Fund 0.50%
Short-Term Bond Fund 0.32%
Intermediate Bond Fund 0.35%
Bond IMMDEX(TM) Fund 0.30%
Tax-Exempt Intermediate Bond Fund 0.32%
Balanced Income Fund 0.45%
Balanced Growth Fund 0.68%
Growth & Income Fund 0.75%
Equity Index Fund 0.18%
Large Cap Core Equity Fund 0.75%
International Value Fund 1.08%
MidCap Index Fund 0.01%
MidCap Core Equity Fund 0.73%
MicroCap Fund 1.50%
</TABLE>
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Prior to March 1, 2000, the Mercantile Government & Corporate Bond Portfolio,
Mercantile U.S. Government Securities Portfolio, Mercantile Missouri Tax-Exempt
Bond Portfolio, Mercantile National Municipal Bond Portfolio, Mercantile Small
Cap Equity Portfolio, Mercantile International Equity Portfolio, Mercantile
Equity Income Portfolio and Mercantile Small Cap Equity Index Portfolio were
managed by Mississippi Valley Advisors Inc. ("MVA"), a subsidiary of Firstar
Corporation.
For the fiscal year ended November 30, 1999, the Predecessor Mercantile Funds
paid their former investment adviser, MVA, the following fees:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Fee Paid
------------------------------------------------------------
<S> <C>
Mercantile Government & Corporate Bond
Portfolio 0.45%
Mercantile U.S. Government Securities Portfolio 0.45%
Mercantile Missouri Tax-Exempt Bond Portfolio 0.45%
Mercantile National Municipal Bond Portfolio 0.55%
Mercantile Small Cap Equity Portfolio 0.75%
Mercantile International Equity Portfolio 1.00%
Mercantile Equity Income Portfolio 0.75%
Mercantile Small Cap Equity Index Portfolio 0.32%
</TABLE>
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Prior to April 1, 2000, the Firstar Stellar Treasury Fund, Firstar Stellar Ohio
Tax-Free Money Market Fund, Firstar Stellar Strategic Income Fund, Firstar
Stellar Science & Technology Fund, Firstar Stellar Growth Equity Fund and
Firstar Stellar Relative Value Fund were managed by the Capital Management
Division of Firstar Bank, N.A., which is also a subsidiary of Firstar
Corporation.
For the fiscal year ended November 30, 1999, the Predecessor Stellar Funds paid
their former investment adviser, Firstar Bank, N.A., the following fees:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Fee Paid
-------------------------------------------------------------
<S> <C>
Firstar Stellar Treasury Fund 0.50%
Firstar Stellar Ohio Tax-Free Money Market Fund 0.35%
Firstar Stellar Strategic Income Fund 0.95%
Firstar Stellar Science & Technology Fund 0.90%/1/
Firstar Stellar Growth Equity Fund 0.75%
Firstar Stellar Relative Value Fund 0.75%
</TABLE>
--------------------------------------------------------------------------------
1 Commenced operations August 9, 1999. The fee given is the contractual
advisory fee rate.
Fund Managers
Richard Burling and Bradley Peters co-manage the Short-Term Bond Fund. Mr.
Burling is FIRMCO's Director of Credit Research. He has been with FIRMCO and
its affiliates since 1980 and has 17 years of investment management experience.
Mr. Peters has been with FIRMCO and its affiliates since 1993 and has 18 years
of investment management experience. Mr. Peters is a Certified Public
Accountant, a Certified Financial Planner, and a Certified Management
Accountant. Mr. Burling and Mr. Peters have managed the Fund since February
2000.
David Bethke manages the Intermediate Bond Fund and the U.S. Government
Securities Fund. Mr. Bethke has 19 years of investment management experience
and has been with FIRMCO and its affiliates since 1987. Mr. Bethke has managed
the Intermediate Bond Fund since February 2000. He has managed the Predecessor
Mercantile U.S. Government Securities Portfolio since it commenced operations
in 1988.
George Schupp and David Bethke co-manage the Bond IMMDEX(TM) Fund and Aggregate
Bond Fund. Mr. Schupp serves as FIRMCO's Director of Fixed Income. He has 24
years of investment management experience and has been with Firstar and its
affiliates since 1983. Mr. Schupp and Mr. Bethke have managed the Bond
IMMDEX(TM) Fund since February 2000. Mr. Schupp has managed the Predecessor
Mercantile Government & Corporate Bond Portfolio since February 1988, and Mr.
Bethke has managed the Predecessor Mercantile Government & Corporate Bond
Portfolio since February 2000.
George Schupp and Karen Bowie co-manage the Strategic Income Fund. Ms. Bowie
has over 15 years of trust and investment management experience with five of
those years at FIRMCO and its affiliates. Mr. Schupp has managed the Fund since
December 2000 and Ms. Bowie since September 2000.
Peter Merzian manages the Tax-Exempt Intermediate Bond Fund, Missouri Tax-
Exempt Bond Fund and National Municipal Bond Fund. Mr. Merzian joined FIRMCO
and its affiliates in 1993 and has 12 years of investment management
experience. He has managed the Tax-Exempt Intermediate Bond Fund since February
2000. He has managed the Predecessor Mercantile Missouri Tax-Exempt Bond
Portfolio since 1993 and the Predecessor Mercantile National Municipal Bond
Portfolio since it commenced operations in 1996.
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Marian Zentmyer and David Bethke co-manage the Balanced Income Fund. Ms.
Zentmyer serves as FIRMCO's Chief Equity Investment Officer. She has been with
FIRMCO and its affiliates since 1982 and has 21 years of investment management
experience. Ms. Zentmyer is a Certified Financial Planner. Ms. Zentmyer has
managed the Fund since its inception in December 1997. Mr. Bethke has managed
the Fund since February 2000.
Walter Dewey and George Schupp co-manage the Balanced Growth Fund. Mr. Dewey
has been with FIRMCO and its affiliates since 1986 and has 16 years of
investment management experience. Mr. Dewey has managed the Fund since November
1999. Mr. Schupp has managed the Fund since February 2000.
Marian Zentmyer and Leon Dodge co-manage the Growth & Income Fund. Ms. Zentmyer
has managed the Fund since February, 1993. Mr. Dodge has been with FIRMCO since
September, 2000. He has 23 years of investment management experience and has
been a portfolio manager of the Fund since September 2000.
Joseph P. Belew manages the Relative Value Fund and the Equity Income Fund. Mr.
Belew joined FIRMCO and its affiliates in 1979 and has 21 years of investment
management experience. He has managed the Predecessor Stellar Relative Value
Fund since its inception in June 1991 and the Predecessor Mercantile Equity
Income Portfolio since October 2000.
Walter Dewey and Jane Snorek co-manage the Large Cap Core Equity Fund. Mr.
Dewey has managed the Fund since July 7, 1997, and Ms. Snorek has managed the
Fund since September 2000. Ms. Snorek has been with FIRMCO and its affiliates
since 1999 and has nine years of investment management experience.
Donald L. Keller and Randy Hare co-manage the Large Cap Growth Fund. Mr. Keller
has been with FIRMCO and its affiliates since 1982 and has 18 years of
investment management experience. Mr. Keller has managed the Predecessor
Stellar Growth Equity Fund since its inception in October 1994. Mr. Hare has
been with FIRMCO and its affiliates since 1998 and has four years of investment
management experience. Mr. Hare has managed the Fund since November 2000.
A Portfolio Management Team lead by Thomas Hansberger, CIC manages the
International Value Fund for Hansberger Global Investors. Mr. Hansberger serves
as the Chief Executive Officer of Hansberger Global Investors and has over
thirty-five years of investment management experience. Before forming
Hansberger Global Investors, Mr. Hansberger served as Chairman, President and
Chief Executive Officer of Templeton Worldwide, Inc. the parent company of the
Templeton group of companies. The Portfolio Management Team has over 20 years
of industry experience.
Clay Finlay's International Equity team is responsible for the management of
the International Growth Fund. Frances Dakers, Greg Jones, Virginie Maisonneuve
and Susan Kenneally serve as regional team leaders on the International Equity
team. Each of these individuals is a Principal and Director of the Firm, and
each has an average of more than seventeen years of investment experience. This
team has managed the Predecessor Mercantile International Equity Portfolio
since it began operations in 1994.
Todd Krieg and Matt D'Attilio co-manage the MidCap Core Equity Fund. Mr. Krieg
has been with FIRMCO and its affiliates since 1992 and has seven years of
investment management experience. Mr. Krieg has managed the Fund since
September 1994. Mr. D'Attilio has been with FIRMCO and its affiliates since
1993. He has six years of investment management experience and has managed the
Fund since December 1998.
David Lettenberger and John Potter co-manage the Small Cap Core Equity Fund -
each since September 2000. Mr. Lettenberger has been with FIRMCO and its
affiliates since 1999 and has seven years of investment management experience.
Mr. Potter joined FIRMCO in September 2000 and has six years of investment
management experience.
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Randy Hare and Donald L. Keller co-manage the Science & Technology Fund. Mr.
Hare has managed the Predecessor Stellar Science & Technology Fund since
October 2000 and Mr. Keller since its inception in August 1999.
Joe Frohna and Barry Randall co-manage the MicroCap Fund. Mr. Frohna has been
with FIRMCO and its affiliates since 1995. He has seven years of investment
management experience and has managed the Fund since September 1997. Mr.
Randall has been with FIRMCO and its affiliates since May 2000. He has seven
years of investment management experience and has managed the Fund since May
2000.
Administrative Services
FMFS, an affiliate of the Adviser, serves as the Funds' Administrator and
receives fees for those services.
Custodian, Transfer and Dividend Disbursing Agent, and Accounting Services
Agent
FMFS also provides transfer agency, dividend disbursing agency and accounting
services for the Funds and receive fees for these services. Inquiries to the
transfer agent may be sent to: Firstar Mutual Fund Services, LLC, P.O. Box
3011, Milwaukee, Wisconsin 53201-3011. Firstar Bank, N.A., an affiliate of the
Adviser, provides custodial services for the Funds and receives fees for those
services.
Net Asset Value And Days Of Operation
The price of the Retail A and Retail B Shares (each, a "class") is based on net
asset value per share, plus, in the case of Retail A Shares of the non-money
market funds a front-end sales charge if applicable. This amount is calculated
separately for each class of shares by dividing the value of all securities and
other assets attributable to the class, less the liabilities attributable to
that class, by the number of outstanding shares of that class. The price at
which a purchase or redemption is effected is based on the next calculation of
net asset value after the order is accepted.
Money Market Funds
The net asset value of the Money Market Funds for purposes of pricing purchase
and redemption orders is determined as of 11:30 a.m. Central time (9:00 a.m.
Central time for the Ohio Tax-Exempt Money Market Fund and 1:00 p.m. Central
time for the U.S. Treasury Money Market Fund) and as of the close of regular
trading hours on the Exchange, normally, 3:00 p.m. Central time, on each day on
which both the Exchange is open for trading and the Federal Reserve Banks'
Fedline System is open. Shares of the Funds are not priced on days when the
Exchange is closed. For a complete list of days the Exchange is closed, please
see the Additional Statement. Net asset value per share is calculated by
dividing the value of all securities and other assets owned by each Fund
attributable to a particular class, less the liabilities charged to the Fund
attributable to a particular class, by the number of the Fund's outstanding
shares.
The Company intends to use its best efforts to maintain the net asset value of
each Money Market Fund at $1.00 per share, although there is no assurance that
it will be able to do so. Net asset value is computed using the amortized cost
method as permitted by SEC rules.
Non-Money Market Funds
Net asset value for purposes of pricing purchase and redemption orders is
determined as of the close of regular trading hours on the Exchange, normally,
3:00 p.m. Central time, on each day the Exchange is open for trading. Shares of
the Funds are not priced on days when the Exchange is closed. For a complete
list of days the Exchange is closed, please see the Additional Statement.
The Funds' investments are valued based on market quotations, except that
restricted securities and securities for which market quotations are not
readily available and other assets are valued at fair value by the Adviser
under the supervision of the Board of Directors. Short-term investments having
a maturity of 60 days or less are valued at amortized cost, unless the
amortized cost does not approximate market value.
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Portfolio securities which are primarily traded on foreign securities exchanges
are generally valued at the preceding closing values of such securities on
their respective exchanges, except when an occurrence subsequent to the time a
value was so established is likely to have changed such value. In such an
event, the fair value of those securities will be determined through the
consideration of other factors by or under the direction of the Board of
Directors. A Fund's foreign securities may trade on weekends or other days when
the Fund does not price its shares. Accordingly, the net asset value per share
of a Fund may change on days when shareholders will not be able to purchase or
redeem the Fund's shares.
Each Fund's securities may be valued based on valuations provided by an
independent pricing service. The Adviser reviews these valuations. If the
Adviser believes that a valuation received from the service does not represent
a fair value, it values the security by a method that the Board of Directors
believes will determine a fair value. Any pricing service used may employ
electronic data processing techniques, including a "matrix" system, to
determine valuations.
Quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents using the foreign exchange quotation in effect at the time
net asset value is computed. Foreign securities held by the International Value
Fund and International Growth Fund may trade in their local markets on days the
Funds are closed, and the Funds' net asset value may, therefore, change on days
when investors may not purchase or redeem Fund shares.
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Appendix
Financial Highlights
The financial highlights table is intended to help you understand each Fund's
financial performance for the past 5 years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the table represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions).
The financial highlights tables set forth on the following pages for the Ohio
Tax-Exempt Money Market Fund, U.S. Treasury Money Market Fund, U.S. Government
Securities Fund, Aggregate Bond Fund, Strategic Income Fund, Missouri Tax-
Exempt Bond Fund, National Municipal Bond Fund, Equity Income Fund, Relative
Value Fund, Large Cap Growth Fund, International Growth Fund, Small Cap Index
Fund, Small Cap Core Equity Fund and Science & Technology Fund are based on the
financial history of the predecessor Stellar Ohio Tax-Free Money Market Fund,
predecessor Stellar Treasury Fund, predecessor Mercantile U.S. Government
Securities Portfolio, predecessor Mercantile Government & Corporate Bond
Portfolio, predecessor Stellar Strategic Income Fund, predecessor Mercantile
Missouri Tax-Exempt Bond Portfolio, predecessor Mercantile National Municipal
Bond Portfolio, predecessor Mercantile Equity Income Portfolio, predecessor
Stellar Relative Value Fund, predecessor Stellar Growth Equity Fund,
predecessor Mercantile International Equity Portfolio, predecessor Mercantile
Small Cap Equity Index Portfolio, predecessor Mercantile Small Cap Equity
Portfolio and predecessor Stellar Science & Technology Fund, respectively.
With respect to the Money Market, Tax-Exempt Money Market, U.S. Government
Money Market, Short-Term Bond, Intermediate Bond, Bond IMMDEX(TM), Tax-Exempt
Intermediate Bond, Balanced Income, Balanced Growth, Growth & Income, Equity
Index, Large Cap Core Equity, International Value, MidCap Index, MidCap Core
Equity and MicroCap Funds, this information for the period ended October
31,1999 has been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are included in the Annual Report, and
incorporated by reference into the Additional Statement, both of which are
available upon request. The financial statements for the six-month period ended
April 30, 2000 are unaudited and are contained in the Funds' Semi-Annual
Report. Those unaudited financial statements are also incorporated by reference
into the Additional Statement.
With respect to the Predecessor Stellar Funds, this information for the periods
ended November 30, 1999 and prior has been audited by Arthur Andersen LLP,
independent public accountants for the Predecessor Stellar Funds, whose
reports, along with each Fund's financial statements, are included in the
Predecessor Stellar Funds' Annual Report, and incorporated by reference into
the Statement of Additional Information (the "Additional Statement"), all of
which are available upon request. The financial statements for the six-month
period ended May 31, 2000 are unaudited and are contained in the Predecessor
Stellar Funds' Semi-Annual Report. Those unaudited financial statements are
also incorporated by reference into the Additional Statement.
With respect to the Predecessor Mercantile Portfolios, this information for the
periods ended November 30, 1999 and prior has been audited by KPMG LLP,
independent auditors for the Predecessor Mercantile Portfolios, whose reports,
along with each Fund's financial statements, are included in the Predecessor
Mercantile Portfolios' Annual Report, and incorporated by reference into the
Statement of Additional Information (the "Additional Statement"), all of which
are available upon request. The financial statements for the six-month period
ended May 31, 2000 are unaudited and are contained in the Predecessor
Mercantile Portfolios' Semi-Annual Report. Those unaudited financial statements
are also incorporated by reference into the Additional Statement.
Contact FMFS for a free copy of the Annual and Semi-Annual Reports or
Additional Statement.
................................................................................
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............................................................................ 143
<PAGE>
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--------------------------------------------------------------------------------
Retail A Shares
Money Market Funds
<TABLE>
<CAPTION>
Net Dividends Net Asset
Asset Value, Net from Net Value,
Beginning Investment Investment End
of Period Income Income of Period
<S> <C> <C> <C> <C>
MONEY MARKET FUND
Year Ended October 31, 1995 $1.00 $0.05 $(0.05) $1.00
------------------------------------------------------------------------------
Year Ended October 31,
1996 1.00 0.05 (0.05) 1.00
------------------------------------------------------------------------------
Year Ended October 31,
1997 1.00 0.05 (0.05) 1.00
------------------------------------------------------------------------------
Year Ended October 31,
1998 1.00 0.05 (0.05) 1.00
------------------------------------------------------------------------------
Year Ended October 31,
1999 1.00 0.04 (0.04) 1.00
------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 1.00 0.03 (0.03) 1.00
TAX-EXEMPT MONEY MARKET FUND/6/
Year Ended October 31,
1995 1.00 0.03 (0.03) 1.00
------------------------------------------------------------------------------
Year Ended October 31,
1996 1.00 0.03 (0.03) 1.00
------------------------------------------------------------------------------
Year Ended October 31,
1997 1.00 0.03 (0.03) 1.00
------------------------------------------------------------------------------
Year Ended October 31,
1998 1.00 0.03 (0.03) 1.00
------------------------------------------------------------------------------
Year Ended October 31,
1999 1.00 0.03 (0.03) 1.00
------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 1.00 0.03 (0.03) 1.00
OHIO TAX-EXEMPT MONEY MARKET FUND/6/,/7/
Period Ended November 30,
1998 1.00 0.03 (0.03) 1.00
------------------------------------------------------------------------------
Year Ended November 30,
1999 1.00 0.03 (0.03) 1.00
------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 1.00 0.02 (0.02) 1.00
U.S. GOVERNMENT MONEY MARKET FUND
Year Ended October 31,
1995 1.00 0.05 (0.05) 1.00
------------------------------------------------------------------------------
Year Ended October 31,
1996 1.00 0.05 (0.05) 1.00
------------------------------------------------------------------------------
Year Ended October 31,
1997 1.00 0.05 (0.05) 1.00
------------------------------------------------------------------------------
Year Ended October 31,
1998 1.00 0.05 (0.05) 1.00
------------------------------------------------------------------------------
Year Ended October 31,
1999 1.00 0.04 (0.04) 1.00
------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 1.00 0.02 (0.02) 1.00
U.S. TREASURY MONEY MARKET FUND
Year Ended November 30, 1995 1.00 0.05 (0.05) 1.00
------------------------------------------------------------------------------
Year Ended November 30, 1996 1.00 0.05 (0.05) 1.00
------------------------------------------------------------------------------
Year Ended November 30, 1997 1.00 0.05 (0.05) 1.00
------------------------------------------------------------------------------
Year Ended November 30, 1998 1.00 0.05 (0.05) 1.00
------------------------------------------------------------------------------
Year Ended November 30, 1999 1.00 0.04 (0.04) 1.00
------------------------------------------------------------------------------
Period Ended May 31, 2000 (unau-
dited) 1.00 0.02 (0.02) 1.00
------------------------------------------------------------------------------
</TABLE>
1 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October 31,
1999, 1998, 1997, 1996, 1995 would have been 0.96%, 0.85%, 0.86%,
0.84%, 0.81%, 0.90%, respectively; and ratios of net investment
income to average net assets for the fiscal years (periods) ended
April 30, 2000 and October 31, 1999, 1998, 1997, 1996, 1995 would
have been 4.94%, 4.31%, 4.79%, 4.73%, 4.73%, 5.06%, respectively.
2 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October 31,
1999, 1998, 1997, 1996, 1995, 1994 would have been 0.72%, 0.73%,
0.75%, 0.75%, 0.78%, 0.84%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 3.01%, 2.49%, 2.87%, 2.91%, 2.91%,
3.12%, respectively.
3 Without fees waived ratios of net expenses to average net assets
for the fiscal periods ended May 31, 2000, November 30, 1999 and
November 30, 1998 would have been 1.06%, 1.09%, and 1.29%
respectively; and ratios of net investment income to average net
assets would have been 2.77%, 2.13% and 2.21% respectively.
................................................................................
144
<PAGE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Supplemental Data and Ratios
--------------------------------------------------------------------------------
Ratio of Net
Net Assets, Ratio of Net Investment
End of Expenses Income
Period to Average to Average Total
(000s) Net Assets Net Assets Return
<S> <C> <C> <C>
$ 172,261 0.60%/1/ 5.36%/1/ 5.51%
--------------------------------------------------------------------------------------
224,036 0.60%/1/ 4.94%/1/ 5.06%
--------------------------------------------------------------------------------------
261,017 0.60%/1/ 4.98%/1/ 5.12%
--------------------------------------------------------------------------------------
289,088 0.60%/1/ 5.05%/1/ 5.16%
--------------------------------------------------------------------------------------
283,481 0.72%/1/ 4.44%/1/ 4.52%
--------------------------------------------------------------------------------------
181,997 0.75%/1/ 5.15%/1/ 2.61%/8/
84,084 0.60%/2/ 3.36%/2/ 3.42%
--------------------------------------------------------------------------------------
79,328 0.60%/2/ 3.09%/2/ 3.13%
--------------------------------------------------------------------------------------
108,639 0.60%/2/ 3.06%/2/ 3.12%
--------------------------------------------------------------------------------------
122,451 0.60%/2/ 3.02%/2/ 3.04%
--------------------------------------------------------------------------------------
153,189 0.71%/2/ 2.51%/2/ 2.53%
--------------------------------------------------------------------------------------
158,938 0.72%/2/,/9/ 3.01%/2/,/9/ 1.50%/8/
57,614 0.69%/3/,/9/ 2.81%/3/,/9/ 2.85%/8/
--------------------------------------------------------------------------------------
64,475 0.58%/3/ 2.64%/3/ 2.67%
--------------------------------------------------------------------------------------
48,448 0.73%/3/,/9/ 3.10%/3/,/9/ 1.60%/8/
163,068 0.60%/4/ 5.24%/4/ 5.37%
--------------------------------------------------------------------------------------
198,334 0.60%/4/ 4.84%/4/ 4.96%
--------------------------------------------------------------------------------------
198,592 0.60%/4/ 4.83%/4/ 4.99%
--------------------------------------------------------------------------------------
233,176 0.60%/4/ 4.90%/4/ 4.97%
--------------------------------------------------------------------------------------
209,015 0.68%/4/ 4.30%/4/ 4.37%
--------------------------------------------------------------------------------------
61,186 0.72%/4/,/9/ 4.77%/4/,/9/ 2.46%/8/
654,963 0.71%/5/ 5.14%/5/ 5.23%
--------------------------------------------------------------------------------------
829,259 0.70%/5/ 4.69%/5/ 4.80%
--------------------------------------------------------------------------------------
469,400 0.73%/5/ 4.73%/5/ 4.85%
--------------------------------------------------------------------------------------
542,430 0.88%/5/ 4.58%/5/ 4.69%
--------------------------------------------------------------------------------------
1,049,641 0.92%/5/ 3.98%/5/ 4.02%
--------------------------------------------------------------------------------------
1,483,384 0.97%/5/,/9/ 4.68%/5/,/9/ 2.36%/8/
--------------------------------------------------------------------------------------
</TABLE>
4 Without fees waived, ratios of net expenses to average net assets for
the fiscal years (periods) ended April 30, 2000 and October 31, 1999,
1998, 1997, 1996, 1995, 1994 would have been 0.79%, 0.69%, 0.71%,
0.70%, 0.71%, 0.75%, respectively; and ratios of net investment income
to average net assets for the fiscal years (periods) ended April 30,
2000 and October 31, 1999, 1998, 1997, 1996, 1995 would have been
4.70%, 4.29%, 4.79%, 4.73%, 4.73%, 5.09% respectively.
5 Without fees waived, ratios of net expenses to average net assets for
the fiscal years (periods) ended May 31, 2000 and November 30, 1999,
1998, 1997, 1996, 1995 would have been 1.08%, 1.08%, 1.08%, 0.93%,
0.90%, 0.91%, respectively; and ratios of net investment income to
average net assets for the fiscal years (periods) ended May 31, 2000
and November 30, 1999, 1998, 1997, 1996, 1995 would have been 4.57%,
3.82%, 4.38%, 4.53%, 4.49%, 4.94%, respectively.
6 For the Tax-Exempt Money Market Fund and the Ohio Tax-Free Money Market
Fund, substantially all the investment income is exempt from federal
income tax.
7 The Ohio Tax-Exempt Money Market Fund has been operating since December
2, 1997.
8 Not Annualized.
9 Annualized.
............................................................................ 145
<PAGE>
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--------------------------------------------------------------------------------
Retail A Share Bond Funds
<TABLE>
<CAPTION>
Income from Investment Operations
---------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains From
Beginning Investment or Losses on Investment
of Period Income/1/ Securities Operations
<S> <C> <C> <C> <C>
SHORT-TERM BOND
Year Ended October 31, 1995/7/ $10.03 $ 0.61 $ 0.24 $ 0.85
-------------------------------------------------------------------------------------
Year Ended October 31, 1996 10.28 0.58/8/ (0.03) 0.55
-------------------------------------------------------------------------------------
Year Ended October 31, 1997 10.25 0.60 0.02 0.62
-------------------------------------------------------------------------------------
Year Ended October 31, 1998 10.27 0.58 0.07 0.65
-------------------------------------------------------------------------------------
Year Ended October 31, 1999 10.34 0.54 (0.22) 0.32
-------------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 10.12 0.28 (0.09) 0.19
INTERMEDIATE BOND
Year Ended October 31, 1995/7/ 9.67 0.60 0.53 1.13
-------------------------------------------------------------------------------------
Year Ended October 31, 1996 10.21 0.56/8/ (0.02) 0.54
-------------------------------------------------------------------------------------
Year Ended October 31, 1997 10.19 0.58 0.12 0.70
-------------------------------------------------------------------------------------
Year Ended October 31, 1998 10.31 0.57 0.19 0.76
-------------------------------------------------------------------------------------
Year Ended October 31, 1999 10.50 0.56 (0.39) 0.17
-------------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 10.10 0.30 (0.18) 0.12
U.S. GOVERNMENT SECURITIES
Year Ended November 30, 1995 10.05 0.64 0.80 1.44
-------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.85 0.62 (0.15) 0.47
-------------------------------------------------------------------------------------
Year Ended November 30, 1997 10.67 0.60 (0.07) 0.53
-------------------------------------------------------------------------------------
Year Ended November 30, 1998 10.62 0.57 0.12 0.69
-------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.74 0.54 (0.40) 0.14
-------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 10.34 0.29 (0.21) 0.08
AGGREGATE BOND
Year Ended November 30, 1995 9.64 0.61 0.89 1.50
-------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.53 0.64 (0.19) 0.45
-------------------------------------------------------------------------------------
Year Ended November 30, 1997 10.34 0.56 0.01 0.57
-------------------------------------------------------------------------------------
Year Ended November 30, 1998 10.35 0.57 0.37 0.94
-------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.72 0.57 (0.69) (0.12)
-------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 9.84 0.28 (0.16) 0.12
-------------------------------------------------------------------------------------
</TABLE>
1 For the Tax-Exempt Intermediate Bond Fund, Missouri Tax-Exempt
Bond Fund, and National Municipal Bond Fund, substantially all
investment income is exempt from federal income tax.
2 The total return calculation for the Funds does not reflect the
maximum sales charge of 4.00%.
3 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
3l, 1999, 1998, 1997, 1996, 1995 would have been 1.11%, 1.09%,
1.11%, 1.11%, 1.12%, 1.10%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 5.24%, 4.99%, 5.31%, 5.43%, 5.30%,
5.63%, respectively.
4 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
3l, 1999, 1998, 1997, 1996, 1995 would have been 0.94%, 0.95%,
0.96%, 0.98%, 0.99%, 0.98%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 5.94%, 5.33%, 5.29%, 5.48%, 5.35%,
5.78%, respectively.
5 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended May 31, 2000 and November 30,
1999, 1998, 1997, 1996, 1995 would have been 1.14%, 1.09%, 1.07%,
1.07%, 1.07%, 1.07%, respectively; and (unaudited) ratios of net
investment income to average net assets for the fiscal years
(periods) ended May 31, 2000 and November 30, 1999, 1998, 1997,
1996, 1995 would have been 5.28%, 5.04%, 5.25%, 5.46%, 5.72%,
5.95%, respectively.
6 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended May 31, 2000 and November 30,
1999, 1998, 1997, 1996, 1995 would have been 1.11%, 1.08%, 1.06%,
1.05%, 1.05%, 1.05%, respectively; and (unaudited) ratios of net
investment income to average net assets for the fiscal years
(periods) ended May 31, 2000 and November 30, 1999, 1998, 1997,
1996, 1995 would have been 5.68%, 5.43%, 5.31%, 5.36%, 5.96%,
5.93%, respectively.
................................................................................
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<PAGE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
------------------------------------------ ---------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income to Portfolio
Investment From Total Value, End Total Period to Average Average Turnover
Income Capital Gains Distributions of Period Return/2/ (000s) Net Assets Net Assets Rate/9/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(0.60) $ - $(0.60) $10.28 8.74% $47,730 0.69%/3/ 6.04%/3/ 100.58%
----------------------------------------------------------------------------------------------------------------------------------
(0.58) - (0.58) 10.25 5.54% 58,843 0.75%/3/ 5.67%/3/ 59.62%
----------------------------------------------------------------------------------------------------------------------------------
(0.60) - (0.60) 10.27 6.21% 65,567 0.75%/3/ 5.79%/3/ 77.12%
----------------------------------------------------------------------------------------------------------------------------------
(0.58) - (0.58) 10.34 6.58% 75,410 0.75%/3/ 5.67%/3/ 78.20%
----------------------------------------------------------------------------------------------------------------------------------
(0.54) - (0.54) 10.12 3.16% 65,490 0.81%/3/ 5.27%/3/ 52.28%
----------------------------------------------------------------------------------------------------------------------------------
(0.28) - (0.28) 10.03 1.89%/10/ 54,738 0.82%/3/,/11/ 5.53%/3/,/11/ 33.23%/10/
(0.59) - (0.59) 10.21 12.04% 11,576 0.69%/4/ 6.07%/4/ 66.69%
----------------------------------------------------------------------------------------------------------------------------------
(0.56) - (0.56) 10.19 5.51% 17,392 0.75%/4/ 5.59%/4/ 59.29%
----------------------------------------------------------------------------------------------------------------------------------
(0.58) - (0.58) 10.31 7.09% 20,691 0.75%/4/ 5.71%/4/ 40.61%
----------------------------------------------------------------------------------------------------------------------------------
(0.57) - (0.57) 10.50 7.57% 29,550 0.75%/4/ 5.50%/4/ 27.29%
----------------------------------------------------------------------------------------------------------------------------------
(0.56) (0.01) (0.57) 10.10 1.66% 33,779 0.81%/4/ 5.47%/4/ 64.07%
----------------------------------------------------------------------------------------------------------------------------------
(0.30) - (0.30) 9.92 1.17%/10/ 29,683 0.82%/4/,/11/ 6.06%/4/,/11/ 46.03%/10/
(0.64) - (0.64) 10.85 14.66% 8,179 0.97%/5/ 6.05%/5/ 93.76%
----------------------------------------------------------------------------------------------------------------------------------
(0.62) (0.03)/12/ (0.65) 10.67 4.57% 7,153 0.97%/5/ 5.82%/5/ 53.76%
----------------------------------------------------------------------------------------------------------------------------------
(0.58) - (0.58) 10.62 5.20% 5,181 0.97%/5/ 5.56%/5/ 100.33%
----------------------------------------------------------------------------------------------------------------------------------
(0.57) - (0.57) 10.74 6.66% 4,664 0.97%/5/ 5.35%/5/ 54.57%
----------------------------------------------------------------------------------------------------------------------------------
(0.54) - (0.54) 10.34 1.37% 4,620 0.98%/5/ 5.15%/5/ 26.17%
----------------------------------------------------------------------------------------------------------------------------------
(0.28) - (0.28) 10.14 0.75%/10/ 3,779 1.03%/5/,/11/ 5.39%/5/,/11/ 4.38%/10/
(0.61) - (0.61) 10.53 15.98% 5,456 0.95%/6/ 6.03%/6/ 59.32%
----------------------------------------------------------------------------------------------------------------------------------
(0.64) - (0.64) 10.34 4.51% 4,915 0.95%/6/ 6.06%/6/ 149.20%
----------------------------------------------------------------------------------------------------------------------------------
(0.56) - (0.56) 10.35 5.78% 4,774 0.95%/6/ 5.46%/6/ 140.72%
----------------------------------------------------------------------------------------------------------------------------------
(0.57) - (0.57) 10.72 9.31% 4,927 0.96%/6/ 5.41%/6/ 91.14%
----------------------------------------------------------------------------------------------------------------------------------
(0.56) (0.20)/13/ (0.76) 9.84 (1.13)% 3,878 0.97%/6/ 5.54%/6/ 38.29%
----------------------------------------------------------------------------------------------------------------------------------
(0.28) - (0.28) 9.68 1.26%/10/ 3,096 1.00%/6/,/11/ 5.79%/6/,/11/ 17.60%/10/
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7 On January 9, 1995, all previously existing series of shares of
each Fund were reclassified as Series A shares. Effective January
9, 1995, Institutional shareowners exchanged their Series A shares
for the Funds' Institutional series shares. For the year ended
October 31, 1995, the Financial Highlights ratios of net expenses
to average net assets, ratios of net investment income to average
net assets, total return and the per share income from investment
operations and distributions are presented on a basis whereby the
Funds' net investment income, net expenses, net realized and
unrealized gains (losses) and distributions for the period
November 1, 1994, through January 9, 1995, were allocated to each
class of shares based upon the relative net assets of each class
of shares as of the close of business on January 9, 1995, and the
results thereof combined with the results of operations and
distributions for each applicable class for the period
January 10, 1995, through October 31, 1995.
8 Net investment income per share is calculated using ending
balances prior to consideration of adjustments for permanent book
and tax differences.
9 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares issued.
10 Not Annualized
11 Annualized
12 Includes distributions in excess of net realized gains of $0.03
per share.
13 Includes distributions in excess of net realized gains of $0.07
per share.
............................................................................ 147
<PAGE>
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--------------------------------------------------------------------------------
Retail A Share
Bond Funds (cont'd.)
<TABLE>
<CAPTION>
Income from Investment Operations
--------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains From
Beginning Investment or Losses on Investment
of Period Income/1/ Securities Operations
<S> <C> <C> <C> <C>
BOND IMMDEX(TM)
Year Ended October 31, 1995/8/ 25.67 1.68 2.30 3.98
-----------------------------------------------------------------------------------------
Year Ended October 31, 1996 27.82 1.61/9/ (0.26) 1.35
-----------------------------------------------------------------------------------------
Year Ended October 31, 1997 27.54 1.66 0.64 2.30
-----------------------------------------------------------------------------------------
Year Ended October 31, 1998 28.16 1.64 0.85 2.49
-----------------------------------------------------------------------------------------
Year Ended October 31, 1999 29.01 1.64 (1.66) (0.02)
-----------------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 27.36 0.86 (0.37) 0.49
STRATEGIC INCOME
Period Ended May 31, 2000/13/
(unaudited) 8.32 0.11 0.00 0.11
TAX-EXEMPT INTERMEDIATE BOND
Year Ended October 31, 1995/8/ 9.78 0.42 0.45 0.87
-----------------------------------------------------------------------------------------
Year Ended October 31, 1996 10.23 0.40/9/ (0.01) 0.39
-----------------------------------------------------------------------------------------
Year Ended October 31, 1997 10.21 0.42 0.14 0.56
-----------------------------------------------------------------------------------------
Year Ended October 31, 1998 10.35 0.41 0.17 0.58
-----------------------------------------------------------------------------------------
Year Ended October 31, 1999 10.52 0.42 (0.40) 0.02
-----------------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 10.12 0.21 (0.09) 0.12
MISSOURI TAX-EXEMPT BOND
Six Months Ended November 30,
1995/14/ 11.52 0.27 0.22 0.49
-----------------------------------------------------------------------------------------
Year Ended November 30, 1996 11.74 0.55 (0.05) 0.50
-----------------------------------------------------------------------------------------
Year Ended November 30, 1997 11.69 0.53 0.18 0.71
-----------------------------------------------------------------------------------------
Year Ended November 30, 1998 11.87 0.52 0.21 0.73
-----------------------------------------------------------------------------------------
Year Ended November 30, 1999 12.08 0.50 (0.74) (0.24)
-----------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 11.31 0.26 (0.19) 0.07
NATIONAL MUNICIPAL BOND
November 18, 1996 to November 30,
1996/15/ 10.00 0.02 0.05 0.07
-----------------------------------------------------------------------------------------
Year Ended November 30, 1997 10.05 0.52 0.22 0.74
-----------------------------------------------------------------------------------------
Year Ended November 30, 1998 10.27 0.30 0.30 0.74
-----------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.22 0.41 (0.69) (0.28)
-----------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 9.43 0.20 (0.18) 0.02
-----------------------------------------------------------------------------------------
</TABLE>
1 For the Tax-Exempt Intermediate Bond Fund, Missouri Tax-Exempt
Bond Fund, and National Municipal Bond Fund, substantially all
investment income is exempt from federal income tax.
2 The total return calculation for the Funds does not reflect the
maximum sales charge of 4.00%.
3 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
3l, 1999, 1998, 1997, 1996,1995 would have been 0.73%, 0.74%,
0.74%, 0.74% ,0.75%, 0.71%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 6.30%, 5.78%, 5.70%,6.01%, 5.91%,
6.24%, respectively.
4 Without fees waived, ratios of net expenses to average net assets
for the period ended May 31, 2000 would have been 1.52%, and ratio
of net investment income to average net assets would have been
6.85%.
5 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
3l, 1999, 1998, 1997, 1996, 1995 would have been 1.11%, 1.07%,
1.06%, 1.13%, 1.22%, 1.20%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 3.95%, 3.73%, 3.69%, 3.73%, 3.52%,
3.76%, respectively.
6 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended May 31, 2000 and November 30,
1999, 1998, 1997, 1996, 1995 would have been 0.98%, 1.07%, 1.06%,
1.06%, 1.05%, 1.18%, respectively; and (unaudited) ratios of net
investment income to average net assets for the fiscal years
(periods) ended May 31, 2000 and November 30, 1999, 1998, 1997,
1996, 1995 would have been 4.60%, 4.09%, 4.08%, 4.37%, 4.55%,
4.39%, respectively.
7 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended May 31, 2000 and November 30,
1999, 1998, 1997, 1996 would have been 1.09%, 1.16%, 1.16%, 1.17%,
1.07%, respectively; and (unaudited) ratios of net investment
income to average net assets for the fiscal years (periods) ended
May 31, 2000 and November 30, 1999, 1998, 1997, 1996 would have
been 4.27%, 3.94%, 3.97%, 3.89%, 8.38%, respectively.
................................................................................
148
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
-------------------------------------------- ---------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income to Portfolio
Investment From Total Value, End Total Period to Average Average Turnover
Income Capital Gains Distributions of Period Return/2/ (000s) Net Assets Net Assets Rate/10/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1.79) (0.04) (1.83) 27.82 16.05% 21,875 0.64%/3/ 6.31%/3/ 41.67%
-----------------------------------------------------------------------------------------------------------------------------------
(1.63) - (1.63) 27.54 5.06% 42,671 0.68%/3/ 5.98%/3/ 33.38%
-----------------------------------------------------------------------------------------------------------------------------------
(1.68) - (1.68) 28.16 8.68% 64,144 0.67%/3/ 6.08%/3/ 35.12%
-----------------------------------------------------------------------------------------------------------------------------------
(1.64) - (1.64) 29.01 9.11% 95,301 0.67%/3/ 5.77%/3/ 20.07%
-----------------------------------------------------------------------------------------------------------------------------------
(1.63) - (1.63) 27.36 (0.05)% 95,635 0.72%/3/ 5.80%/3/ 57.04%
-----------------------------------------------------------------------------------------------------------------------------------
(0.85) - (0.85) 27.00 1.82%/11/ 83,806 0.73%/3/,/12/ 6.30%/3/,/12/ 33.11%/11/
(0.11) - (0.11) 8.32 1.32%/11/ - 1.42%/4/,/12/ 6.94%/4/,/12/ 29.00%/11/
(0.42) - (0.42) 10.23 9.07% 7,711 0.71%/5/ 4.25%/5/ 44.13%
-----------------------------------------------------------------------------------------------------------------------------------
(0.41) - (0.41) 10.21 3.87% 10,690 0.75%/5/ 3.99%/5/ 30.46%
-----------------------------------------------------------------------------------------------------------------------------------
(0.42) - (0.42) 10.35 5.60% 19,199 0.75%/5/ 4.11%/5/ 11.22%
-----------------------------------------------------------------------------------------------------------------------------------
(0.41) - (0.41) 10.52 5.73% 32,466 0.75%/5/ 4.00%/5/ 14.38%
-----------------------------------------------------------------------------------------------------------------------------------
(0.41) (0.01) (0.42) 10.12 0.14% 20,016 0.89%/5/ 3.91%/5/ 21.77%
-----------------------------------------------------------------------------------------------------------------------------------
(0.21) (0.04) (0.25) 9.99 1.14%/11/ 14,798 0.92%/5/,/12/ 4.14%/5/,/12/ 10.68%/11/
(0.27) - (0.27) 11.74 4.32% 24,726 0.95%/6/ 4.64%/6/ 1.55%
-----------------------------------------------------------------------------------------------------------------------------------
(0.55) - (0.55) 11.69 4.41% 25,144 0.85%/6/ 4.75%/6/ 3.66%
-----------------------------------------------------------------------------------------------------------------------------------
(0.53) - (0.53) 11.87 6.27% 23,722 0.86%/6/ 4.57%/6/ 3.50%
-----------------------------------------------------------------------------------------------------------------------------------
(0.52) - (0.51) 12.08 6.31% 23,611 0.86%/6/ 4.38%/6/ 6.14%
-----------------------------------------------------------------------------------------------------------------------------------
(0.51) (0.02) (0.53) 11.31 (2.09)% 21,242 0.86%/6/ 4.30%/6/ 0.76%
-----------------------------------------------------------------------------------------------------------------------------------
(0.26) - (0.26) 11.12 0.65%/11/ 19,487 0.87%/6/,/12/ 4.71%/6/,/12/ 2.26%/11/
(0.02) - (0.02) 10.05 0.73% 1 0.37%/7/ 9.08%/7/ -
-----------------------------------------------------------------------------------------------------------------------------------
(0.52) - (0.52) 10.27 7.61% 717 0.35%/7/ 4.71%/7/ 83.94%
-----------------------------------------------------------------------------------------------------------------------------------
(0.44) (0.35) (0.79) 10.22 7.56% 1,162 0.85%/7/ 4.18%/7/ 18.30%
-----------------------------------------------------------------------------------------------------------------------------------
(0.41)/16/ (0.10)/16/ (0.51) 9.43 (2.87)% 1,582 0.96%/7/ 4.14%/7/ -
-----------------------------------------------------------------------------------------------------------------------------------
(0.21) (0.21) 9.24 0.21%/11/ 1,438 0.98%/7/,/12/ 4.38%/7/,/12/ -
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8 On January 9, 1995, all previously existing series of shares of
each Fund were reclassified as Series A shares. Effective January
9, 1995, Institutional shareowners exchanged their Series A shares
for the Funds' Institutional series shares. For the year ended
October 31, 1995, the Financial Highlights ratios of net expenses
to average net assets, ratios of net investment income to average
net assets, total return and the per share income from investment
operations and distributions are presented on a basis whereby the
Funds' net investment income, net expenses, net realized and
unrealized gains (losses) and distributions for the period
November 1, 1994, through January 9, 1995, were allocated to each
class of shares based upon the relative net assets of each class
of shares as of the close of business on January 9, 1995, and the
results thereof combined with the results of operations and
distributions for each applicable class for the period January 10,
1995, through October 31, 1995.
9 Net investment income per share is calculated using ending
balances prior to consideration of adjustments for permanent book
and tax differences.
10 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares
issued.
11 Not Annualized.
12 Annualized.
13 Reflects operations for the period from March 31, 2000 (date of
public investments) to May 31, 2000.
14 Upon reorganizing as a Portfolio of the Arch Fund, Inc., the
Missouri Tax-Exempt Bond Portfolio changed its fiscal year end
from May 31 to November 30.
15 Period from commencement of operations.
16 Includes distributions in excess of net income and net realized
gains of $0.01 and $0.01 per share respectively
............................................................................ 149
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Retail B Share Bond Funds
<TABLE>
<CAPTION>
Income from Investment Operations
----------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning Investment or Losses on Investment
of Period Income/2/ Securities Operations
<S> <C> <C> <C> <C>
SHORT-TERM BOND
March 1, 1999/1/ through October
31, 1999 $10.23 $0.31/11/ $(0.09) $0.22
-----------------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 10.12 0.22 (0.07) 0.15
INTERMEDIATE BOND
March 1, 1999/1/ through October
31, 1999 10.31 0.31/11/ (0.21) 0.10
-----------------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 10.09 0.27/11/ (0.18) 0.09
U.S. GOVERNMENT SECURITIES
March 1, 1995/1/ to November 30,
1995 10.34 0.31 0.50 0.81
-----------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.84 0.55 (0.15) 0.40
-----------------------------------------------------------------------------------------
Year Ended November 30, 1997 10.66 0.51 (0.05) 0.46
-----------------------------------------------------------------------------------------
Year Ended November 30, 1998 10.61 0.50/11/ 0.13 0.63
-----------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.74 0.47/11/ (0.38) 0.09
-----------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 10.36 0.28 (0.24) 0.04
AGGREGATE BOND
March 1, 1995/1/ to November 30,
1995 9.92 0.38 0.61 0.99
-----------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.53 0.57 (0.19) 0.38
-----------------------------------------------------------------------------------------
Year Ended November 30, 1997 10.34 0.49 0.03 0.52
-----------------------------------------------------------------------------------------
Year Ended November 30, 1998 10.37 0.50 0.38 0.88
-----------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.75 0.49 (0.69) (0.20)
-----------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 9.86 0.24 (0.15) 0.09
-----------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 For the Tax-Exempt Intermediate Bond Fund, Missouri Tax-Exempt
Bond Fund, and National Municipal Bond Fund substantially all
investment income is exempt from federal income tax.
3 The total return calculation for the Funds does not reflect
the maximum deferred sales charge of 5.00%.
4 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended April 30, 2000 and
October 31, 1999, would have been 1.86%, 1.85%, respectively;
and ratios of net investment income to average net assets for
the fiscal years (periods) ended April 30, 2000 and October
31, 1999, would have been 4.50%, 4.30%, respectively.
5 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended April 30, 2000 and
October 31, 1999, would have been 1.69%, 1.71%, respectively;
and ratios of net investment income to average net assets for
the fiscal years (periods) ended April 30, 2000 and October
31, 1999, would have been 5.20%, 4.73%, respectively.
6 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended May 31, 2000 and
November 30, 1999, 1998, 1997, 1996, 1995 would have been
1.84%, 1.79%, 1.77%, 1.77%, 1.76%, 1.78%, respectively; and
(unaudited) ratios of net investment income to average net
assets for the fiscal years (periods) ended May 31, 2000 and
November 30, 1999, 1998, 1997, 1996, 1995 would have been
4.58%, 4.36%, 4.50%, 4.74%, 4.96%, 5.27%, respectively.
................................................................................
150
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
------------------------------------------- -------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return/3/ (000s) Net Assets Net Assets Rate/10/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(0.33) $ - $(0.33) $10.12 2.18%/8/ 517 1.57%/4/,/9/ 4.58%/4/,/9/ 52.28%/8/
--------------------------------------------------------------------------------------------------------------------------------
(0.24) - (0.24) 10.03 1.48%/8/ 644 1.57%/4/,/9/ 4.79%/4/,/9/ 33.23%/8/
(0.32) - (0.32) 10.09 1.02%/8/ 206 1.57%/5/,/9/ 4.87%/5/,/9/ 64.07%/8/
--------------------------------------------------------------------------------------------------------------------------------
(0.26) - (0.26) 9.92 0.92%/8/ 267 1.57%/5/,/9/ 5.32%/5/,/9/ 46.03%/8/
(0.31) - (0.31) 10.84 12.85%/14/ 41 1.68%/6/,/9/ 5.37%/6/,/9/ 93.76%/8/
--------------------------------------------------------------------------------------------------------------------------------
(0.55) (0.03)/17/ (0.58) 10.66 3.85% 359 1.66%/6/ 5.06%/6/ 53.76%
--------------------------------------------------------------------------------------------------------------------------------
(0.51) - (0.51) 10.61 4.47% 466 1.67%/6/ 4.84%/6/ 100.33%
--------------------------------------------------------------------------------------------------------------------------------
(0.50) - (0.50) 10.74 6.02% 149 1.67%/6/ 4.67%/6/ 54.57%
--------------------------------------------------------------------------------------------------------------------------------
(0.47) - (0.47) 10.36 0.86% 282 1.68%/6/ 4.47%/6/ 26.17%
--------------------------------------------------------------------------------------------------------------------------------
(0.24) - (0.24) 10.16 0.40%/8/ 173 1.73%/6/,/9/ 4.69%/6/,/9/ 4.38%/8/
(0.38) - (0.38) 10.53 15.27%/8/ 106 1.65%/7/,/9/ 5.19%/7/,/9/ 59.32%/8/
--------------------------------------------------------------------------------------------------------------------------------
(0.57) - (0.57) 10.34 3.79% 511 1.65%/7/ 5.37%/7/ 149.20%
--------------------------------------------------------------------------------------------------------------------------------
(0.49) - (0.49) 10.37 5.26% 545 1.65%/7/ 4.84%/7/ 140.72%
--------------------------------------------------------------------------------------------------------------------------------
(0.50) - (0.50) 10.75 8.65% 662 1.66%/7/ 4.70%/7/ 91.14%
--------------------------------------------------------------------------------------------------------------------------------
(0.49) (0.20)/13/ (0.69) 9.86 (1.90)% 712 1.67%/7/ 4.85%/7/ 38.29%
--------------------------------------------------------------------------------------------------------------------------------
(0.25) - (0.25) 9.70 0.91%/8/ 653 1.70%/7/,/9/ 5.09%/7/,/9/ 17.60%/8/
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7 Without fees waived, ratios of net expenses to average net assets for
the fiscal years (periods) ended May 31, 2000 and November 30, 1999,
1998, 1997, 1996, 1995 would have been 1.81%, 1.78%, 1.76%, 1.75%,
1.75%, 1.75%, respectively; and (unaudited) ratios of net investment
income to average net assets for the fiscal years (periods) ended May
31, 2000 and November 30, 1999, 1998, 1997, 1996, 1995 would have been
4.98%, 4.74%, 4.60%, 4.74%, 5.27%, 5.09%, respectively.
8 Not annualized.
9 Annualized.
10 Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
11 Net investment income per share represents net investment income
divided by the average shares outstanding throughout the period.
12 Includes distributions in excess of net realized gains of $0.03 per
share.
13 Includes distributions in excess of net realized gains of $0.07 per
share.
14 Represents total return for the Retail A Shares from December 1, 1994
to February 28, 1995 plus the total return for the Retail B Shares
from March 1, 1995 to November 30, 1995.
............................................................................ 151
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Retail B Share Bond Funds (cont'd)
<TABLE>
<CAPTION>
Income from Investment Operations
---------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning Investment or Losses on Investment
of Period Income/2/ Securities Operations
<S> <C> <C> <C> <C>
BOND IMMDEXTM
March 1, 1999/1/ through October
31, 1999 28.34 0.92/11/ (0.91) 0.01
----------------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 27.36 0.76/11/ (0.36) 0.40
STRATEGIC INCOME
December 12, 1994/1/ to November
30, 1995 10.00 0.69 0.55 1.24
----------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.53 0.73 (0.04) 0.69
----------------------------------------------------------------------------------------
Year Ended November 30, 1997 10.50 0.73 0.18 0.91
----------------------------------------------------------------------------------------
Year Ended November 30, 1998 10.67 0.72 (0.94) (0.22)
----------------------------------------------------------------------------------------
Year Ended November 30, 1999 9.62 0.64 (1.10) (0.46)
----------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 8.52 0.32 (0.18) 0.14
TAX-EXEMPT INTERMEDIATE BOND
March 1, 1999/1/ through October
31, 1999 10.51 0.22/11/ (0.38) (0.16)
----------------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 10.12 0.18 (0.09) 0.09
MISSOURI TAX-EXEMPT BOND
Six Months Ended November 30,
1995/13/ 11.52 0.22 0.22 0.44
----------------------------------------------------------------------------------------
Year Ended November 30, 1996 11.74 0.45 (0.06) 0.39
----------------------------------------------------------------------------------------
Year Ended November 30, 1997 11.68 0.44 0.18 0.62
----------------------------------------------------------------------------------------
Year Ended November 30, 1998 11.86 0.43 0.21 0.64
----------------------------------------------------------------------------------------
Year Ended November 30, 1999 12.07 0.41 (0.73) (0.32)
----------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 11.31 0.22 (0.20) 0.02
NATIONAL MUNICIPAL BOND
November 18, 1996/1/ to November
30, 1996 10.00 0.02 0.05 0.07
----------------------------------------------------------------------------------------
Year Ended November 30, 1997 10.05 0.44 0.24 0.68
----------------------------------------------------------------------------------------
Year Ended November 30, 1998 10.29 0.36 0.30 0.66
----------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.24 0.33 (0.72) (0.39)
----------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 9.41 0.16 (0.17) (0.01)
----------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 For the Tax-Exempt Intermediate Bond Fund, Missouri Tax-Exempt
Bond Fund, and National Municipal Bond Fund substantially all
investment income is exempt from federal income tax.
3 The total return calculation for the Funds does not reflect
the maximum deferred sales charge of 5.00%.
4 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended May 31, 2000 and
November 30, 1999, 1998, 1997, 1996, 1995 would have been
1.46%, 1.44%, 1.46%, 1.46%, 1.56%, 1.77%, respectively; and
ratios of net investment income to average net assets for the
fiscal years (periods) ended May 31, 2000 and November 30,
1999, 1998, 1997, 1996, 1995 would have been 7.51%, 6.79%,
6.99%, 6.93%, 7.06%, 7.11%, respectively.
5 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended April 30, 2000 and
October 31, 1999, would have been 1.86%, 1.85%, respectively;
and ratios of net investment income to average net assets for
the fiscal years (periods) ended April 30, 2000 and October
31, 1999, would have been 3.20%, 3.07%, respectively.
6 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended May 31, 2000 and
November 30, 1999, 1998, 1997, 1996, 1995 would have been
1.78%, 1.77%, 1.76%, 1.76%, 1.75%, 1.87%, respectively; and
(unaudited) ratios of net investment income to average net
assets for the fiscal years (periods) ended May 31, 2000 and
November 30, 1999, 1998, 1997, 1996, 1995 would have been
3.80%, 3.40%, 3.47%, 3.66%, 3.86%, 3.72%, respectively.
................................................................................
152
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
-------------------------------------------- -------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return/3/ (000s) Net Assets Net Assets Rate/10/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.99) - (0.99) 27.36 0.04%/8/ 1,869 1.49%/9/ 5.06%/9/ 57.04%/8/
---------------------------------------------------------------------------------------------------------------------------------
(0.77) - (0.77) 26.99 1.43%/8/ 2,182 1.48%/9/ 5.55%/9/ 33.11%/8/
(0.67) (0.04) (0.71) 10.53 12.71%/8/ 47,513 1.47%/4/,/9/ 7.41%/4/,/9/ 258.00%/8/
---------------------------------------------------------------------------------------------------------------------------------
(0.72) - (0.72) 10.50 6.99% 110,775 1.36%/4/ 7.26%/4/ 201.00%
---------------------------------------------------------------------------------------------------------------------------------
(0.74) - (0.74) 10.67 9.02% 179,413 1.26%/4/ 7.13%/4/ 142.00%
---------------------------------------------------------------------------------------------------------------------------------
(0.73) (0.10) (0.83) 9.62 (2.16)% 202,354 1.26%/4/ 7.19%/4/ 146.00%
---------------------------------------------------------------------------------------------------------------------------------
(0.64)/14/ - (0.64) 8.52 (4.99)% 160,605 1.28%/4/ 6.95%/4/ 73.00%
---------------------------------------------------------------------------------------------------------------------------------
(0.34) - (0.34) 8.32 1.77%/8/ 138,250 1.35%/4/,/9/ 7.62%/4/,/9/ 29.00%/8/
(0.23) - (0.23) 10.12 (1.55)%/8/ 74 1.67%/5/,/9/ 3.25%/5/,/9/ 21.77%
---------------------------------------------------------------------------------------------------------------------------------
(0.18) (0.04) (0.22) 9.99 0.77%/8/ 75 1.67%/5/,/9/ 3.39%/5/,/9/ 10.68%/8/
(0.22) - (0.22) 11.74 3.88%/8/ 433 1.77%/6/,/9/ 3.82%/6/,/9/ 1.55%/8/
---------------------------------------------------------------------------------------------------------------------------------
(0.45) - (0.45) 11.68 3.48% 675 1.65%/6/ 3.96%/6/ 3.66%
---------------------------------------------------------------------------------------------------------------------------------
(0.44) - (0.44) 11.86 5.43% 1,398 1.66%/6/ 3.76%/6/ 3.50%
---------------------------------------------------------------------------------------------------------------------------------
(0.43) - (0.43) 12.07 5.47% 2,496 1.66%/6/ 3.57%/6/ 6.14%
---------------------------------------------------------------------------------------------------------------------------------
(0.42) (0.02) (0.44) 11.31 (2.79)% 3,519 1.66%/6/ 3.51%/6/ 0.76%
---------------------------------------------------------------------------------------------------------------------------------
(0.22) - (0.22) 11.11 0.16%/8/ 2,863 1.67%/6/,/9/ 3.91%/6/,/9/ 2.26%/8/
(0.02) - (0.02) 10.05 0.70%/8/ 1 1.10%/7/,/9/ 8.35%/7/,/9/ -
---------------------------------------------------------------------------------------------------------------------------------
(0.44) - (0.44) 10.29 7.01% 408 1.17%/7/ 4.08%/7/ 83.94%
---------------------------------------------------------------------------------------------------------------------------------
(0.36) (0.35) (0.71) 10.24 6.69% 503 1.56%/7/ 3.51%/7/ 18.30%
---------------------------------------------------------------------------------------------------------------------------------
(0.34)/17/ (0.10)/12/ (0.44) 9.41 (4.03)% 747 1.76%/7/ 3.34%/7/ -
---------------------------------------------------------------------------------------------------------------------------------
(0.17) (0.17) 9.23 0.21%/8/ 1,438 0.98%/7/,/9/ 4.38%/7/,/9/ -
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7 Without fees waived, ratios of net expenses to average net assets for
the fiscal years (periods) ended May 31, 2000 and November 30, 1999,
1998, 1997, 1996, would have been 1.89%, 1.86%, 1.86%, 1.89%, 1.80%,
respectively; and (unaudited) ratios of net investment income to
average net assets for the fiscal years (periods) ended May 31, 2000
and November 30, 1999, 1998, 1997, 1996, would have been 3.47%, 3.24%,
3.21%, 3.36%, 7.65%, respectively.
8 Not annualized.
9 Annualized.
10 Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
11 Net investment income per share represents net investment income
divided by the average shares outstanding throughout the period.
12 Includes distributions in excess of net income and net realized gains
of $0.01 and $0.01 per share respectively.
13 Upon reorganizing as a Portfolio of the Arch Fund, Inc., the Missouri
Tax-Exempt Bond Portfolio changed its fiscal year end from May 31 to
November 30.
14 Includes distributions in excess of net investment income of .01.
............................................................................ 153
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Retail A Share
Equity Funds
<TABLE>
<CAPTION>
Income from Investment Operations
-----------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning Investment or (Losses) on Investment
of Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
BALANCED INCOME
December 1, 1997/1/ through
October 31, 1998 $10.00 $0.28/8/ $0.96 $1.24
------------------------------------------------------------------------------------------
Year Ended October 31, 1999 11.00 0.28 0.38 0.66
------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 10.94 0.13/8/ 0.21 0.34
BALANCED GROWTH
Year Ended October 31, 1995/7/ 22.10 0.49 3.77 4.26
------------------------------------------------------------------------------------------
Year Ended October 31, 1996 25.89 0.47/9/ 2.64 3.11
------------------------------------------------------------------------------------------
Year Ended October 31, 1997 27.98 0.58 4.19 4.77
------------------------------------------------------------------------------------------
Year Ended October 31, 1998 30.48 0.56 1.86 2.42
------------------------------------------------------------------------------------------
Year Ended October 31, 1999 29.82 0.49 1.19 1.68
------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 30.06 0.26 4.21 4.47
GROWTH AND INCOME
Year Ended October 31, 1995/7/ 23.09 0.37 5.14 5.51
------------------------------------------------------------------------------------------
Year Ended October 31, 1996 27.62 0.42/9/ 6.61 7.03
------------------------------------------------------------------------------------------
Year Ended October 31, 1997 33.07 0.37 8.92 9.29
------------------------------------------------------------------------------------------
Year Ended October 31, 1998 39.24 0.36 6.55 6.91
------------------------------------------------------------------------------------------
Year Ended October 31, 1999 44.41 0.29 4.92 5.21
------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 46.08 0.07 2.70 2.77
EQUITY INCOME
February 27, 1997/1/ through
November 30, 1997 10.00 0.16 1.57 1.73
------------------------------------------------------------------------------------------
Year Ended November 30, 1998 11.56 0.17 0.98 1.15
------------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.24 0.13 (0.18) (0.05)
------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 7.83 0.05 (0.13) (0.08)
------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 The total return calculation for the Fund does not reflect the
maximum sales charge of 5.50%.
3 Without fees waived, ratios of net expenses to average net assets
for the period ended April 30, 2000, the fiscal year ended October
31, 1999 and the period ended October 31, 1998 would have been
1.37%, 1.48%, 1.63%, respectively; and ratios of net investment
income to average net assets for the period ended April 30, 2000,
the fiscal year ended October 31, 1999 and the period ended
October 31, 1998 would have been 2.35%, 2.29%, 2.19%,
respectively.
4 Without fees waived, ratios of net expenses to average net assets
for the period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 1.27%,
1.25%, 1.24%, 1.25%, 1.28%, 1.25%, respectively; and ratios of net
investment income to average net assets for the period ended April
30, 2000 and for the fiscal years ended October 31, 1999, 1998,
1997, 1996, 1995 would have been 1.57%, 1.52%, 1.67%, 1.80%,
1.52%, 1.74%, respectively.
5 Without fees waived, ratios of net expenses to average net assets
for the period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 0.68%,
0.68%, 0.69%, 0.70%, 0.73%, 0.73%, respectively; and ratios of net
investment income to average net assets for the period ended April
30, 2000 and for the fiscal years ended October 31, 1999, 1998,
1997, 1996, 1995 would have been 0.79%, 0.85%, 1.07%, 1.33%,
1.69%, 2.07%, respectively.
6 Without fees waived, ratios of net expenses to average net assets
for the period ended May 31, 2000 and for the fiscal years ended
November 30, 1999, 1998, and the period ended November 30, 1997
would have been 1.46%, 1.38%, 1.38%, 1.38%, respectively; and
(unaudited) the ratios of net investment income to average net
assets for the period ended May 31, 2000 and for the fiscal years
ended November 30, 1999, 1998 and the period ended November 30,
1997 would have been 1.49%, 1.50%, 1.28% , 1.36% respectively.
................................................................................
154
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
------------------------------------------- ---------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return/2/ (000s) Net Assets Net Assets Rate/11/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(0.24) $ - $(0.24) $11.00 12.46%/12/ $10,614 1.00%/13/ 2.82%/13/ 58.33%/13/
----------------------------------------------------------------------------------------------------------------------------------
(0.28) (0.44) (0.72) 10.94 6.01% 13,087 1.18%/3/ 2.59%/3/ 48.46%
----------------------------------------------------------------------------------------------------------------------------------
(0.12) (0.20) (0.32) 10.96 3.20%/12/ 11,413 1.22%/13/ 2.50%/13/ 93.42%/13/
(0.47) - (0.47) 25.89 19.55% 21,832 0.94%/4/ 2.05%/4/ 61.87%
----------------------------------------------------------------------------------------------------------------------------------
(0.47) (0.55) (1.02) 27.98 12.30% 29,034 1.00%/4/ 1.80%/4/ 63.91%
----------------------------------------------------------------------------------------------------------------------------------
(0.59) (1.68) (2.27) 30.48 18.07% 44,026 1.00%/4/ 2.06%/4/ 69.90%
----------------------------------------------------------------------------------------------------------------------------------
(0.58) (2.50) (3.08) 29.82 8.60% 59,657 1.00%/4/ 1.91%/4/ 56.44%
----------------------------------------------------------------------------------------------------------------------------------
(0.49) (0.95) (1.44) 30.06 5.56% 53,807 1.18%/4/ 1.59%/4/ 69.42%
----------------------------------------------------------------------------------------------------------------------------------
(0.26) (1.67) (1.93) 32.60 15.29%/12/ 53,470 1.22%/4/,/13/ 1.62%/4/,/13/ 81.13%/13/
(0.38) (0.60) (0.98) 27.62 24.75% 42,424 1.09%/5/ 1.51%/5/ 47.85%
----------------------------------------------------------------------------------------------------------------------------------
(0.39) (1.19) (1.58) 33.07 26.62% 71,310 1.15%/5/ 1.42%/5/ 51.37%
----------------------------------------------------------------------------------------------------------------------------------
(0.39) (2.73) (3.12) 39.24 30.47% 128,070 1.12%/5/ 1.09%/5/ 31.36%
----------------------------------------------------------------------------------------------------------------------------------
(0.35) (1.39) (1.74) 44.41 18.08% 190,331 1.12%/5/ 0.86%/5/ 48.56%
----------------------------------------------------------------------------------------------------------------------------------
(0.35) (3.21) (3.56) 46.06 11.78% 194,089 1.17%/5/ 0.74%/5/ 62.20%
----------------------------------------------------------------------------------------------------------------------------------
(0.05) (3.90) (3.95) 44.90 6.43%/12/ 181,142 1.19%/5/,/13/ 0.33%/5/,/13/ 91.87%/13/
(0.17)/10/ - (0.17) 11.56 17.42%/12/ 173 0.45%/6/,/13/ 2.29%/6/,/13/ 48.33%
----------------------------------------------------------------------------------------------------------------------------------
(0.18) (2.29) (2.47) 10.24 11.69% 1,709 1.15%/6/ 1.51%/6/ 98.32%
----------------------------------------------------------------------------------------------------------------------------------
(0.13) (2.23) (2.36) 7.83 (0.05)% 1,336 1.28%/6/ 1.60%/6/ 81.84%
----------------------------------------------------------------------------------------------------------------------------------
(0.05) (1.11) (1.16) 6.59 (1.00)%/12/ 843 1.36%/6/,/13/ 1.59%/6/,/13/ 15.81%/13/
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7 On January 9, 1995, all previously existing series of shares of
each Fund were reclassified as Series A shares. Effective January
9, 1995, Institutional shareholders exchanged their Series A
shares for the Funds' Institutional series shares. For the year
ended October 31, 1995, the Financial Highlights ratios of net
expenses to average net assets, ratios of net investment income to
average net assets, total return and the per share income from
investment operations and distributions are presented on a basis
whereby the Funds' net investment income, net expenses, net
realized and unrealized gains (losses) and distributions for the
period November 1, 1994 through January 9, 1995, were allocated to
each class of shares based upon the relative net assets of each
class of shares as of the close of business on January 9, 1995,
and the results thereof combined with the results of operations
and distributions for each applicable class for the period January
10, 1995 through October 31, 1995.
8 Net investment income (loss) per share represents net investment
income divided by the average shares outstanding throughout the
period.
9 Net investment income (loss) per share is calculated using ending
balances prior to consideration of adjustments for permanent book
and tax differences.
10 Includes distribution in excess of net investment income of $0.01
per share.
11 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares
issued.
12 Not Annualized.
13 Annualized.
............................................................................ 155
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Retail A Share Equity Funds (cont'd)
<TABLE>
<CAPTION>
Income from Investment Operations
-----------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
RELATIVE VALUE
Year Ended November 30, 1995 11.36 0.29 3.65 3.94
-------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 15.02 0.27 4.01 4.28
-------------------------------------------------------------------------------------------------
Year Ended November 30, 1997 19.03 0.67 4.45 5.12
-------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 23.48 0.11 3.66 3.77
-------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 26.26 0.10 3.01 3.11
-------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 29.10 0.13 (0.24) (0.11)
EQUITY INDEX
Year Ended October 31, 1995/9/ 33.41 0.70 7.70 8.40
-------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 41.07 0.77/8/ 8.69 9.46
-------------------------------------------------------------------------------------------------
Year Ended October 31, 1997 49.40 0.80/7/ 14.33 15.13
-------------------------------------------------------------------------------------------------
Year Ended October 31, 1998 63.11 0.84 12.58 13.42
-------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 74.58 0.80 17.75 18.55
-------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 91.83 0.40/12/ 5.72 6.12
LARGE CAP CORE EQUITY
Year Ended October 31, 1995/9/ 21.47 (0.02) 4.16 4.14
-------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 25.58 (0.07)/8/ 4.81 4.74
-------------------------------------------------------------------------------------------------
Year Ended October 31, 1997 30.32 (0.05)/8/ 6.30 6.25
-------------------------------------------------------------------------------------------------
Year Ended October 31, 1998 35.27 (0.02)/7/ 5.66 5.64
-------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 35.72 (0.12)/7/ 6.42 6.30
-------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 37.96 (0.07) 7.08 7.01
LARGE CAP GROWTH
March 31, 2000/1/ through May 31, 2000
(unaudited) 26.95 - (1.26) (1.26)
-------------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 The total return calculation does not reflect the maximum sales
charge of 5.50%.
3 Without fees waived, the ratio of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal years
ended November 30, 1999, 1998, 1997, 1996, 1995 would have been
1.46%, 1.46%, 1.49%, 1.21%, 1.24%, 1.26%, respectively; and ratios
of net investment income to average net assets for the period ended
May 31, 2000 and for the fiscal years ended November 30, 1999,
1998, 1997, 1996, 1995 would have been 0.77%, 0.36%, 0.50%, 1.20%,
1.51%, 1.97%, respectively.
4 Without fees waived, ratios of net expenses to average net assets
for the period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 0.68%,
0.68%, 0.69%, 0.70%, 0.73%, 0.73%, respectively; and ratios of net
investment income to average net assets for the period ended April
30, 2000 and for the fiscal years ended October 31, 1999, 1998,
1997, 1996, 1995 would have been 0.79%, 0.85%, 1.07%, 1.33%, 1.69%,
2.07%, respectively.
5 Without fees waived, ratios of net expenses to average net assets
for the period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 1.20%,
1.20%, 1.21%, 1.21%, 1.23%, 1.21%, respectively; and ratios of net
investment income to average net assets for the period ended April
30, 2000 and for the fiscal years ended October 31, 1999, 1998,
1997, 1996, 1995 would have been (0.32)%, (0.32)%, (0.12)%,
(0.24)%, (0.36)%, (0.18)%, respectively.
6 Without fees waived, the ratio of net expenses to average net
assets for the period ended May 31, 2000 would have been 1.51%, and
ratio of net investment income to average net assets would have
been (0.16)%.
................................................................................
156
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
----------------------------------------- ----------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return/2/ (000s) Net Assets Net Assets Rate/10/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.28) - (0.28) 15.02 35.10% 131,979 1.06%/3/ 2.17%/3/ 24.00%
----------------------------------------------------------------------------------------------------------------------------------
(0.26) (0.01) (0.27) 19.03 28.86% 215,843 1.04%/3/ 1.71%/3/ 16.00%
----------------------------------------------------------------------------------------------------------------------------------
(0.28) (0.39) (0.67) 23.48 27.69% 37,748 1.01%/3/ 1.40%/3/ 18.00%
----------------------------------------------------------------------------------------------------------------------------------
(0.17) (0.82) (0.99) 26.26 16.67% 50,925 1.29%/3/ 0.70%/3/ 26.00%
----------------------------------------------------------------------------------------------------------------------------------
(0.16) (0.11) (0.27) 29.10 11.89% 54,825 1.30%/3/ 0.52%/3/ 11.00%
----------------------------------------------------------------------------------------------------------------------------------
(0.09) - (0.09) 28.90 (0.38)%/11/ 49,126 1.35%/3/,/12/ 0.88%/3/,/12/ 4.00%/11/
(0.68) (0.06) (0.74) 41.07 25.79% 18,663 0.66%/4/ 2.14%/4/ 4.61%
----------------------------------------------------------------------------------------------------------------------------------
(0.78) (0.35) (1.13) 49.40 23.36% 39,656 0.66%/4/ 1.76%/4/ 7.48%
----------------------------------------------------------------------------------------------------------------------------------
(0.81) (0.61) (1.42) 63.11 31.08% 76,866 0.63%/4/ 1.40%/4/ 9.81%
----------------------------------------------------------------------------------------------------------------------------------
(0.84) (1.11) (1.95) 74.58 21.63% 110,129 0.58%/4/ 1.18%/4/ 2.91%
----------------------------------------------------------------------------------------------------------------------------------
(0.83) (0.47) (1.30) 91.83 25.01% 142,247 0.61%/4/ 0.92%/4/ 13.95%
----------------------------------------------------------------------------------------------------------------------------------
(0.39) (2.08) (2.47) 95.48 6.64%/11/ 146,680 0.62%/4/,/12/ 0.85%/4/,/12/ 2.80%/11/
(0.03) - (0.03) 25.58 19.31% 10,105 1.09%/5/ (0.06)%/5/ 49.84%
----------------------------------------------------------------------------------------------------------------------------------
- - - 30.32 18.53% 16,636 1.15%/5/ (0.29)%/5/ 56.75%
----------------------------------------------------------------------------------------------------------------------------------
- (1.30) (1.30) 35.27 21.30% 25,043 1.14%/5/ (0.16)%/5/ 62.09%
----------------------------------------------------------------------------------------------------------------------------------
(0.02) (5.17) (5.19) 35.72 18.58% 38,213 1.14%/5/ (0.05)%/5/ 51.82%
----------------------------------------------------------------------------------------------------------------------------------
(0.02) (4.04) (4.06) 37.96 17.92% 47,238 1.19%/5/ (0.31)%/5/ 59.35%
----------------------------------------------------------------------------------------------------------------------------------
- (2.03) (2.03) 42.94 18.84%/11/ 51,718 1.19%/5/,/12/ (0.31)%/5/,/12/ 65.02%/11/
- - - 25.69 (4.68)%/11/ 195 1.42%/6/,/12/ (0.07)%/6/,/12/ 9.00%/11/
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7 Net investment income (loss) per share represents net investment
income divided by the average shares outstanding throughout the
period.
8 Net investment income (loss) per share is calculated using ending
balances prior to consideration of adjustments for permanent book
and tax differences.
9 On January 9, 1995, all previously existing series of shares of
each Fund were reclassified as Series A shares. Effective January
9, 1995, Institutional shareholders exchanged their Series A
shares for the Funds' Institutional series shares. For the year
ended October 31, 1995, the Financial Highlights ratios of net
expenses to average net assets, ratios of net investment income to
average net assets, total return and the per share income from
investment operations and distributions are presented on a basis
whereby the Funds' net investment income, net expenses, net
realized and unrealized gains (losses) and distributions for the
period November 1, 1994 through January 9, 1995, were allocated to
each class of shares based upon the relative net assets of each
class of shares as of the close of business on January 9, 1995,
and the results thereof combined with the results of operations
and distributions for each applicable class for the period January
10, 1995 through October 31, 1995.
10 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares
issued.
11 Not annualized.
12 Annualized.
............................................................................ 157
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Retail A Share Equity Funds (cont'd)
<TABLE>
<CAPTION>
Income from Investment Operations
-----------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
INTERNATIONAL VALUE/11/
Year Ended October 31, 1995/7/ 19.99 0.08 (0.87) (0.79)
-----------------------------------------------------------------------------------------
Year Ended October 31, 1996 19.15 0.07/5/ 1.43 1.50
-----------------------------------------------------------------------------------------
Year Ended October 31, 1997 20.21 0.06/5/ (1.10) (1.04)
-----------------------------------------------------------------------------------------
Year Ended October 31, 1998 18.58 0.20/4/ (3.15) (2.95)
-----------------------------------------------------------------------------------------
Year Ended October 31, 1999 15.18 0.03 3.62 3.65
-----------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 18.53 (0.05)/4/ (0.23) (0.28)
INTERNATIONAL GROWTH
Year Ended November 30, 1995 9.90 0.02 0.86 0.88
-----------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.76 0.02 1.27 1.29
-----------------------------------------------------------------------------------------
Year Ended November 30, 1997 12.05 (0.02) 0.32 0.30
-----------------------------------------------------------------------------------------
Year Ended November 30, 1998 11.99 0.01 1.77 1.78
-----------------------------------------------------------------------------------------
Year Ended November 30, 1999 13.27 - 4.55 4.55
-----------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 17.03 (0.06) 1.04 0.98
-----------------------------------------------------------------------------------------
</TABLE>
1 The total return calculation does not reflect the maximum sales
charge of 5.50%.
2 Without fees waived, ratios of net expenses to average net assets
for the period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 2.04%,
2.10%, 2.16%, 2.50%, 2.61%, 2.85%, respectively; and ratios of net
investment income to average net assets for the period ended April
30, 2000 and for the fiscal years ended October 31, 1999, 1998,
1997, 1996, 1995 would have been (0.74)%, (0.27)%, 0.71%, (0.50)%,
(0.48)%, (0.69)%, respectively.
................................................................................
158
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
------------------------------------------ ------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return/1/ (000s) Net Assets Net Assets Rate/8/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.04) (0.01) (0.05) 19.15 (3.95)% 1,633 1.70%/2/ 0.46%/2/ 15.12%
-----------------------------------------------------------------------------------------------------------------------------
(0.07) (0.37) (0.44) 20.21 7.95% 3,769 1.75%/2/ 0.37%/2/ 31.57%
-----------------------------------------------------------------------------------------------------------------------------
(0.13) (0.46) (0.59) 18.58 (5.30)% 6,502 1.75%/2/ 0.25%/2/ 97.09%
-----------------------------------------------------------------------------------------------------------------------------
(0.08) (0.37) (0.45) 15.18 (16.16)% 6,486 1.75%/2/ 1.12%/2/ 43.96%
-----------------------------------------------------------------------------------------------------------------------------
(0.30) - (0.30) 18.53 24.48% 6,418 1.81%/2/ 0.56%/2/ 45.50%
-----------------------------------------------------------------------------------------------------------------------------
(0.01) - (0.01) 18.23 (1.56)%/9/ 5,963 1.82%/2/,/10/ (0.52)%/2/,/10/ 51.16%/9/
- (0.02)/6/ (0.02) 10.76 8.89% 1,568 1.45%/3/ 0.07%/3/ 62.78%
-----------------------------------------------------------------------------------------------------------------------------
- - - 12.05 11.99% 2,573 1.44%/3/ 0.19%/3/ 77.63%
-----------------------------------------------------------------------------------------------------------------------------
(0.05)/6/ (0.31) (0.36) 11.99 2.58% 2,854 1.59%/3/ (0.20)%/3/ 75.18%
-----------------------------------------------------------------------------------------------------------------------------
(0.07)/6/ (0.43) (0.50) 13.27 15.33% 3,154 1.58%/3/ 0.02%/3/ 88.95%
-----------------------------------------------------------------------------------------------------------------------------
(0.04)/6/ (0.75) (0.79) 17.03 36.62% 3,939 1.56%/3/ (0.01)%/3/ 93.73%
-----------------------------------------------------------------------------------------------------------------------------
(0.11) (1.52) (1.63) 16.38 5.03%/9/ 3,961 1.48%/3/,/10/ (0.18)%/3/,/10/ 44.99%/9/
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
3 Without fees waived, ratios of net expenses to average net assets
for the period ended May 31, 2000 and for the fiscal years ended
November 30, 1999, 1998, 1997, 1996, 1995 would have been 1.64%,
1.75%, 1.75%, 1.75%, 1.75%, 1.76%, respectively; and (unaudited)
ratios of net investment income to average net assets for the
period ended May 31, 2000 and for the fiscal years ended November
30, 1999, 1998, 1997, 1996, 1995 would have been (0.34)%, (0.20)%,
(0.15)%, (0.36)%, (0.12)%, (0.24)%, respectively.
4 Net investment income (loss) per share represents net investment
income divided by the average shares outstanding throughout the
period.
5 Net investment income (loss) per share is calculated using ending
balances prior to consideration of adjustments for permanent book
and tax differences.
6 Includes distribution in excess of net investment income for the
periods ended November 30, 1999, 1998, 1997 of $0.01, $0.07, $0.05
per share, respectively. Includes return of capital distribution
of $0.01 per share for the period ended November 30, 1995.
7 On January 9, 1995, all previously existing series of shares of
each Fund were reclassified as Series A shares. Effective January
9, 1995, Institutional shareholders exchanged their Series A
shares for the Funds' Institutional series shares. For the year
ended October 31, 1995, the Financial Highlights ratios of net
expenses to average net assets, ratios of net investment income to
average net assets, total return and the per share income from
investment operations and distributions are presented on a basis
whereby the Funds' net investment income, net expenses, net
realized and unrealized gains (losses) and distributions for the
period November 1, 1994 through January 9, 1995, were allocated to
each class of shares based upon the relative net assets of each
class of shares as of the close of business on January 9, 1995,
and the results thereof combined with the results of operations
and distributions for each applicable class for the period January
10, 1995 through October 31, 1995.
8 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares issued.
9 Not annualized.
10 Annualized.
11 Effective September 2, 1997, Hansberger Global Investors assumed
the investment sub-advisory responsibilities of State Street
Global Advisors.
............................................................................ 159
<PAGE>
................................................................................
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--------------------------------------------------------------------------------
Retail A Share
Equity Funds (cont'd)
<TABLE>
<CAPTION>
Income from Investment Operations
------------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning Investment or (Losses) on Investment
of Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
MIDCAP INDEX
November 4, 1999/1/ through April 30,
2000 (unaudited) 10.00 0.04 1.65 1.69
MIDCAP CORE EQUITY
Year Ended October 31, 1995/11/ 33.19 (0.07) 8.49 8.42
--------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 41.40 (0.13)/10/ 4.70 4.57
--------------------------------------------------------------------------------------------------
Year Ended October 31, 1997 41.38 (0.20)/10/ 8.44 8.24
--------------------------------------------------------------------------------------------------
Year Ended October 31, 1998 44.36 (0.24)/9/ (2.07) (2.31)
--------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 37.59 (0.08)/9/ 0.60 0.52
--------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 37.80 (0.22) 11.63 11.41
--------------------------------------------------------------------------------------------------
SMALL CAP INDEX
December 30, 1998/1/ through
November 30, 1999 10.00 - 0.19 0.19
--------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 10.18 (0.01) 0.97 0.96
SMALL CAP CORE EQUITY
Year Ended November 30, 1995 11.99 - 2.36 2.36
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 13.44 (0.01) 1.03 1.02
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1997 13.40 (0.05) 2.50 2.45
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 15.03 (0.06) (1.89) (1.95)
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 11.86 (0.07)/9/ 2.10 2.03
--------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 13.84 (0.05) 3.02 2.97
SCIENCE & TECHNOLOGY
March 31, 2000/1/ through May 31, 2000
(unaudited) 21.93 (0.05) (4.53) (4.58)
MICROCAP
August 1, 1995/1/ through June
30, 1996 10.00 (0.02) 6.10 6.08
--------------------------------------------------------------------------------------------------
July 1, 1996 through October 31,
1996 15.42 (0.08)/10/ 0.82 0.74
--------------------------------------------------------------------------------------------------
Year Ended October 31, 1997 16.16 (0.18)/10/ 4.24 4.06
--------------------------------------------------------------------------------------------------
Year Ended October 31, 1998 17.47 (0.25)/9/ (3.17) (3.42)
--------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 12.38 (0.26)/10/ 9.71 9.45
--------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 21.80 (0.19) 14.80 14.61
--------------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 The total return calculation does not reflect the maximum sales
charge of 5.50%.
3 Without fees waived, the ratio of net expenses to average net
assets for the period ended April 30, 2000 would have been 0.94%;
and the ratio of net investment income to average net assets for
the period ended April 30, 2000 would have been 0.58%.
4 Without fees waived, ratios of net expenses to average net assets
for the period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 1.22%,
1.21%, 1.20%, 1.20%, 1.20%, 1.17%, respectively; and ratios of net
investment income to average net assets for the period ended April
30, 2000 and for the fiscal years ended October 31, 1999, 1998,
1997, 1996, 1995 would have been (0.54)%, (0.23)%, (0.64)%,
(0.57)%, (0.42)%, (0.27)%, respectively.
5 Without fees waived, ratios of net expenses to average net assets
for the periods ended May 31, 2000 and November 30, 1999 would
have been 1.07% and 1.14%, and (unaudited) the ratio of net
investment income to average net assets would have been (0.30)%
and (0.29)%.
6 Without fees waived, ratios of net expenses to average net assets
for the period ended May 31, 2000 and for the fiscal years ended
November 30, 1999, 1998, 1997, 1996, 1995 would have been 1.39%,
1.36%, 1.35%, 1.35%, 1.36%, 1.36%, respectively; and (unaudited)
the ratios of net investment income to average net assets for the
period ended May 31, 2000 would have been (0.17)%, (0.67)%,
(0.55)%, (0.39)%, (0.23)%, (0.22)%, respectively.
7 Without fees waived, ratios of net expenses to average net assets
for the period ended May 31, 2000 would have been 1.70%, and the
ratio of net investment income to average net assets would have
been (1.19)%.
................................................................................
160
<PAGE>
................................................................................
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
-------------------------------------------- -----------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Net Turnover
Income Capital Gains Distributions of Period Return/2/ (000s) Net Assets Assets Rate/13/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.04) - (0.04) 11.65 16.88%/14/ 1,391 0.75%/15/ 0.77%/15/ 23.17%/14/
- (0.21) (0.21) 41.40 25.56% 87,269 1.09%/4/ (0.19)%/4/ 79.25%
------------------------------------------------------------------------------------------------------------------------------
- (4.59) (4.59) 41.38 12.27% 111,159 1.13%/4/ (0.35)%/4/ 103.34%
------------------------------------------------------------------------------------------------------------------------------
- (5.26) (5.26) 44.36 22.18% 147,396 1.12%/4/ (0.50)%/4/ 97.40%
------------------------------------------------------------------------------------------------------------------------------
- (4.46) (4.46) 37.59 (5.91)% 136,146 1.13%/4/ (0.57)%/4/ 77.39%
------------------------------------------------------------------------------------------------------------------------------
- (0.31) (0.31) 37.80 1.31% 95,758 1.19%/4/ (0.21)%/4/ 139.91%
------------------------------------------------------------------------------------------------------------------------------
- (0.79) (0.79) 48.42 30.50%/14/ 100,515 1.20%/4/,/15/ (0.52)%/4/,/15/ 177.11%/14/
------------------------------------------------------------------------------------------------------------------------------
(0.01) - (0.01) 10.18 1.86%/14/ 134 1.00%/5/,/15/ (0.15)%/5/,/15/ 35.27%/14/
------------------------------------------------------------------------------------------------------------------------------
- (0.14) (0.14) 11.00 9.52%/14/ 159 0.97%/5/,/15/ (0.20)%/5/,/15/ 19.13%/14/
- (0.91) (0.91) 13.44 21.47% 15,056 1.26%/6/ (0.12)%/6/ 83.13%
------------------------------------------------------------------------------------------------------------------------------
(0.01)/12/ (1.05) (1.06) 13.40 8.36% 13,889 1.26%/6/ (0.13)%/6/ 65.85%
------------------------------------------------------------------------------------------------------------------------------
- (0.82) (0.82) 15.03 19.45% 14,213 1.25%/6/ (0.29)%/6/ 80.23%
------------------------------------------------------------------------------------------------------------------------------
- (1.22)/12/ (1.22) 11.86 (14.19)% 11,601 1.25%/6/ (0.45)%/6/ 69.72%
------------------------------------------------------------------------------------------------------------------------------
- (0.05) (0.05) 13.84 17.21% 8,885 1.26%/6/ (0.57)%/6/ 72.08%
------------------------------------------------------------------------------------------------------------------------------
- (0.27) (0.27) 16.54 21.79%/14/ 9,288 1.28%/6/,/15/ (0.06)%/6/,/15/ 40.05%/14/
- - - 17.35 (20.88)%/14/ 533 1.61%/7/,/15/ (1.10)%/7/,/15/ 31.00%/14/
(0.04) (0.62) (0.66) 15.42 63.52%/14/ 9,036 1.99%/8/,/15/ (0.36)%/8/,/15/ 283.67%/14/
------------------------------------------------------------------------------------------------------------------------------
- - - 16.16 4.80%/14/ 9,273 1.97%/8/,/15/ (1.69)%/8/,/15/ 64.44%/14/
------------------------------------------------------------------------------------------------------------------------------
- (2.75) (2.75) 17.47 29.78% 16,793 1.95%/8/ (1.45)%/8/ 158.39%
------------------------------------------------------------------------------------------------------------------------------
- (1.67) (1.67) 12.38 (21.71)% 12,419 1.99%/8/ (1.63)%/8/ 135.61%
------------------------------------------------------------------------------------------------------------------------------
- (0.03) (0.03) 21.80 76.54% 21,988 2.01%/8/ (1.43)%/8/ 200.09%
------------------------------------------------------------------------------------------------------------------------------
- (6.13) (6.13) 30.28 81.55%/14/ 40,097 1.94%/8/,/15/ (0.52)%/8/,/15/ 231.39%/14/
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8 Without fees waived, the ratio of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996 and for the period
ended June 30, 1996 would have been 1.94%, 2.02%, 2.06%, 2.03%,
2.04%, 2.22%, respectively; and the ratio of net investment income
(loss) to average net assets for the period ended April 30, 2000
and for the fiscal years ended October 31, 1999, 1998, 1997, 1996
and the period ended June 30, 1996 would have been (0.52)%,
(1.44)%, (1.70)%, (1.53)%, (1.76)%, (0.59)%, respectively.
9 Net investment income (loss) per share represents net investment
income divided by the average shares outstanding throughout the
period.
10 Net investment income (loss) per share is calculated using ending
balances prior to consideration of adjustments for permanent book
and tax differences.
11 On January 9, 1995, all previously existing series of shares of
each Fund were reclassified as Series A shares. Effective January
9, 1995, Institutional shareholders exchanged their Series A
shares for the Funds' Institutional series shares. For the year
ended October 31, 1995, the Financial Highlights ratios of net
expenses to average net assets, ratios of net investment income
to average net assets, total return and the per share income from
investment operations and distributions are presented on a basis
whereby the Funds' net investment income, net expenses, net
realized and unrealized gains (losses) and distributions for the
period November 1, 1994 through January 9, 1995, were allocated
to each class of shares based upon the relative net assets of
each class of shares as of the close of business on January 9,
1995, and the results thereof combined with the results of
operations and distributions for each applicable class for the
period January 10, 1995 through October 31, 1995.
12 Includes distribution in excess of net capital gains of $0.03 per
share for the period ended November 30, 1998. Includes
distribution in excess of net investment income of $0.01 per
share for the period ended November 30. 1996.
13 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares
issued.
14 Not annualized.
15 Annualized.
............................................................................ 161
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Retail B Share
Equity Funds
<TABLE>
<CAPTION>
Income from Investment Operations
-------------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains From
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
BALANCED INCOME
March 1, 1999/1/ through October 31,
1999 $10.87 $ 0.14/10/ $ 0.07 $ 0.21
---------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 10.96 0.10/10/ 0.21 0.31
BALANCED GROWTH
March 1, 1999/1/ through October 31,
1999 30.25 0.17/10/ (0.10) 0.07
---------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 30.15 0.16 4.21 4.37
GROWTH AND INCOME
March 1, 1999/1/ through October 31,
1999 44.64 0.02/10/ 1.40 1.42
---------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 46.06 (0.06) 2.65 2.59
EQUITY INCOME
February 27, 1997/1/ through November
30, 1997 10.00 0.10 1.57 1.67
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 11.55 0.11/10/ 0.97 1.08
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.23 0.08 (0.19) (0.11)
---------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 7.81 0.03 (0.13) (0.10)
RELATIVE VALUE
March 31, 1998/1/ through November 30,
1998 26.01 0.14 0.24 0.38
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 26.28 0.16 2.94 3.10
---------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 29.09 0.13 (0.32) (0.19)
EQUITY INDEX
March 1, 1999/1/ through October 31,
1999 83.72 0.08/10/ 8.18 8.26
---------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 91.72 0.05/10/ 5.72 5.77
LARGE CAP CORE EQUITY
March 1, 1999/1/ through October 31,
1999 36.92 (0.29)/10/ 1.15 0.86
---------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 37.78 (0.14) 6.96 6.82
LARGE CAP GROWTH
December 12, 1994/1/ through November
30, 1995 10.00 0.24 2.67 2.91
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 12.70 0.17 3.12 3.29
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1997 15.17 0.19 2.97 3.16
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 17.17 0.02 3.32 3.34
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 19.52 (0.04) 4.88 4.84
---------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 23.89 (0.02) 1.83 1.81
---------------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 The total return calculation does not reflect the maximum deferred
sales charge of 5.00%.
3 Without fees waived, the ratio of net expenses to average net
assets for the periods ended April 30, 2000 and October 31, 2000
would have been 2.12% , 2.21%, respectively; and the ratio of net
investment income to average net assets for the periods ended
April 30, 2000 and October 31, 2000 would have been 1.64%., 1.66%,
respectively.
4 Without fees waived, the ratio of net expenses to average net
assets for the periods ended April 30, 2000 and October 31, 2000
would have been 2.02% , 2.03%, respectively; and the ratio of net
investment income to average net assets for the periods ended
April 30, 2000 and October 31, 2000 would have been 0.85%., 0.81%,
respectively.
5 Without fees waived, the ratio of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal years
ended November 30, 1999, 1998, and for the period ended November
30, 1997 would have been 2.16%, 2.08%, 2.08%, 2.07%, respectively;
and (unaudited) the ratio of net investment income to average net
assets for the period ended May 31, 2000 and for the fiscal years
ended November 30, 1999, 1998, and the period ended November 30,
1997 would have been 0.79%, 0.79%, 0.59%, 0.60%, respectively.
6 Without fees waived, the ratio of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal years
ended November 30, 1999, and for the period ended November 30,
1998 would have been 1.46%, 1.46%, 1.24%, respectively; and the
ratio of net investment income to average net assets for the
period ended May 31, 2000 and for the fiscal years ended November
30, 1999, and the period ended November 30, 1998 would have been
0.77%, 0.36%, 0.75%, respectively.
................................................................................
162
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
------------------------------------------- -----------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return/2/ (000s) Net Assets Net Assets Rate/11/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(0.12) $ - $(0.12) $10.96 1.97%/12/ $ 1,571 1.97%/3/,/13/ 1.90%/3/,/13/ 48.46%/12/
----------------------------------------------------------------------------------------------------------------------------
(0.09) (0.20) (0.29) 10.98 2.92%/12/ 3,582 1.97%/3/,/13/ 1.79%/3/,/13/ 93.43%/12/
(0.17) - (0.17) 30.15 0.25%/12/ 630 1.97%/4/,/13/ 0.87%/4/,/13/ 69.42%/12/
----------------------------------------------------------------------------------------------------------------------------
(0.16) (1.67) (1.83) 32.69 14.89%/12/ 1,264 1.97%/4/,/13/ 0.90%/4/,/13/ 81.13%/12/
(0.03) - (0.03) 46.03 3.19%/12/ 1,550 1.94%/13/ 0.05%/13/ 62.20%/12/
----------------------------------------------------------------------------------------------------------------------------
- (3.90) (3.90) 44.75 6.00%/12/ 2,461 1.97%/13/ (0.42)%/13/ 91.87%/12/
(0.12)/14/ - (0.12) 11.55 16.75%/12/ 131 1.14%/5/,/13/ 1.53%/5/,/13/ 48.33%/12/
----------------------------------------------------------------------------------------------------------------------------
(0.11) (2.29) (2.40) 10.23 10.98% 520 1.84%/5/ 0.83%/5/ 98.32%
----------------------------------------------------------------------------------------------------------------------------
(0.08) (2.23) (2.31) 7.81 (0.85)% 766 1.98%/5/ 0.89%/5/ 81.84%
----------------------------------------------------------------------------------------------------------------------------
(0.03) (1.11) (1.14) 6.57 (1.30)%/12/ 653 2.06%/5/,/13/ 0.89%/5/,/13/ 15.81%/12/
(0.11) - (0.11) 26.28 1.50%/12/ 7,847 1.04%/6/,/13/ 0.95%/6/,/13/ 26.00%/12/
----------------------------------------------------------------------------------------------------------------------------
(0.18) (0.11) (0.29) 29.09 11.84% 14,278 1.30%/6/ 0.52%/6/ 11.00%
----------------------------------------------------------------------------------------------------------------------------
(0.09) - (0.09) 28.81 (0.65)%/12/ 16,361 1.35%/6/,/13/ 0.88%/6/,/13/ 4.00%/12/
(0.26) - (0.26) 91.72 9.88%/12/ 4,613 1.37%/7/,/13/ 0.13%/7/,/13/ 13.95%/12/
----------------------------------------------------------------------------------------------------------------------------
(0.10) (2.08) (2.18) 95.31 6.27%/12/ 9,132 1.37%/7/,/13/ 0.10%/7/,/13/ 2.80%/12/
- - - 37.78 2.33%/12/ 722 1.96%/8/,/13/ (1.17)%/8/,/13/ 59.35%/12/
----------------------------------------------------------------------------------------------------------------------------
- (2.03) (2.03) 42.57 18.42%/12/ 1,144 1.94%/8/,/13/ (1.06)%/8/,/13/ 65.02%/12/
(0.21) - (0.21) 12.70 29.44%/12/ 48,699 1.17%/9/,/13/ 2.00%/9/,/13/ 171.00%/12/
----------------------------------------------------------------------------------------------------------------------------
(0.16) (0.66) (0.82) 15.17 27.34% 85,311 1.19%/9/ 1.31%/9/ 96.00%
----------------------------------------------------------------------------------------------------------------------------
(0.14) (1.02) (1.16) 17.17 22.65% 45,025 1.09%/9/ 0.86%/9/ 60.00%
----------------------------------------------------------------------------------------------------------------------------
(0.03) (0.96) (0.99) 19.52 20.76% 66,478 1.34%/9/ 0.12%/9/ 48.00%
----------------------------------------------------------------------------------------------------------------------------
(0.02) (0.45) (0.47) 23.89 25.26% 90,468 1.36%/9/ (0.08)%/9/ 28.00%
----------------------------------------------------------------------------------------------------------------------------
- - - 25.70 7.58%/12/ 101,800 1.36%/9/,/13/ (0.17)%/9/,/13/ 9.00%/12/
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
7 Without fees waived, the ratio of net expenses to average net
assets for the periods ended April 30, 2000 and October 31, 2000
would have been 1.43%, 1.43%, respectively; and the ratio of net
investment income to average net assets for the periods ended
April 30, 2000 and October 31, 2000 would have been 0.04%.,
0.07%, respectively.
8 Without fees waived, the ratio of net expenses to average net
assets for the periods ended April 30, 2000 and October 31, 2000
would have been 1.95%, 1.97%, respectively; and the ratio of net
investment income to average net assets for the periods ended
April 30, 2000 and October 31, 2000 would have been (1.07)%.,
(1.18)%, respectively
9 Without fees waived, ratios of net expenses to average net assets
for the period ended May 31, 2000, the fiscal year ended November
30, 1999, 1998, 1997, 1996 and the period ended November 30, 1995
would have been 1.47%, 1.52%, 1.54%, 1.29%, 1.39%, 1.40%,
respectively; and ratios of net investment income to average net
assets for the period ended May 31, 2000, the fiscal year ended
November 30, 1999, 1998, 1997, 1996 and the period ended November
30, 1995 would have been (0.28)%, (0.24)%, (0.08)%, 0.66%, 1.11%,
1.77%, respectively.
10 Net investment income (loss) per share represents net investment
income divided by the average shares outstanding throughout the
period.
11 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares
issued.
12 Not annualized.
13 Annualized.
14 Includes distribution in excess of net investment income of
$0.02 per share.
............................................................................ 163
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Retail B Share
Equity Funds (cont'd.)
<TABLE>
<CAPTION>
Income from Investment Operations
------------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains From
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
INTERNATIONAL VALUE/16/
March 1, 1999/1/ through October 31,
1999 $14.71 $(0.10)/9/ $ 3.76 $ 3.66
--------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 18.37 (0.09)/9/ (0.27) (0.36)
INTERNATIONAL GROWTH
March 1, 1995/1/ to November 30, 1995 9.26 (0.03) 1.48 1.45
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.71 (0.04) 1.23 1.19
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1997 11.90 (0.09) 0.30 0.21
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 11.77 (0.09) 1.74 1.65
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 12.97 (0.10) 4.43 4.33
--------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 16.54 (0.11) 1.00 0.89
--------------------------------------------------------------------------------------------------
MIDCAP INDEX
November 4, 1999/1/ through April 30,
2000 (unaudited) 10.00 0.02 1.64 1.66
MIDCAP CORE EQUITY
March 1, 1999/1/ through October 31,
1999 37.57 (0.23)/9/ 0.29 0.06
--------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 37.63 (0.28)/9/ 11.46 11.18
SMALL CAP CORE EQUITY
March 1, 1995/1/ to November 30, 1995 11.83 (0.03) 1.57 1.54
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 13.37 (0.07) 0.99 0.92
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1997 13.24 (0.13) 2.45 2.32
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 14.74 (0.14) (1.85) (1.99)
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 11.53 (0.16)/9/ 2.06 1.90
--------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 13.38 (0.13) 2.94 2.81
SCIENCE & TECHNOLOGY
August 9, 1999/1/ through November 30,
1999 10.00 - 4.52 4.52
--------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 14.52 (0.09) 2.90 2.81
MICROCAP
March 1, 1999/1/ through October 31,
1999 13.74 (0.30)/9/ 8.25 7.95
--------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 21.69 (0.34) 14.76 14.42
--------------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 The total return calculation does not reflect the maximum
deferred sales charge of 5.00%.
3 Without fees waived, the ratio of net expenses to average net
assets for the periods ended April 30, 2000 and October 31, 2000
would have been 2.79%, 2.85%, respectively; and the ratio of net
investment income to average net assets for the periods ended
April 30, 2000 and October 31, 2000 would have been (1.15)%,
(1.13)%, respectively.
4 Without fees waived, ratios of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, 1997, 1996, 1995 would have
been 2.34%, 2.45%, 2.45%, 2.45%, 2.46%, 2.44%, respectively; and
(unaudited) ratios of net investment income to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, 1997, 1996, 1995 would have
been (1.04)%, (0.90)%, (0.87)%, (1.07)%, (0.82)%, (1.38)%
respectively.
5 Without fees waived, the ratio of net expenses to average net
assets for the periods ended April 30, 2000 would have been
1.69%, and the ratio of net investment income to average net
assets for the periods ended April 30, 2000 would have been
(0.21)%.
6 Without fees waived, the ratio of net expenses to average net
assets for the periods ended April 30, 2000 and October 31, 2000
would have been 1.97%, 1.97%, respectively; and the ratio of net
investment income to average net assets for the periods ended
April 30, 2000 and October 31, 2000 would have been (1.29)%,
(0.91)%, respectively.
7 Without fees waived, ratios of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, 1997, 1996, 1995 would have
been 2.09%, 2.06%, 2.05%, 2.05%, 2.05%, 2.06%, respectively; and
(unaudited) ratios of net investment income to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, 1997, 1996, 1995 would have
been (0.85)%, (1.37)%, (1.25)%, (1.09)%, (0.93)%, (0.88)%
respectively.
................................................................................
164
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
--------------------------------------------- -----------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return/2/ (000s) Net Assets Net Assets Rate/10/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ - $ - $ - $18.37 24.88%/13/ $ 44 2.57%/3/,/14/ (0.85)%/3/,/14/ 45.50%/13/
-------------------------------------------------------------------------------------------------------------------------------
- - - 18.01 (1.85)%/13/ 302 2.57%/3/,/14/ (0.93)%/3/,/14/ 51.16%/13/
- - - 10.71 8.38%/15/ 102 2.02%/4/,/14/ (0.96)%/4/,/14/ 62.78%/13/
-------------------------------------------------------------------------------------------------------------------------------
- - - 11.90 11.11% 437 2.14%/4/ (0.50)%/4/ 77.63%
-------------------------------------------------------------------------------------------------------------------------------
(0.03)/12/ (0.31) (0.34) 11.77 1.82% 562 2.29%/4/ (0.91)%/4/ 75.18%
-------------------------------------------------------------------------------------------------------------------------------
(0.02)/12/ (0.43) (0.45) 12.97 14.48% 624 2.28%/4/ (0.70)%/4/ 88.95%
-------------------------------------------------------------------------------------------------------------------------------
(0.01) (0.75) (0.76) 16.54 35.65% 781 2.26%/4/ (0.71)%/4/ 93.73%
-------------------------------------------------------------------------------------------------------------------------------
(0.08) (1.52) (1.60) 15.83 5.44%/13/ 741 2.18%/4/,/14/ (0.88)%/4/,/14/ 44.99%/13/
(0.03) - (0.03) 11.63 16.56%/13/ 295 1.50%/5/,/14/ (0.02)%/5/,/14/ 23.17%/13/
- - - 37.63 0.16%/13/ 126 1.95%/6/,/14/ (0.89)%/6/,/14/ 139.91%/13/
-------------------------------------------------------------------------------------------------------------------------------
- (0.79) (0.79) 48.02 30.02%/13/ 248 1.95%/6/,/14/ (1.27)%/6/,/14/ 177.11%/13/
- - - 13.37 20.83%/13/ 603 1.96%/7/,/14/ (0.78)%/7/,/14/ 83.13%/13/
-------------------------------------------------------------------------------------------------------------------------------
- (1.05) (1.05) 13.24 7.63% 1,272 1.96%/7/ (0.83)%/7/ 65.85%
-------------------------------------------------------------------------------------------------------------------------------
- (0.82) (0.82) 14.74 18.62% 1,503 1.95%/7/ (0.99)%/7/ 80.23%
-------------------------------------------------------------------------------------------------------------------------------
- (1.22)/11/ (1.22) 11.53 (14.79)% 1,286 1.95%/7/ (1.15)%/7/ 69.72%
-------------------------------------------------------------------------------------------------------------------------------
- (0.05) (0.05) 13.38 16.57% 1,094 1.96%/7/ (1.27)%/7/ 72.08%
-------------------------------------------------------------------------------------------------------------------------------
- (0.27) (0.27) 15.92 21.34%/13/ 1,174 1.98%/7/,/14/ (0.76)%/7/,/14/ 40.05%/13/
- - - 14.52 45.20%/13/ 1,345 1.94%/8/,/14/ (1.19)%/8/,/14/ 16.00%/13/
-------------------------------------------------------------------------------------------------------------------------------
- - - 17.33 19.35%/13/ 10,510 1.98%/8/,/14/ (1.43)%/8/,/14/ 31.00%/13/
- - - 21.69 57.86%/13/ 140 2.78%/14/ (2.36)%/14/ 200.09%/13/
-------------------------------------------------------------------------------------------------------------------------------
- (6.13) (6.13) 29.98 80.94%/13/ 845 2.69%/14/ (2.24)%/14/ 231.39%/13/
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8 Without fees waived, ratios of net expenses to average net
assets for the periods ended May 31, 2000 and November 30, 1999
would have been 2.09%, 2.09%, respectively; and ratios of net
investment income to average net assets for the periods ended
May 31, 2000 and November 30, 1999 would have been (1.54)%,
(1.34)%, respectively.
9 Net investment income (loss) per share represents net investment
income divided by the average shares outstanding throughout the
period.
10 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares
issued.
11 Includes distribution in excess of net capital gains of $0.04
per share.
12 Includes distribution in excess of net investment income of
$0.02 and $0.03 per share for the periods ended November 30,
1998 and 1997 respectively.
13 Not annualized.
14 Annualized.
15 Represents total return for the Retail A shares from December 1,
1994 to February 28, 1995 plus the total return for the Retail B
shares from March 1, 1995 to November 30, 1995.
16 Effective September 2, 1997, Hansberger Global Investors assumed
the investment sub-advisory responsibilities of State Street
Global Advisors.
............................................................................ 165
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Funds' Additional
Statement incorporated herein by reference, in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Funds
or their Distributor. This Prospectus does not constitute an offering by the
Funds or by their Distributor in any jurisdiction in which such offering may
not lawfully be made.
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500", "500",
"S&P MidCap 400 Index", "Standard & Poor's MidCap 400 Index", "S&P SmallCap
600" and "Standard & Poor's SmallCap 600" are trademarks of The McGraw Hill
Companies, Inc. and have been licensed for use by Firstar Funds. The Equity
Index Fund, MidCap Index Fund and SmallCap Index Fund are not sponsored,
endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no
representation regarding the advisability of investing in the Equity Index
Fund, MidCap Index Fund or SmallCap Index Fund.
The Lehman Brothers 1-3 Year Government/Credit Bond Index, the Lehman Brothers
Intermediate Government/Credit Bond Index and the Lehman Brothers
Government/Credit Bond Index are trademarks of Lehman Brothers. The Fund, its
Adviser and the Administrator are not affiliated in any way with Lehman
Brothers. Inclusion of a security in the bond index in no way implies an
opinion by Lehman Brothers as to its attractiveness or appropriateness as an
investment. Lehman Brothers' publication of the bond index is not made in
connection with any sale or offer for sale of securities or any solicitations
of orders for the purchase of securities.
................................................................................
166
<PAGE>
For More Information
Annual/Semiannual Reports
Additional information about the Funds' performance and investments is
available in the Funds' annual and semiannual reports to shareholders. In the
Funds' annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the Funds' performance during
its last fiscal year.
Statement of Additional Information
Additional information about the Funds and their policies is also available in
the Funds' Statement of Additional Information ("Additional Statement"). The
Additional Statement is incorporated by reference into this Prospectus (and is
legally considered part of this Prospectus).
The Funds' annual and semiannual reports and the Additional Statement are
available free upon request by calling Firstar Funds at 1-800-677-FUND
To obtain other information and for shareholder inquiries:
By telephone - call 1-800-677-FUND
By mail - Firstar Funds
615 East Michigan Street
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
By e-mail - [email protected]
On the Internet - Text only version of the Funds' documents are located online
and may be downloaded from: - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's Public
Reference Room in Washington, D.C. You may also obtain copies of Fund documents
by paying a duplicating fee and sending an electronic request at the following
e-mail address at: [email protected]., or by sending your request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C. 20549-
0102. Information on the operation of the public reference room may be obtained
by calling the SEC at 1-202-942-8090.
The Fund's Investment Company Act File Number is 811-5380.
www.firstarfunds.com
[LOGO OF FIRSTAR]
<PAGE>
Prospectus
December 11, 2000
INSTITUTIONAL SHARES
Institutional Money Market Fund
Tax-Exempt Money Market Fund
Ohio Tax-Exempt Money Market Fund
U.S. Government Money Market Fund
U.S. Treasury Money Market Fund
Short-Term Bond Fund
Intermediate Bond Fund
U.S. Government Securities Fund
Aggregate Bond Fund
Bond IMMDEXTM Fund
Strategic Income Fund
Tax-Exempt Intermediate Bond Fund
Missouri Tax-Exempt Bond Fund
National Municipal Bond Fund
Balanced Income Fund
Balanced Growth Fund
Growth & Income Fund
Equity Income Fund
Relative Value Fund
Equity Index Fund
Large Cap Core Equity Fund
Large Cap Growth Fund
International Value Fund
Global Equity Fund
International Growth Fund
MidCap Index Fund
MidCap Core Equity Fund
Small Cap Index Fund
Small Cap Core Equity Fund
Science & Technology Fund
MicroCap Fund
As with all mutual funds, the Securities and Exchange
Commission has not approved or disapproved any shares
of these funds or determined if this prospectus is
truthful or complete. Anyone who tells you otherwise is
committing a criminal offense.
[LOGO OF FIRSTAR] Bigger & Brighter
<PAGE>
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Table of Contents
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Institutional Money Market Fund 1
-------------------------------------------------------
Tax-Exempt Money Market Fund 3
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Ohio Tax-Exempt Money Market Fund 6
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U.S. Government Money Market Fund 11
-------------------------------------------------------
U.S. Treasury Money Market Fund 13
-------------------------------------------------------
Short-Term Bond Fund 16
-------------------------------------------------------
Intermediate Bond Fund and Bond IMMDEX(TM) Fund 16
-------------------------------------------------------
U.S. Government Securities Fund 22
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Aggregate Bond Fund 25
-------------------------------------------------------
Strategic Income Fund 29
-------------------------------------------------------
Tax-Exempt Intermediate Bond Fund 33
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Missouri Tax-Exempt Bond Fund 36
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National Municipal Bond Fund 41
-------------------------------------------------------
Balanced Income Fund 44
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Balanced Growth Fund 48
-------------------------------------------------------
Growth & Income Fund 52
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Equity Income Fund 55
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Relative Value Fund 58
-------------------------------------------------------
Equity Index Fund 62
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Large Cap Core Equity Fund 65
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Large Cap Growth Fund 68
-------------------------------------------------------
International Value Fund 73
-------------------------------------------------------
Global Equity Fund 76
-------------------------------------------------------
International Growth Fund 81
-------------------------------------------------------
MidCap Index Fund 85
-------------------------------------------------------
MidCap Core Equity Fund 87
-------------------------------------------------------
Small Cap Index Fund 91
-------------------------------------------------------
Small Cap Core Equity Fund 94
-------------------------------------------------------
Science & Technology Fund 98
-------------------------------------------------------
MicroCap Fund 102
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Types of Investment Risk 106
-------------------------------------------------------
Investing With Firstar Funds 115
-------------------------------------------------------
Share Classes Available 115
-------------------------------------------------------
Purchasing Shares 116
-------------------------------------------------------
Redeeming Shares 119
-------------------------------------------------------
Exchanging Shares 121
-------------------------------------------------------
Additional Shareholder Services 121
-------------------------------------------------------
Additional Information 122
-------------------------------------------------------
Dividends, Capital Gains Distributions And Taxes 122
-------------------------------------------------------
Management Of The Funds 124
-------------------------------------------------------
Net Asset Value And Days Of Operation 129
-------------------------------------------------------
Appendix 131
-------------------------------------------------------
Financial Highlights 131
-------------------------------------------------------
</TABLE>
An investment in the Funds is not a deposit of Firstar Bank N.A. and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Although each money market fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Funds.
Learn about each Fund's Objective, Principal Investment Strategies, Principal
Risks, Performance and Expenses.
................................................................................
<PAGE>
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Institutional Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Institutional Money Market Fund is to provide a
high level of taxable current income consistent with liquidity, the
preservation of capital and a stable net asset value. This investment objective
may be changed by the Board of Directors without approval of Shareholders,
although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in short-term, high quality, dollar-denominated
money market debt obligations generally maturing in 397 days or less. These
obligations may be issued by entities including domestic and foreign
corporations, banks and other financial institutions and other types of
entities or by investment companies, or they may be issued or guaranteed by a
U.S. or foreign government, agency, instrumentality or political subdivision.
The Fund will acquire only securities which are rated in the highest short-term
rating category by at least two rating agencies (or by the only rating agency
providing a rating), or are issued or guaranteed by, or otherwise provide the
right to demand payment from, entities with those ratings. If the securities
are unrated, they must be of comparable quality, as determined at the time of
acquisition.
The Fund maintains an average maturity of 90 days or less.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed-income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed-income
securities will decline in value.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
shares from year to year and the average annual return of the Fund's shares.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If fee waivers were not in place,
the Fund's performance would be reduced.
Year by-year total return as of 12/31 each year (%)
[GRAPH]
92 3.58
93 2.90
94 4.08
95 5.81
96 5.26
97 5.39
98 5.38
99 4.94
.............................................................................. 1
<PAGE>
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The total return for Institutional Money Market Fund Shares for the nine-month
period ended September 30, 2000 was 4.52%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '95 1.46%
Worst Quarter: Q 2 '93 0.70%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (April 26, 1991)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Money Market Fund 4.94% 5.35% -- 4.72%
-------------------------------------------------------------------------
</TABLE>
The 7-day yield for the period ended on 12/31/99 for the Institutional Money
Market Fund was 5.54%, and without giving effect to fee waivers was 5.29%.
Figures reflect past performance. Yields will vary. You may call 1-800-677-FUND
to obtain the current 7-day yield of the Institutional Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Shares of the Institutional Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Management Fees (before waivers)/2/ 0.49%
Distribution and Service (12b-1) Fees None
Other Expenses (before waivers)/3/ 0.36%
-------
Total Annual Fund Operating Expenses (before
waivers) 0.85%
Fee Waivers and Expense Reimbursements/4/ (0.46)%
-------
Net Annual Fund Operating Expenses/4/ 0.39%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Institutional
Money Market Fund is 0.28% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's shares. As a result of fee waivers and/or expense
reimbursements, Other Expenses of the Institutional Money Market Fund
currently are .11% of the Fund's average daily net assets.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for the Fund until October 31, 2001, so that Net Annual
Fund Operating Expenses will be no more than 0.39% of the Fund's average
daily net assets for the current fiscal year. These fee waivers and expense
reimbursements may be terminated at any time after October 31, 2001 at the
discretion of the service providers.
................................................................................
2
<PAGE>
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in the Fund for the time periods indicated, reinvest
all of your dividends and distributions, and then redeem all of your shares at
the end of those periods. The example also assumes that your investment has a
5% return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Money Market Fund $40 $230 $435 $1,028
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Tax-Exempt Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Tax-Exempt Money Market Fund is to provide a
high level of current income exempt from federal income taxes consistent with
liquidity, the preservation of capital and a stable net asset value. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in a diversified portfolio of dollar-denominated
debt obligations ("municipal obligations") issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their authorities, agencies, instrumentalities and political sub-divisions. The
Fund will acquire only securities which are rated in the highest short-term
rating category by at least two rating agencies (or by the only rating agency
providing a rating), or are issued or guaranteed by, or otherwise provide the
right to demand payment from, entities with those ratings. If the security is
unrated, it must be of comparable quality to securities with those ratings, as
determined at the time of acquisition. During normal market conditions, the
Fund will invest at least 80% of its net assets in municipal obligations which
are exempt from federal income taxes with remaining maturities of 13 months or
less. (Securities which are subject to demand features and certain U.S.
government obligations may have longer maturities). The Fund maintains an
average portfolio maturity of 90 days or less.
The two principal classifications of municipal obligations which the Tax-Exempt
Money Market Fund invests in are:
General Obligation Revenue Securities
Securities Revenue securities are payable only from the
General obligation revenues derived from a particular facility or
securities are secured class of facilities or, in some cases, from the
by the issuer's pledge proceeds of a special excise tax or other
of its full faith, specific revenue source such as the issuer of the
credit and taxing power facility being financed.
for the payment of
principal and interest.
Municipal obligations purchased by the Fund may include variable and floating
rate instruments which are instruments with interest rates that are adjusted
either on a schedule or when an index or benchmark changes. While there may be
no active secondary market with respect to a particular variable or floating
rate demand instrument, the Fund may demand payment in full of the principal
and interest.
.............................................................................. 3
<PAGE>
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Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Long-term fixed income securities will
normally have more price volatility because of this risk than short-term
securities.
Municipal obligations which the Fund purchases may be backed by letters of
credit issued by banks and other financial institutions. Adverse developments
affecting banks could have a negative effect on the Fund's portfolio
securities.
The Fund may invest more than 25% of its total assets in municipal obligations
issued by entities located in the same state and the interest on which is paid
solely from revenues of similar projects. As a result, changes in economic,
business or political conditions relating to a particular state or types of
projects may have a disproportionate impact on the Fund's share price.
The Fund may acquire municipal lease obligations which are issued by a state or
local government or authority to acquire land and a wide variety of equipment
and facilities. 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.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
Institutional Shares of the Tax-Exempt Money Market Fund are new and have no
performance history. For this reason, the performance information shown below
is for another class of shares (Retail A Shares) that is not offered in this
prospectus but would have substantially similar annual returns because both
classes of shares will be invested in the same portfolio of securities. Annual
returns will differ only to the extent that the classes do not have the same
expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A shares from year to year and the average annual returns of the Fund's
Retail A Shares. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
................................................................................
4
<PAGE>
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[LOGO OF FIRSTAR]
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Year-by-year total return as of 12/31 each year (%)(Retail A Shares)
[GRAPH]
90 5.48
91 4.24
92 2.64
93 2.06
94 2.49
95 3.44
96 3.06
97 3.13
98 2.97
99 2.58
The Tax-Exempt Money Market Fund's total return for Retail A Shares for the
nine-month period ended September 30, 2000 was 2.52%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '89 1.58%
Worst Quarter: Q 1 '94 0.50%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1
Year 5 Years 10 Years
------------------------------------------------------
<S> <C> <C> <C>
Tax-Exempt Money Market Fund -
Retail A Shares 2.58% 3.03% 3.20%
------------------------------------------------------
</TABLE>
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
Tax-Exempt Money Market Fund was 3.66% and without giving effect to fee waivers
was 3.66%. Figures reflect past performance. Yields will vary. You may call 1-
800-677-FUND to obtain the current 7-day yield of Retail A Shares of the Tax-
Exempt Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the Tax-Exempt Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
.............................................................................. 5
<PAGE>
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
---------------------------------------------------------
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees 0.50%
Distribution and Service (12b-1) Fees None
Other Expenses (before waivers)/2/ 0.43%
-------
Total Annual Fund Operating Expenses
(before waivers) 0.93%
Fee Waivers and Expense Reimbursements/3/ (0.14)%
-------
Net Annual Fund Operating Expenses/3/ 0.79%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Institutional Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the Tax-Exempt Money Market Fund
currently are 0.29% of the Fund's average daily net assets.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Tax-Exempt Money Market
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than 0.79% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money Market Fund -
Institutional Shares $81 $336 $611 $1,397
</TABLE>
--------------------------------------------------------------------------------
Ohio Tax-Exempt Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Ohio Tax-Exempt Money Market Fund is to provide
current income exempt from federal income tax and the personal income taxes
imposed by the state of Ohio and Ohio municipalities consistent with stability
of principal. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund intends to achieve its investment goal by investing its assets so that
at least 80% of its annual interest income is exempt from federal income tax
and not subject to the alternative minimum tax and the personal income taxes
imposed by the state of Ohio and Ohio municipalities. In addition, the Fund
will invest its assets so that under normal circumstances, at least 65% of the
value of its total assets will be invested in Ohio municipal securities exempt
from federal regular income tax and Ohio State income tax.
Examples of Ohio Municipal Securities
.tax and revenue anticipation notes issued to finance working capital needs in
anticipation of receiving taxes or other revenues
.bond anticipation notes that are intended to be refinanced through a later
issuance of longer term bonds
.municipal commercial paper and other short-term notes
.variable rate demand notes
.municipal bonds and leases
.participation interests in any of the above
..............................................................................
6
<PAGE>
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The Fund's portfolio consists of municipal securities maturing in 397 days or
less. The average maturity, however, of all the securities in the Fund's
portfolio will be 90 days or less on a dollar-weighted basis. The Fund may
invest more than 25% of its total assets in securities credit - enhanced by
banks. Credit - enhanced securities are investments backed by a guaranty, a
letter of credit or insurance.
The municipal securities in which the Fund invests are primarily debt
obligations issued by or on behalf of Ohio and its political subdivisions and
financing authorities and obligations of other states, territories and
possessions of the United States and any political subdivision or financing
authority of any of these. The income from such obligations must be exempt from
federal income tax (including alternative minimum tax) and the personal income
taxes imposed by the state of Ohio and its political subdivisions.
Participation Interests
The Fund may purchase interests in municipal securities from financial
institutions such as commercial and investment banks, savings associations and
insurance companies. Financial institutions provide guarantees, letters of
credit or insurance to the Fund on the underlying municipal securities.
Municipal Leases
The Fund may also invest in municipal leases, which are obligations issued by
state and local governments to finance the acquisition of equipment and
facilities. Municipal leases may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation interest.
Municipal leases may be considered illiquid.
Variable Rate Demand Notes
The Fund may invest in variable rate demand notes, which are obligations with
variable or floating interest rates. The notes provide the Fund with the right
to tender the security for repurchase at its stated principal amount plus
accrued interest. These securities usually bear interest at a rate that allows
the securities to trade at par. Most variable rate demand notes allow the fund
to demand the repurchase of the security on not more than 7 days' notice. Other
notes only permit the Fund to tender the security at the time of each interest
rate adjustment or at other fixed intervals. The Fund treats variable rate
demand notes as maturing on the later of the date of the next interest
adjustment or the date on which the Fund may next tender the security for
repurchase.
Temporary Investments
From time to time, the Fund may invest in tax-exempt or taxable short-term
temporary investments when the Fund's Adviser determines that market conditions
call for a temporary defensive posture. During such times, it is possible for
the Fund not to reach its investment objective. Although the Fund is permitted
to make taxable temporary investments, the Adviser currently has no intention
to generate income subject to federal regular income tax.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk and tax risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal;
to the extent the Fund invests in credit enhanced securities, it is especially
susceptible to credit risk. The ability of a state or local government issuer
to make payments can be affected by many factors, including economic
conditions, the flow of tax revenues and changes in the level of federal, state
or local aid. Some municipal securities are payable only from limited revenue
sources or by private entities. Interest rate risk is the risk that, when
interest rates increase, fixed income securities, including municipal
securities, will decline in value. Tax risk is the risk that the Fund may be
more adversely impacted by changes in tax rates and policies than other funds.
.............................................................................. 7
<PAGE>
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Municipal obligations which the Fund purchases may be backed by letters of
credit issued by banks and other financial institutions. Adverse developments
affecting banks could have a negative effect on the Fund's portfolio
securities.
The Fund is also subject to Ohio state-specific risks, as it may invest at
least 65% of its total assets in municipal obligations issued by the State or
entities located in the state of Ohio. Ohio's economy is largely composed of
manufacturing, which is concentrated in the automobile sector and other durable
goods. The exposure to these industries, particularly the auto sector, leaves
Ohio vulnerable to an economic slowdown associated with business cycles.
Furthermore, population growth, as in many states around the Great Lakes, has
been stagnant.
The Fund's concentration in securities issued by Ohio and its political
subdivisions provides a greater level of risk than a fund whose assets are
diversified across numerous states and municipal issuers. The ability of Ohio
or its local issuers to meet their obligations will depend on, among other
factors:
1. the availability of tax and other revenues;
2. economic, political and demographic conditions within the state or region
of the state; and
3. the underlying fiscal condition of the state, its counties, municipalities
and school districts.
See the Additional Statement for additional information regarding Ohio state-
specific risks.
Investing in the Fund has added risks because the Fund is a non-diversified
fund under the Investment Company Act of 1940, as amended (the "1940 Act"),
subjecting the Fund to non-diversification risks. Compared with other mutual
funds, this Fund may invest a greater percentage of its assets in a more
limited number of issues concentrated in one state which, as a result, can
increase the Fund's volatility. The value of the Fund's securities can be
impacted by economic or political developments affecting certain securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A Shares from year to year and the average annual returns of the Fund's
Retail A Shares. The Fund began operations on December 2, 1997 as the Firstar
Stellar Ohio Tax-Free Money Market Fund, a separate portfolio (a "Predecessor
Stellar Fund") of Firstar Stellar Funds. On December 11, 2000, the Predecessor
Stellar Fund was reorganized as a new portfolio of Firstar Funds, Inc. The
Predecessor Stellar Fund did not offer Institutional Shares. The performance
set forth below is based on the performance of a different class of the
Predecessor Stellar Fund (Retail A Shares). The performance of the other class
shown would be substantially similar to that of the Institutional class because
both classes will be invested in the same portfolio of securities. Annual
returns will differ only to the extent that the classes do not have the same
expenses.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
................................................................................
8
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Year-by-year total return as of 12/31 each year (%)(Retail A Shares)
[GRAPH]
98 2.85
99 2.69
The Ohio Tax-Exempt Money Market Fund's total return for Retail A Shares for
the nine-month period ended September 30, 2000 was 2.49%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '98 0.78%
Worst Quarter: Q 2 '99 0.62%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (December 2, 1997)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ohio Tax-Exempt Money Market Fund -
Retail A Shares 2.69% -- -- 2.77%
-------------------------------------------------------------------------------
</TABLE>
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
Ohio Tax-Exempt Money Market Fund was 3.52% and without giving effect to fee
waivers was 3.20%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-FUND to obtain the current 7-day yield of the Ohio Tax-Exempt
Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Ohio Tax-Exempt Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
.............................................................................. 9
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.50%
Distribution and Service (12b-1) Fees None
Other Expenses (before waivers)/3/ 0.63%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.13%
Fee Waivers and Expense Reimbursements/4/ (0.34)%
-------
Net Annual Fund Operating Expenses/4/ 0.79%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Ohio Tax-
Exempt Money Market Fund is 0.34% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Institutional Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the Ohio Tax-Exempt Money Market
Fund currently are 0.45% of the Fund's average daily net assets.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Ohio Tax-Exempt Money
Market Fund until October 31, 2001, so that Net Annual Fund Operating
Expenses will be no more than 0.79% of the Fund's average daily net assets
for the current fiscal year. These fee waivers and expense reimbursements
may be terminated at any time after October 31, 2001 at the discretion of
the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ohio Tax-Exempt Money Market Fund -
Institutional Shares $81 $379 $699 $1,606
</TABLE>
--------------------------------------------------------------------------------
................................................................................
10
<PAGE>
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[LOGO OF FIRSTAR]
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U.S. Government Money Market Fund
Objective
[GRAPHIC]
The investment objective of the U.S. Government Money Market Fund is to provide
a high level of taxable current income consistent with liquidity, the
preservation of capital and a stable net asset value (irrespective of state
income tax considerations). This investment objective may be changed by the
Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The U.S. Government Money Market Fund invests in short term dollar-denominated
debt obligations generally maturing in 397 days or less, issued or guaranteed
as to principal and interest by the U.S. government, its agencies or
instrumentalities. Under normal market conditions, the Fund intends to invest
at least 65% of its total assets in these obligations. The Fund also invests in
variable and floating rate instruments and repurchase agreements.
The Fund maintains an average maturity of 90 days or less.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that the
dividends on your investment will vary. The Fund is subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value.
Even though the U.S. Government Money Market Fund purchases mostly U.S.
government obligations, shares of the Fund are not themselves issued or
guaranteed by any government agency.
There can be no assurance that the U.S. government will provide financial
support to U.S. government-sponsored agencies or instrumentalities where it is
not obligated to do so by law.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
BAR CHART AND PERFORMANCE TABLE
[GRAPHIC]
Institutional Shares of the U.S. Government Money Market Fund are new and have
no performance history. For this reason, the performance information shown
below is for another class of shares (Retail A Shares) that is not offered in
this prospectus but would have substantially similar annual returns because
both classes of shares will be invested in the same portfolio of securities.
Annual returns will differ only to the extent that the classes do not have the
same expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A shares from year to year and the average annual returns of the Fund's
Retail A Shares.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
............................................................................. 11
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Year-by-year total return as of 12/31 each year (%)(Retail A Shares)
[GRAPH]
90 7.71
91 5.56
92 3.30
93 2.61
94 3.76
95 5.39
96 4.92
97 4.97
98 4.95
99 4.41
The U.S. Government Money Market Fund's total return for Retail A Shares for
the nine-month period ended September 30, 2000 was 4.12%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '89 2.24%
Worst Quarter: Q 2 '93 0.63%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Money Market Fund -
Retail A Shares 4.41% 4.92% 4.75%
</TABLE>
--------------------------------------------------------------------------------
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
U.S. Government Money Market Fund was 4.66% and without giving effect to fee
waivers was 4.66%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-FUND to obtain the current 7-day yield of Retail A Shares of the
U.S. Government Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the U.S. Government Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering
price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
................................................................................
12
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.50%
Distribution and Service (12b-1) fees None
Other Expenses (before waivers)/3/ 0.66%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.16%
Fee Waivers and Expense Reimbursements/4/ (0.37)%
-------
Net Annual Fund Operating Expenses/4/ 0.79%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the U.S.
Government Money Market Fund is 0.31% of the Fund's average daily net
assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Institutional Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the U.S. Government Money Market
Fund currently are .48% of the Fund's average daily net assets.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the U.S. Government Money
Market Fund until October 31, 2001, so that Net Annual Fund Operating
Expenses will be no more than 0.79% of the Fund's average daily net assets
for the current fiscal year. These fee waivers and expense reimbursements
may be terminated at any time after October 31, 2001 at the discretion of
the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Money Market
Fund - Institutional Shares $81 $385 $712 $1,637
</TABLE>
--------------------------------------------------------------------------------
U.S. Treasury Money Market Fund
Objective
[GRAPHIC]
The investment objective of the U.S. Treasury Money Market Fund is to seek
stability of principal and current income consistent with stability of
principal. This investment objective may be changed by the Board of Directors
without approval of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The U.S. Treasury Money Market Fund invests exclusively in short-term U.S.
Treasury obligations that have a maturity of 397 days or less from the date of
purchase. The Fund may purchase repurchase agreements collateralized by U.S.
Treasury obligations. The Fund intends to invest in the agreements that provide
for repurchase within 397 days from the date of acquisition. The average
maturity of these securities is 120 days or less. The average maturity,
however, of all the securities in the Fund's portfolio will be 90 days or less
on a dollar-weighted basis. Securities subject to repurchase agreements are
marked to market on a daily basis. U.S. Treasury obligations are issued by the
U.S. government and are fully guaranteed as to principal and interest by the
United States government. The Fund may also retain assets in cash and may
purchase U.S. Treasury obligations on a when-issued or delayed delivery basis.
............................................................................. 13
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
Even though the U.S. Treasury Money Market Fund purchases mostly U.S. government
obligations, shares of the Fund are not themselves issued or guaranteed by any
government agency.
The rate of income on Fund shares will vary from day to day so that the
dividends on your investment will vary. The Fund is subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value.
The Fund is subject to when-issued and delayed delivery transaction risks. When-
issued and delayed delivery transactions involve securities with payment and
delivery scheduled for a future time. One of the risks of investing in when-
issued or delayed delivery transactions is if the seller chooses not to complete
the transaction, the Fund could miss an advantageous price or yield. The Fund
may enter into transactions to sell its purchase commitments to third parties at
current market rates and simultaneously acquire other commitments to purchase
similar securities at later dates. The Fund may realize short-term profits or
losses on the sale of these kinds of commitments.
The Fund is also subject to repurchase agreement risk. Repurchase agreements
are arrangements in which banks, broker/dealers and other financial
institutions sell securities to the Fund and agree to repurchase them at a
certain time and price within one year. Repurchase agreement risk is the risk
that the seller may not repurchase the securities from the Fund, which may
result in the Fund selling the security for less than the agreed upon price.
Another risk of repurchase agreements is that the seller may default or file
for bankruptcy. That could mean the Fund might have to wait through lengthy
court actions before selling the securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Institutional Shares from year to year and the average annual returns of the
Fund's Institutional Shares.
On November 27, 2000, the Mercantile Treasury Money Market Portfolio, a
portfolio of Mercantile Mutual Funds, Inc., and the Firstar Stellar Treasury
Fund, a portfolio of Firstar Stellar Funds, reorganized into the Firstar U.S.
Treasury Money Market Fund. At that time, the Firstar U.S. Treasury Money
Market Fund adopted an investment objective and certain non-fundamental
investment policies and restrictions that are substantially the same as those
of the Firstar Stellar Treasury Fund (a "Predecessor Stellar Fund"). The
performance set forth below for the U.S. Treasury Money Market Fund is based on
the performance of a corresponding class of the Firstar Stellar Treasury Fund.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
................................................................................
14
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
1998 4.77
1999 4.22
The U.S. Treasury Money Market Fund's total return for Institutional Shares for
the nine-month period ending September 30, 2000 was 3.93%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '97 1.24%
Worst Quarter: Q 2 '99 0.98%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (March 25, 1997)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Money Market Fund -
Institutional Shares 4.22% -- -- 4.62%
</TABLE>
--------------------------------------------------------------------------------
The 7-day yield for the period ended on 12/31/99 for Institutional Shares of
the U.S. Treasury Money Market Fund was 4.13%, and without giving effect to fee
waivers was 4.13%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-FUND to obtain the current 7-day yield of Institutional Shares
of the Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the U.S. Treasury Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering
price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
............................................................................. 15
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Management Fees 0.44%
Distribution and Service (12b-1) Fees None
Other Expenses (before waivers)/2/ 0.39%
-------
Total Annual Fund Operating Expenses (before
waivers) 0.83%
Fee Waivers and Expense Reimbursements/3/ (0.04)%
-------
Net Annual Fund Operating Expenses/3/ 0.79%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Institutional Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the U.S. Treasury Money Market Fund
currently are 0.35% of the Fund's average daily net assets.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the U.S. Treasury Money Market
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than 0.79% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
Example
The following example is intended to help you compare the cost of investing in
the Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in the Institutional Shares
of the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Money Market Fund -
Institutional Shares $81 $261 $456 $1,021
</TABLE>
Short-Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund
Objectives
[GRAPHIC]
The investment objective of the Short-Term Bond Fund (formerly Short-Term Bond
Market Fund) is to provide an annual rate of total return, before Fund
expenses, comparable to the annual rate of total return of the Lehman Brothers
1-3 Year Government/Credit Bond Index (the "Lehman 1-3 Index").
The investment objective of the Intermediate Bond Fund (formerly Intermediate
Bond Market Fund) is to provide an annual rate of total return, before Fund
expenses, comparable to the annual rate of total return of the Lehman Brothers
Intermediate Government/Credit Bond Index (the "Lehman Intermediate Index").
The investment objective of the Bond IMMDEX(TM) Fund is to provide an annual
rate of total return, before Fund expenses, comparable to the annual rate of
total return of the Lehman Brothers Government/Credit Bond Index (the "Lehman
Index").
Each of these investment objectives may be changed by the Board of Directors
without approval of Shareholders, although no change is currently anticipated.
................................................................................
16
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Principal Investment Strategies
[GRAPHIC]
The Adviser attempts to make each Fund's duration and return comparable to those
of its respective bond index, and to maintain an overall interest rate
sensitivity for each Fund equivalent to its respective bond index.
The Adviser generally will sell a security when it, on a relative basis and in
the Adviser's opinion, will no longer help a Fund to maintain overall interest
sensitivity and return objectives.
The effective dollar-weighted average portfolio maturity of each Fund will be
more than one year but less than three years for the Short-Term Bond Fund; more
than three years but less than ten for the Intermediate Bond Fund; and more than
five years for the Bond IMMDEX TM Fund during normal market conditions.
Each Fund typically holds less than 200 securities.
The Adviser will attempt to keep each Fund fully invested. Each Fund's policy is
to invest at least 65 % of total assets in the following types of debt
securities:
.U.S. government .U.S. government agencies
.Stripped U.S. .Corporate
government .Medium-term notes
.Collateralized mortgage .Eurobonds
obligations
.Asset-backed and
mortgage-backed
obligations
Duration Defined:
"Duration" is the average time it takes to receive expected cash flows
(discounted to their present value) on a particular fixed-income instrument or a
portfolio of instruments. Duration usually defines the effect of interest rate
changes on bond prices. However, for large interest rate changes (generally
changes of 1% or more) this measure does not completely explain the interest
rate sensitivity of a bond.
For Example
The duration of a 5-year zero coupon bond which pays no interest or principal
until the maturity of the bond is 5 years. This is because a zero coupon bond
produces no cash flow until the maturity date.
On the other hand, a coupon bond that pays interest semiannually and matures in
5 years will have a duration of less than 5 years reflecting the semiannual cash
flows resulting from coupon payments.
Investment Grade Securities are: securities rated in the highest 4 categories by
S&P, Moody's or another nationally recognized rating agency.
Debt obligations acquired by each Fund will be "investment grade," as rated by
at least one rating agency. The Adviser may purchase unrated obligations that
are determined by the Adviser to be comparable in quality to the rated
obligations. Average quality for each Fund is expected to be at least the second
highest rating category of S&P or Moody's. After purchase, a security may cease
to be rated or may have its rating reduced below the minimum rating required by
the Fund for purchase. The Adviser will consider whether to continue to hold the
security. If over 5% of the Fund's net assets consist of obligations which have
fallen below the minimum rating, the Adviser will immediately sell the
securities.
Although these Funds attempt to achieve returns comparable to those of their
respective benchmark indices by maintaining a comparable duration (see
"Strategies" for definition), these Funds are NOT index funds. Each Fund may
invest more than 50% of their assets in securities not included in the index.
............................................................................. 17
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Description of Bond Indices
The bond indices measure the price changes of securities and the income
provided by the securities. The bond indices are intended to measure
performance of fixed-rate debt markets over given time intervals. The
difference between the indices is the maturity range of the securities
included. Each index is comprised of:
.U.S. Treasury securities
.U.S. government agency securities
.U.S. dollar denominated debt of certain foreign sovereign or supranational
entities
.investment-grade corporate debt obligations
The indices require that investment-grade corporate debt obligations must:
.be fixed-rate debt (as opposed to variable-rate debt);
.have at least one year until maturity;
.have a minimum outstanding par value of $100 million
.have a minimum quality rating of Baa by Moody's, BBB by S&P, or BBB by Fitch
IBCA.
The indices also require the following maturities for each debt obligation:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Index Length of Maturity
--------------------------------------------------------------------------
<S> <C>
Lehman 1-3 Index From one to three years remaining until maturity
Lehman Intermediate
Index From one to 10 years remaining until maturity
Lehman Index From one to 30 years or more remaining until maturity
</TABLE>
--------------------------------------------------------------------------------
The following chart depicts the number of bond issues and their aggregate
dollar values as represented by the indices on October 31, 1999.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Bond Issues Dollar Value
----------------------------------------------------
<S> <C> <C>
Lehman 1-3 Index 1,059 $ 974 billion
Lehman Intermediate Index 3,406 $2.6 trillion
Lehman Index 4,829 $3.6 trillion
</TABLE>
--------------------------------------------------------------------------------
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Funds are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Funds are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Obligations rated in the lowest of the top
four rating categories are considered to have speculative characteristics and
are subject to greater credit and interest rate risk than higher rated
securities.
Because of the smaller number of issues held by a Fund than its respective bond
index, material events affecting a Fund's portfolio (for example, an issuer's
decline in credit quality) may influence the performance of the Fund to a
greater degree than such events will influence its respective bond index and
may prevent the Fund from attaining its investment objective for particular
periods.
While the Adviser believes purchasing securities which are not in each Fund's
respective index or not consistent with the "mix" of the index provides the
opportunity to achieve an enhanced gross return compared to the index, the
Adviser may err in its choices of securities or portfolio mixes. Further, the
................................................................................
18
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Adviser calculates the Funds' duration and average maturity based on certain
estimates relating to the duration and maturity of the securities held by the
Fund. The estimates used may not always be accurate, so the Adviser's
calculations may be incorrect. Such errors could result in a negative return
and a loss to you. In the event the performance of a Fund is not comparable to
the performance of its respective index, the Board of Directors will examine
the reasons for the deviation and the availability of corrective measures.
An investment in the Funds is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in a Fund by showing: (a) changes in the performance of a Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of a Fund's Institutional Shares compare to those of a broad-based securities
market index.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, a Fund's performance would be reduced.
[GRAPH]
Year-by-Year total return as of 12/31 each year (%) (Institutional Shares)
Short-Term Intermediate Bond
Bond Bond IMMDEX
90 7.62 8.22
91 13.50 16.58
92 6.85 7.56
93 6.46 10.96
94 0.93 -2.09 -3.06
95 10.73 15.25 19.55
96 4.99 4.06 3.08
97 6.39 7.34 9.43
98 6.57 7.91 9.43
99 3.36 1.00 -1.36
The Short-Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX TM Fund's
total return for Institutional Shares for the nine-month period ended September
30, 2000 was 5.44%, 6.34% and 7.21%, respectively.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short-Term Intermediate Bond IMMDEX(TM)
Bond Fund Bond Fund Fund
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Best Quarter: Q 4 '91 4.18% Q 2 '95 5.02% Q 2 '95 6.65%
Worst Quarter: Q 1 '94 -0.21% Q 1 '94 -2.04% Q 1 '94 -2.90%
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 19
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (inception date)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Bond Fund
Institutional Shares 3.36% 6.38% 6.68% --
Lehman Brothers 1-3 Year
Government/Credit Bond Index 3.15% 6.55% 6.64% --
Intermediate Bond Fund
Institutional Shares 1.00% 7.00% -- 5.90%
(January 5, 1993)
Lehman Brothers Intermediate
Government/Credit Bond Index 0.39% 7.10% -- 5.94%
(January 5, 1993)
Bond IMMDEX(TM) Fund
Institutional Shares -1.36% 7.75% 7.80% --
Lehman Brothers Government/Credit
Bond Index -2.15% 7.61% 7.65% --
</TABLE>
--------------------------------------------------------------------------------
Each of the Lehman Brothers 1-3 Year Government/Credit Bond Index, Intermediate
Government/Credit Bond Index and Government/Credit Bond Index is a widely-
recognized unmanaged index of bond prices compiled by Lehman Brothers. The
Index figures do not reflect any fees or expenses. Investors cannot invest
directly in the Index.
Securities included in the Lehman Brothers 1-3 Year Government/Credit Bond
Index must meet the following criteria: not less than one year to maturity; not
more than three years remaining to maturity.
Securities included in the Lehman Brothers Intermediate Government/Credit Bond
Index must meet the following criteria: remaining maturity of one to ten years;
and rated investment grade or higher by Moody's, Standard & Poor's, or Fitch,
in that order.
Securities included in the Lehman Brothers Government/Credit Bond Index must
meet the following criteria: not less than one year to maturity; and rated
investment grade or higher by Moody's, Standard & Poor's, or Fitch, in that
order.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the Short-Term Bond Fund, Intermediate Bond Fund and
Bond IMMDEX(TM) Fund.
................................................................................
20
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short-Term Intermediate Bond IMMDEX(TM)
Bond Fund Bond Fund Fund
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None None None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None None None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None None
Redemption Fees None/1/ None/1/ None/1/
Exchange Fees None None None
-------------------------------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short-Term Intermediate Bond IMMDEX(TM)
Bond Fund Bond Fund Fund
------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fees (before waivers)/2/ 0.60% 0.50% 0.30%
Distribution and Service (12b-1) Fees None None None
Other Expenses/3/ 0.27% 0.20% 0.18%
------- ------- -----
Total Annual Fund Operating Expenses
(before waivers) 0.87% 0.70% 0.48%
Fee Waivers and Expense
Reimbursements/4/ (0.27)% (0.10)% --
------- ------- -----
Net Annual Fund Operating Expenses/4/ 0.60% 0.60% 0.48%
======= ======= =====
------------------------------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2. As a result of fee waivers, the current management fees of the Short-Term
Bond Fund and Intermediate Bond Fund are 0.33% and 0.40% of the respective
Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Funds not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse other expenses for the Institutional Shares of the Short-Term Bond
Fund and Intermediate Bond Fund until October 31, 2001, so that the Net
Annual Fund Operating Expenses will be no more than 0.60% of each Fund's
average daily net assets for the current fiscal year. These fee waivers and
expense reimbursements may be terminated at any time after October 31, 2001
at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Funds with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional shares of
each Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that each Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Bond Fund - Institutional
Shares $61 $250 $455 $1,045
Intermediate Bond Fund - Institutional
Shares 61 214 379 860
Bond IMMDEX(TM) - Institutional Shares 49 154 269 604
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 21
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
U.S. Government Securities Fund
Objective
[GRAPHIC]
The investment objective of the U.S. Government Securities Fund is to seek a
high rate of current income that is consistent with relative stability of
principal. The investment objective may be changed by the Board of Directors
without approval of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund normally invests at least 65% of its total assets in debt obligations
issued or guaranteed by the U.S. Government and its agencies, including U.S.
Treasury bonds, notes and bills, as well as in repurchase agreements backed by
such obligations. The Fund also invests in mortgage-backed securities issued by
U.S. Government-sponsored entities such as Ginnie Maes, Fannie Maes, and
Freddie Macs. The remaining maturity (i.e., length of time until an obligation
must be repaid) of the obligations held by the Fund will vary from one to 30
years. Under normal conditions, however, the Adviser does not expect the Fund's
average weighted maturity to exceed 10 years when adjusted for the expected
average life of any mortgage-backed securities held by the Fund.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. Fixed-income securities in which the Fund invests
are subject to credit risk, interest rate risk and maturity risk. Credit risk
is the risk that an issuer of fixed-income securities may default on its
obligation to pay interest and repay principal. Interest rate risk is the risk
that, when interest rates increase, fixed-income securities will decline in
value. Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities. Maturity risk is
the risk that, generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate changes.
Certain securities in which the Fund invests pose additional risks. The
Statement of Additional Statement (the "Additional Statement") describes risks
of collateralized mortgage obligations and mortgage- and asset-backed
securities, which are subject to extension risk and prepayment risk. Extension
risk is the risk that an issuer will exercise its right to pay principal on an
obligation held by the Fund (such as a mortgage- or asset-backed security)
later than expected. This may happen when there is a rise in interest rates.
Under such circumstances, the value of the obligation will decrease and a Fund
will also suffer from the inability to invest in higher yielding securities.
Prepayment risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Fund (such as a mortgage- or asset-backed
security) earlier than expected. This may happen when there is a decline in
interest rates. These events may make a Fund unable to recoup its initial
investment and may result in reduced yields.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations, the value of its debt securities will fall. Securities issued or
guaranteed by the U.S. Government and its agencies have historically involved
little risk of loss of principal if held to maturity. Certain U.S. government
securities, such as Ginnie Maes, are supported by the full faith and credit of
the U.S. Treasury. Others, such as Freddie Macs, are supported by the right of
the issuer to borrow from the U.S. Treasury. Other securities, such as Fannie
Maes, are supported by the discretionary authority of the U.S. Government to
purchase certain obligations of the issuers, and still others are supported by
the issuer's own credit.
Repurchase Agreements carry the risk that the other party may not fulfill its
obligations under the agreement.
................................................................................
22
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The Fund began investment operations on June 2, 1988 as the
Mercantile U.S. Government Securities Portfolio, a separate portfolio of
Mercantile Mutual Funds, Inc. (a "Predecessor Mercantile Portfolio"). On
November 27, 2000, the Predecessor Mercantile Portfolio was reorganized as a
new portfolio of Firstar Funds, Inc. upon the closing of reorganizations
between Firstar Funds, Inc. and each of Mercantile Funds, Inc. and Firstar
Stellar Funds (together, the "Firstar Reorganization"). The performance set
forth below is based on the performance of a corresponding class of the
Predecessor Mercantile Portfolio. The Predecessor Mercantile Portfolio was
managed by a different investment adviser for the periods shown below until
March 1, 2000. See "Management of the Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%) (Institutional Shares)
[GRAPH]
92 5.79
93 9.10
94 -2.44
95 15.29
96 3.32
97 6.68
98 6.75
99 1.00
The U.S. Government Securities Fund's total return for Institutional Shares for
the nine-month period ended September 30, 2000 was 6.07%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '95 5.46%
Worst Quarter: Q 1 '94 -2.53%
------------------------------
</TABLE>
............................................................................. 23
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (Inception date)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund -
Institutional Shares 1.00% 6.50% -- 6.36%
(February 1, 1991)
Lehman Brothers Intermediate
Government Bond Index 0.49% 6.93% -- 6.78%
(January 31, 1991)
-----------------------------------------------------------------------------
</TABLE>
The Lehman Brothers Intermediate Government Bond Index is an unmanaged index,
which tracks the performance of intermediate-term U.S. Government bonds. The
Index figures do not reflect any fees or expenses. Investors cannot invest
directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the U.S. Government Securities Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.60%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.23%
-------
Total Annual Fund Operating Expenses
(before waivers) 0.83%
Fee Waivers and Expense Reimbursements/4/ (0.10)%
-------
Net Annual Fund Operating Expenses/4/ 0.73%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the U.S. Government
Securities Fund is 0.50% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the U.S. Government Securities
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than 0.73% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
................................................................................
24
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in the Institutional Shares
of the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund -
Institutional Shares $75 $255 $450 $1,015
</TABLE>
Aggregate Bond Fund
Objective
[GRAPHIC]
The investment objective of the Aggregate Bond Fund is to provide an annual
rate of total return, before fund expenses, comparable to the annual rate of
total return of the Lehman Brothers Aggregate Bond Index. The investment
objective may be changed by the Board of Directors without approval of
Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests substantially all of its assets in a broad range of debt
obligations, including corporate obligations and U.S. Government obligations.
Corporate obligations may include bonds, notes and debentures. U.S. Government
obligations may include U.S. Treasury obligations and obligations of certain
U.S. Government agencies. The Fund also invests in mortgage-backed securities,
including Ginnie Maes, Fannie Maes and Freddie Macs. Although the Fund invests
primarily in the debt obligations of U.S. issuers, it may from time to time
invest up to 10% of its total assets in U.S. dollar-denominated debt
obligations of foreign corporations and governments.
The Fund may only purchase investment grade debt obligations, which are those
rated in one of the four highest rating categories by one or more national
rating agencies, such as S&P's or Moody's. Under normal market conditions,
however, the Fund intends to invest at least 65% of its total assets in debt
obligations rated in one of the three highest rating categories. Unrated debt
obligations will be purchased only if they are determined by the Adviser to be
at least comparable in quality at the time of purchase to eligible rated
securities. Occasionally, the rating of a security held by the Fund may be
downgraded to below investment grade. If that happens, the Fund does not have
to sell the security unless the Adviser determines that under the circumstances
the security is no longer an appropriate investment for the Fund.
In making investment decisions, the Adviser considers a number of factors
including credit quality, the price of the security relative to that of other
securities in its sector, current yield, maturity, yield to maturity,
anticipated changes in interest rates and other economic factors, liquidity,
and the overall quality of the investment.
The remaining maturity (i.e., length of time until an obligation must be
repaid) of the obligations held by the Fund will vary from less than one year
to 30 years. The Fund's average weighted maturity will vary from time to time
depending on current market and economic conditions and the Adviser's
assessment of probable changes in interest rates.
............................................................................. 25
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. Fixed-income securities in which the Fund invests
are subject to credit risk, interest rate risk and maturity risk. Credit risk
is the risk that an issuer of fixed-income securities may default on its
obligation to pay interest and repay principal. Interest rate risk is the risk
that, when interest rates increase, fixed-income securities will decline in
value. Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities. Maturity risk is
the risk that, generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate changes.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to extension risk and
prepayment risk. Extension risk is the risk that an issuer will exercise its
right to pay principal on an obligation held by the Fund (such as a mortgage-
or asset-backed security) later than expected. This may happen when there is a
rise in interest rates. Under such circumstances, the value of the obligation
will decrease and a Fund will also suffer from the inability to invest in
higher yielding securities. Prepayment risk is the risk that an issuer will
exercise its right to pay principal on an obligation held by the Fund (such as
a mortgage- or asset-backed security) earlier than expected. This may happen
when there is a decline in interest rates. These events may make the Fund
unable to recoup its initial investment and may result in reduced yields.
The Fund's investments in foreign debt securities are subject to foreign risks.
Foreign debt securities involve special risks not typically associated with
U.S. securities. The foreign debt securities held by the Fund may underperform
other types of securities, and they may not increase or may decline in value.
Foreign investments may be riskier than U.S. investments because of factors
such as foreign government restrictions, changes in currency exchange rates,
incomplete financial information about the issuers of securities, and political
or economic instability. Foreign securities may be more volatile and less
liquid than U.S. stocks.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The Fund began investment operations on June 15, 1988 as the
Mercantile Government & Corporate Bond Portfolio, a separate portfolio of
Mercantile Mutual Funds, Inc.(a "Predecessor Mercantile Portfolio"). On
November 27, 2000, the Predecessor Mercantile Portfolio was reorganized as a
new portfolio of Firstar Funds, Inc. upon the closing of reorganizations
between Firstar Funds, Inc. and each of Mercantile Mutual Funds, Inc. and
Firstar Stellar Funds (together, the "Firstar Reorganization"). The performance
set forth below is based on the performance of a corresponding class of the
Predecessor Mercantile Portfolio. The Predecessor Mercantile Portfolio was
managed by a different investment adviser for the periods shown below until
March 1, 2000. See "Management of the Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
................................................................................
26
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
92 6.10
93 9.39
94 -2.52
95 16.93
96 2.14
97 8.56
98 8.99
99 -1.77
The Aggregate Bond Fund's total return for Institutional Shares for the nine-
month period ended September 30, 2000 was 6.99%.
<TABLE>
------------------------------
<S> <C> <C> <C>
Best Quarter: Q 2 '95 5.68%
Worst Quarter: Q 1 '96 -2.71%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (Inception date)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Bond Fund -
Institutional Shares -1.77% 6.78% -- 6.72%
(February 1, 1991)
Lehman Brothers Aggregate Bond
Index -0.82% 7.73% -- 7.48%
(January 31, 1991)
</TABLE>
--------------------------------------------------------------------------------
The Lehman Brothers Aggregate Bond Index is a widely-recognized unmanaged index
made up of Lehman Brothers' Government/Credit Bond Index, its Mortgage Backed
Securities Index and its Asset Backed Securities Index. The Index figures do
not reflect any fees or expenses. Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Aggregate Bond Fund.
............................................................................. 27
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
-----------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.50%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.24%
-------
Total Annual Fund Operating Expenses (before
waivers) 0.74%
Fee Waivers and Expense Reimbursements/4/ (0.06)%
-------
Net Annual Fund Operating Expenses/4/ 0.68%
=======
-----------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Aggregate Bond
Fund is 0.44% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Aggregate Bond Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.68% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Bond Fund -
Institutional Shares $69 $230 $405 $912
</TABLE>
--------------------------------------------------------------------------------
28
................................................................................
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Strategic Income Fund
Objective
[GRAPHIC]
The investment objective of the Strategic Income Fund is to generate high
current income. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund attempts to achieve its investment goal by investing its assets in a
core group of securities as shown in the box to the right. The Adviser's
strategy is to spread the investment portfolio over several securities
categories to reduce the impact of any drastic market movements affecting one
category. With that in mind, the Fund invests approximately 40% of its assets
in short to long-term, investment grade U.S. government and corporate fixed-
income securities (category 1). The Fund invests between 0% to 20% of its
assets in each of the other categories (categories 2 through 6). Overall, the
Fund will have at least 65% of its assets invested in securities that produce
income.
The Fund's investment categories:
1. U.S. government & corporate fixed-income securities
2. International securities
3. Real estate investment trusts
4. Domestic equity securities
5. Money market securities
6. Mortgage and asset-backed securities
To aid in selecting securities, the Adviser will use the following techniques:
.fundamental and quantitative analysis to select equity securities, which
includes examining price/earnings ratios, historical and projected earnings
growth rates, historical sales growth rates, historical return on equity,
market capitalization, and average daily trading volume;
.use of ratings assigned by nationally recognized statistical rating
organizations (when needed);
.credit research;
.review of issuers' historical performance;
.examination of issuers' dividend growth record;
.consideration of market trends; and
.hedging through the use of options and futures.
Domestic Fixed-Income Securities
As noted above, the Fund will invest in domestic corporate debt obligations,
obligations of the United States, and notes, bonds and discount notes of U.S.
government agencies or instrumentalities. The Adviser selects bonds based on
their potential interest rates and yield in relation to other bonds of similar
quality and maturity. The Fund will only invest in bonds which are rated Baa or
higher by Moody's or rated BBB or higher by S&P or Fitch. If the securities are
unrated, the Adviser must consider them to be of similar quality to the rated
securities before the Fund may invest in them.
U.S. Government Securities
The Fund may invest in securities issued and/or guaranteed as to the payment of
principal and interest by the U.S. government or its agencies or
instrumentalities. U.S. government securities include direct obligations of the
U.S. Treasury (such as U.S. Treasury bills, notes and bonds) and obligations
issued or guaranteed by U.S. government agencies or instrumentalities.
International Securities
The Fund may invest in international securities (including other investment
companies that invest primarily in international securities). The international
securities include equity securities of non-U.S. companies and corporate and
government fixed-income securities denominated in currencies other than U.S.
dollars. These securities may be traded domestically or abroad through various
stock exchanges, American Depository Receipts or International Depository
Receipts (ADRs or IDRs). The international fixed-income and corporate
securities include ADRs, IDRs, and government securities of other nations and
must be rated Baa or better by Moody's or BBB or better by S&P. If the
securities are unrated, the Adviser must determine that they are of similar
quality to the rated securities before the Fund may invest in them.
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Real Estate Investment Trusts
The Fund may invest in equity or mortgage REITs that produce income. REITs will
be diversified by geographic location and by sector (such as shopping malls,
apartment building complexes and health care facilities). An equity REIT holds
equity positions in real estate and provides its shareholders with income from
the leasing of its properties and capital gains from any sales of properties. A
mortgage REIT specializes in lending money to developers of properties and
passes interest income to its shareholders.
A REIT (real estate investment trust) is a managed portfolio of real estate
investments.
Domestic Equity Securities
The Fund's domestic equity securities consist of high dividend paying common
and preferred stocks of U.S. companies listed on the New York or American Stock
Exchanges or traded in the over-the-counter market. The companies must have a
history of stable earnings and/or growing dividends. The Fund may also invest
in warrants and securities convertible into common stocks of these U.S.
companies.
Money Market Instruments
The Fund may invest in U.S. and foreign short-term money market instruments,
including commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's or F-1 or F-2 by Fitch, bank instruments, obligations of the U.S.
government, its agencies or instrumentalities, repurchase agreements, and other
unrated short-term instruments that the Adviser believes to be of comparable
quality to the other obligations in which the Fund may invest.
Mortgage and Asset-Backed Securities
The Fund may invest in mortgage-backed securities, adjustable rate mortgage
securities, collateralized mortgage obligations and asset-backed securities.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to market risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. The Fund is also subject to liquidity risk. Liquidity risk
is the risk that certain securities may be difficult or impossible to sell.
Fixed income securities in which the Fund invests are subject to credit risk
and interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Obligations rated in the lowest of the top
four rating categories are considered to have speculative characteristics and
are subject to greater credit and interest rate risk than higher rated
securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise react in tandem with
interest rate changes or market moves and may be leveraged. Extension risk is
the risk that an issuer will exercise its right to pay principal on an
obligation held by the Fund (such as a mortgage- or asset-backed security)
later than expected. This may happen when there is a rise in interest rates.
Under such circumstances, the value of the obligation will decrease and the
Fund will also suffer from the inability to invest in higher yielding
securities. Prepayment risk is the risk that an issuer will exercise its right
to pay principal on an obligation held by the Fund (such as a mortgage- or
asset-backed security) earlier than expected. This may happen when there is a
decline in
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interest rates. These events may make the Fund unable to recoup its initial
investment and may result in reduced yields.
The Fund's investments in foreign securities are subject to foreign risks.
Foreign stocks involve special risks not typically associated with U.S. stocks.
The stocks held by the Fund may underperform other types of stocks, and they
may not increase or may decline in value. Foreign investments may be riskier
than U.S. investments because of factors such as foreign government
restrictions, changes in currency exchange rates, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
The Fund is subject to futures and options on futures risks, as the Fund may
use futures and options on futures for hedging purposes only. The hedging
strategy may not be successful if the Adviser is unable to accurately predict
movements in the prices of individual securities held by the Fund or if the
strategy does not correlate well with the Fund's investments. The use of
futures and options on futures may produce a loss for the Fund, even when used
only for hedging purposes, and you could lose money because of the Fund's use
of options.
The Fund is also subject to portfolio turnover risk. The Fund purchases and
sells securities to capture dividends on particular securities. The Fund will
purchase a security close to its ex-dividend date, thereby entitling the Fund
to receive the anticipated dividend. The Fund will then sell the security after
the ex-dividend date. This practice could result in the Fund experiencing an
annual turnover rate of up to 250%. High portfolio turnover rates lead to
increased costs, could cause you to pay higher taxes and could negatively
affect the performance of the Fund.
To the extent the Fund invests in REITs, it is subject to real estate
investment trust risks. Some of the risks of equity and mortgage REITs are that
they depend on management skills and are not diversified. As a result, REITs
are subject to the risk of financing either single projects or any number of
projects. REITs depend on heavy cash flow and may be subject to defaults by
borrowers and self-liquidation. Additionally, equity REITs may be affected by
any changes in the value of the underlying property owned by the trusts.
Mortgage REITs may be affected by the quality of any credit extended. The
Adviser tries to minimize these risks by selecting REITs diversified by sector
(i.e., shopping malls, apartment building complexes, health care facilities)
and geographic location. The Fund will generally be subject to risks associated
with direct ownership of real estate, such as decreases in real estate values
or fluctuations in rental income caused by a variety of factors, including
increases in interest rates, increases in property taxes and other operating
costs, casualty or condemnation losses, possible environmental liabilities and
changes in supply and demand for properties.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail B Shares from year to year; and (b) how the average annual returns of
the Fund's Retail B Shares compare to those of a broad-based securities market
index. The Fund began operations on December 12, 1994 as the Stellar Strategic
Income Fund (the "Predecessor Stellar Fund") a separate portfolio of Firstar
Stellar Funds. On December 11, 2000, the Predecessor Stellar Fund was
reorganized as a new portfolio of Firstar Funds, Inc. Upon the closing of
reorganizations between Firstar Funds, Inc. and each of Mercantile Mutual
Funds, Inc. and Firstar Stellar Funds (together, the "Firstar Reorganization").
The Predecessor Stellar Fund did not offer Institutional Shares. The
performance set forth below is based on the performance of a different class of
the Predecessor Stellar Fund (Retail B Shares). The
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performance of this other class shown would be substantially similar to that of
the Institutional class because both classes will be invested in the same
portfolio of securities. Annual returns will differ only to the extent that the
classes do not have the same expenses. The Fund's Retail A Shares commenced
operations on March 31, 2000.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart and table. If these amounts were reflected, returns would be
less than those shown.
Year-by-year total return as of 12/31 each year (%)(Retail B Shares)
[GRAPH]
95 13.24
96 5.29
97 9.49
98 -3.19
99 -5.80
The Strategic Income Fund's total return for Retail B Shares for the nine-month
period ended September 30, 2000 was 9.58%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q2 '97 4.59%
Worst Quarter: Q1 '99 -2.72%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (December 12, 1994)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic Income Fund -
Retail B Shares -5.80% 3.55% -- 3.78%
Lehman Brothers
Government/Credit Bond Index -2.15% 7.61% -- 7.66%
-------------------------------------------------------------------------
</TABLE>
The Lehman Brothers Government/Credit Bond Index is a widely-recognized
unmanaged index of bonds which have maturities of at least one year and are
rated investment grade or higher by Moody's, S&P or Fitch, in that order. The
Index figures do not reflect any fees or expenses. Investors cannot invest
directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Strategic Income Fund.
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--------------------------------------------------------------------------------
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.95%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.29%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.24%
Fee Waivers and Expense Reimbursements/4/ (0.04)%
-------
Net Annual Fund Operating Expenses/4/ 1.20%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Strategic
Income Fund is 0.91% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Strategic Income Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 1.20% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic Income Fund - Institutional
Shares $122 $389 $677 $1,496
</TABLE>
Tax-Exempt Intermediate Bond Fund
Objective
[GRAPHIC]
The investment objective of the Tax-Exempt Intermediate Bond Fund is to provide
current income that is substantially exempt from federal income tax and
emphasize total return with relatively low volatility of principal. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
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Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in investment-grade intermediate-term municipal
obligations issued by state and local governments exempt from federal income
tax. Except during temporary defensive periods, the Fund will invest at least
80% of its net assets in securities, the interest on which is exempt from
regular federal income and alternative minimum taxes and will invest at least
65% of its total assets in bonds and debentures. The Fund intends to maintain
an average weighted maturity between three and ten years. There is no limit on
the maturity of any individual security in the Fund, and the Fund may invest in
short-term municipal obligations and tax-exempt commercial paper.
The Adviser generally will sell a security when it, on a relative basis and in
the Adviser's opinion, will no longer help a Fund to maintain overall interest
rate sensitivity and return objectives.
In pursuing its investment objective, the Fund invests in a diversified
portfolio of municipal obligations (as defined above under "Tax-Exempt Money
Market Fund"). Municipal obligations purchased by the Fund will be:
.investment grade at the time of purchase (i.e., BBB by S&P or Fitch IBCA or
Baa by Moody's, or in the highest 4 categories by another nationally
recognized rating agency)
.unrated at the time of purchase but determined to be of comparable quality by
the Adviser
.municipal notes and other short-term obligations rated SP-1 by S&P or MIG-1 by
Moody's
.tax-exempt commercial paper rated A-1 or higher by S&P or VMIG-1 by Moody's
After purchase, a security may cease to be rated or may have its rating reduced
below the minimum rating required for purchase by the Fund. At that time, the
Adviser will consider whether to 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 if the securities exceed 5% of
the Fund's net assets.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk and tax risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Tax risk is the risk that the Fund may be
more adversely impacted by changes in tax rates and policies than other funds.
Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities.
The Fund may invest more than 25% of its total assets in municipal obligations
issued by persons located in the same state and the interest on which is paid
solely from revenues of similar projects. As a result, changes in economic,
business or political conditions relating to a particular state or types of
projects may have a disproportionate impact on the Fund's share price.
Municipal obligations which the Fund may acquire include municipal lease
obligations, which are issued by a state or local government or authority to
acquire land and a wide variety of equipment and facilities. 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.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
................................................................................
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Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
94 -1.73
95 10.51
96 3.78
97 6.05
98 5.36
99 0.31
The Tax-Exempt Intermediate Bond Fund's total return of Institutional Shares
for the nine-month period ended September 30, 2000 was 3.91%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 1 '95 3.93%
Worst Quarter: Q 1 '94 -2.75%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Since Inception
Year 5 Years 10 Years (February 8, 1993)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Intermediate Bond Fund
Institutional Shares 0.31% 5.15% -- 4.41%
Lehman Brothers 5-Year
General Obligation Bond Index 0.71% 5.81% -- 5.03%
----------------------------------------------------------------------------
</TABLE>
The Lehman Brothers 5-year General Obligation Bond Index is a widely recognized
unmanaged index of bond prices compiled by Lehman Brothers. The Index figures
do not reflect any fees or expenses. Investors cannot invest directly in the
Index. To be included in this Index, a municipal bond must be a state or local
General Obligation bond; have a minimum credit rating of at least Baa; have
been issued as part of an offering of at least $50 million; have a minimum
amount outstanding of at least $3 million; have been issued within the last
five years; and have a maturity of four to six years.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the Tax-Exempt Intermediate Bond Fund.
............................................................................. 35
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--------------------------------------------------------------------------------
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
---------------------------------------------------------
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.50%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.36%
-------
Total Annual Operating Expenses (before
waivers) 0.86%
Fee Waivers and Expense Reimbursements/4/ (0.11)%
-------
Net Annual Fund Operating Expenses/4/ 0.75%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Tax-Exempt
Intermediate Bond Fund is 0.39% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Tax-Exempt Intermediate
Bond Fund until October 31, 2001, so that Net Annual Fund Operating Expenses
will be no more than 0.75% of the Fund's average daily net assets for the
current fiscal year. These fee waivers and expense reimbursements may be
terminated at any time after October 31, 2001 at the discretion of the
service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Intermediate Bond Fund -
Institutional Shares $77 $263 $466 $1,050
</TABLE>
Missouri Tax-Exempt Bond Fund
[GRAPHIC]
Objective
The investment objective of the Missouri Tax-Exempt Bond Fund is to seek as
high a level of interest income exempt from federal income tax as is consistent
with conservation of capital. This investment
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objective may be changed by the Board of Directors without approval of
Shareholders, although no change is currently anticipated.
What Are Municipal Securities? State and local governments issue municipal
securities to raise money to finance public works, to repay outstanding
obligations, to raise funds for general operating expenses and to make loans to
other public institutions. Some municipal securities, known as private activity
bonds, are backed by private entities and are used to finance various non-public
projects. Municipal securities, which can be issued as bonds, notes or
commercial paper, usually have fixed interest rates, although some have interest
rates that change from time to time.
[GRAPHIC]
Principal Investment Strategies
The Fund normally invests at least 80% of its total assets in municipal
securities that pay interest that is exempt from federal income tax, and at
least 65% of its total assets in Missouri municipal securities, which are
securities issued by the State of Missouri and other government issuers and that
pay interest which is exempt from both federal income tax and Missouri state
income tax.
Average Weighted Maturity gives you the average time until all debt obligations,
including municipal securities, in the Fund come due or mature. It is calculated
by averaging the time to maturity of all debt obligations held by the Fund with
each maturity "weighted" according to the percentage of assets which it
represents.
Municipal securities purchased by the Fund may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes of
the 80% requirement stated above. Under normal market conditions, the Fund's
investments in private activity bonds, together with any investments in taxable
obligations, will not exceed 20% of its total assets.
In selecting municipal securities for the Fund, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity.
The Fund will invest only in investment grade municipal securities. These are
securities which have one of the four highest ratings assigned by a national
rating agency, such as Standard & Poor's or Moody's, or are unrated securities
determined by the Adviser to be of comparable quality. Short-term municipal
securities purchased by the Fund, such as municipal notes and tax-exempt
commercial paper, will have one of the two highest ratings assigned by a
national rating agency or will be unrated securities that the Adviser has
determined to be of comparable quality.
Occasionally, the rating of a security held by the Fund may be downgraded below
the minimum required rating. If that happens, the Fund does not have to sell
the security unless the Adviser determines that under the circumstances the
security is no longer an appropriate investment for the Fund.
The remaining maturity (i.e., length of time until an obligation must be
repaid) of the obligations held by the Fund will vary from one to 30 years. The
Fund's average weighted maturity will vary from time to time depending on
current economic and market conditions and the Adviser's assessment of probable
changes in interest rates.
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PRINCIPAL RISKS
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk, prepayment risk and tax risk. Credit risk is the risk that an issuer of
fixed income securities may default on its obligation to pay interest and repay
principal. Interest rate risk is the risk that, when interest rates increase,
fixed income securities, including municipal securities, will decline in value.
The ability of a state or local government issuer to make payments can be
affected by many factors, including economic conditions, the flow of tax
revenues and changes in the level of federal, state or local aid. Some
municipal securities are payable only from limited revenue sources or by
private entities. Prepayment risk is the risk that an issuer will exercise its
right to pay principal on an obligation paid by the Fund earlier than expected.
This may happen when there is a decline in interest rates. These events may
make the Fund unable to recoup its initial investment and may result in reduced
yields. Tax risk is the risk that the Fund may be more adversely impacted by
changes in tax rates and policies than other funds. Obligations rated in the
lowest of the top four rating categories are considered to have speculative
characteristics and are subject to greater credit and interest rate risk than
higher rated securities.
Municipal obligations which the Fund purchases may be backed by letters of
credit issued by banks and other financial institutions. Adverse developments
affecting banks could have a negative effect on the Fund's portfolio
securities.
The Fund is also subject to Missouri state-specific risks, as it may invest at
least 65% of its total assets in municipal obligations issued by entities
located in the state of Missouri and the interest on which is paid solely from
revenues of similar projects. Missouri's economy is largely comprised of
services, manufacturing (primarily defense, transportation and other durable
goods), wholesale and retail trade, and state and local government. The
exposure to these industries leaves Missouri vulnerable to an economic slowdown
associated with the business cycles of such industries. Because defense-related
business plays an important role in Missouri's economy, declining defense
appropriations, military base closings in Missouri and federal downsizing also
may continue to have an adverse impact on the State. From time to time,
Missouri's political subdivisions have encountered financial difficulties.
Investing in the Fund has added risks because the Fund is a non-diversified
fund under the 1940 Act, subjecting the Fund to non-diversification risks.
Compared with other mutual funds, this Fund may invest a greater percentage of
its assets in a more limited number of issues concentrated in one state which,
as a result, can increase the Fund's volatility. The value of the Fund's
securities can be impacted by economic or political developments affecting
certain securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. An investment in a Fund involves risk, including the risk of losing
money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The Fund began operations on July 15, 1988 as the Mercantile
Missouri Tax-Exempt Bond Portfolio, a separate portfolio of Mercantile Mutual
Funds, Inc. (a "Predecessor Mercantile Portfolio"). On December 11, 2000, the
Predecessor Mercantile Portfolio was reorganized as a new portfolio of Firstar
Funds, Inc. upon the closing of reorganizations between Firstar Funds, Inc. and
each of Mercantile Mutual Funds, Inc. and Firstar Stellar Funds (together, the
"Firstar Reorganization"). The performance set forth below is based on the
performance of a corresponding class of the Predecessor Mercantile Portfolio.
................................................................................
38
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
The Predecessor Mercantile Portfolio commenced operations on July 15, 1988 as a
separate investment portfolio (the "Predecessor ARCH Portfolio") of The ARCH
Tax-Exempt Trust. On October 2, 1995, the Predecessor ARCH Portfolio was
reorganized as a new portfolio of Mercantile Mutual Funds, Inc. Prior to that
reorganization, the Predecessor ARCH Portfolio offered and sold shares that
were similar to the Fund's Institutional Shares. Total returns for periods
prior to October 2, 1995 reflect the performance of Institutional Shares of the
Predecessor ARCH Portfolio.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
90 5.94
91 11.66
92 8.93
93 11.86
94 -5.59
95 17.01
96 3.19
97 8.29
98 5.41
99 -2.85
The Missouri Tax-Exempt Bond Fund's total return for Institutional Shares for
the nine-month period ended September 30, 2000 was 6.22%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 1 '95 7.58%
Worst Quarter: Q 1 '94 -5.57%
------------------------------
</TABLE>
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Missouri Tax-Exempt Bond Fund
Institutional Shares -2.85% 6.01% 6.18% 6.80%
(July 15, 1988)
Lehman Brothers Municipal Bond Index -2.06% 6.91% 6.89% 7.32%
(June 30, 1988)
------------------------------------------------------------------------------
</TABLE>
The Lehman Brothers Municipal Bond Index is a widely-recognized unmanaged index
that tracks the performance of municipal bonds. The Index figures do not
reflect any fees or expenses. Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Missouri Tax-Exempt Bond Fund.
............................................................................. 39
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering
price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
------------------------------------------------------
<S> <C>
Management Fees 0.45%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.27%
-----
Total Annual Fund Operating Expenses/3/ 0.72%
=====
------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Missouri Tax-Exempt Bond
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than 0.72% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund, with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in the Institutional Shares
of the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Missouri Tax-Exempt Bond Fund -
Institutional Shares $74 $230 $401 $894
--------------------------------------------------------------------------
</TABLE>
................................................................................
40
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
National Municipal Bond Fund
Objective
[GRAPHIC]
The investment objective of the National Municipal Bond Fund is to seek as high
a level of current income exempt from regular federal income tax as is
consistent with conservation of capital. The investment objective may be
changed by the Board of Directors without approval of Shareholders, although no
change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund normally invests at least 80% of its total assets in municipal
securities that pay interest which is exempt from federal income tax. Municipal
securities purchased by the Fund may include general obligation securities,
revenue securities and private activity bonds. General obligation securities
are secured by the issuer's full faith, credit and taxing power. Revenue
securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under normal market conditions, the Fund's
investments in private activity bonds and taxable obligations will not exceed
20% of its total assets.
In selecting municipal securities for the Fund, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity. The Adviser also attempts to maintain a
broad geographic diversification for the Fund, with emphasis on no particular
state.
The Fund will invest only in investment grade municipal securities. These are
securities which have one of the four highest ratings assigned by a national
rating agency, such as S&P's or Moody's or are unrated securities determined by
the Adviser to be of comparable quality. Short-term municipal securities
purchased by the Fund, such as municipal notes and tax-exempt commercial paper,
will have one of the two highest ratings assigned by a national rating agency
or will be unrated securities that the Adviser has determined to be of
comparable quality. Occasionally, the rating of a security held by the Fund may
be downgraded to below the minimum required rating. If that happens, the Fund
does not have to sell the security unless the Adviser determines that under the
circumstances the security is no longer an appropriate investment for the Fund.
The Fund's average weighted maturity will vary from time to time depending on
current economic and market conditions and the Adviser's assessment of probable
changes in interest rates. The Fund's average weighted maturity generally will
be 10 years or less.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk and tax risk. Credit risk is the risk that an issuer of fixed-income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed-income
securities will decline in value. Tax risk is the risk that the Fund may be
more adversely impacted by changes in tax rates and policies than other funds.
Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities.
The Fund is also subject to extension risk and prepayment risk. Extension risk
is the risk that an issuer will exercise its right to pay principal on an
obligation held by the Fund later than expected. This may happen when there is
a rise in interest rates. Under such circumstances, the value of the obligation
will decrease and the Fund will also suffer from the inability to invest in
higher yielding securities. Prepayment risk is the risk that an issuer will
exercise its rights to pay principal on an obligation held by the Fund earlier
than expected.
............................................................................. 41
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
This may happen when there is a decline in interest rates. These events may
make the Fund unable to recoup its initial investment and may result in reduced
yields.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. The ability of a state or local government issuer to make
payments can be affected by many factors, including economic conditions, the
flow of tax revenues and changes in the level of federal, state or local aid.
Some municipal securities are payable only from limited revenue sources or by
private entities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The Fund began investment operations on November 18, 1996 as the
Mercantile National Municipal Bond Portfolio, a separate portfolio of
Mercantile Mutual Funds, Inc. (a "Predecessor Mercantile Portfolio"). On
November 27, 2000, the Predecessor Mercantile Portfolio was reorganized as a
new portfolio of Firstar Funds, Inc. upon the closing of reorganizations
between Firstar Funds, Inc. and each of Mercantile Mutual Funds, Inc. and
Firstar Stellar Funds (together, the "Firstar Reorganization"). The performance
set forth below is based on the performance of a corresponding class of the
Predecessor Mercantile Portfolio. The Predecessor Mercantile Portfolio was
managed by a different investment adviser for the periods shown below until
March 1, 2000. See "Management of the Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
97 10.29
98 6.15
99 -4.41
The National Municipal Bond Fund's total return for Institutional Shares for
the nine-month period ended September 30, 2000 was 7.41%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 3 '97 3.77%
Worst Quarter: Q 2 '99 -2.71%
------------------------------
</TABLE>
................................................................................
42
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (Inception date)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National Municipal Bond Fund
Institutional Shares -4.41% -- -- 3.81%
(November 18, 1996)
Lehman Brothers Municipal
Bond Index-10 Year -1.25% -- -- 4.53%
(November 30, 1996)
-------------------------------------------------------------------------
</TABLE>
The Lehman Brothers Municipal Bond Index-10 Year is a widely-recognized
unmanaged index that tracks the performance of municipal bonds with remaining
maturities of 10 years or less. The Index figures do not reflect any fees or
expenses. Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the National Municipal Bond Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
------------------------------------------------------
<S> <C>
Management Fees 0.55%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.21%
-----
Total Annual Fund Operating Expenses/3/ 0.76%
=====
------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the National Municipal Bond
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than 0.76% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
............................................................................. 43
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in the Institutional Shares
of the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National Municipal Bond Fund -
Institutional Shares $78 $243 $422 $942
</TABLE>
Balanced Income Fund
Objective
[GRAPHIC]
The investment objective of the Balanced Income Fund is to provide current
income and the preservation of capital by investing in a balanced portfolio of
dividend-paying equity and fixed-income securities. This investment objective
may be changed by the Board of Directors without approval of Shareholders,
although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund selects and purchases common stocks of domestic companies that have a
history of paying dividends. The Fund selects fixed-income securities, which
the Adviser believes will provide an annual rate of total return similar to
that of the Lehman Intermediate Index. That Index is described under "Short-
Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund - Description
of Bond Indices."
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
The Fund plans to use a 50/50 method to invest its total assets - that means
50% in equity securities and 50% in fixed-income securities.
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Equity
Securities 50% (no less than 20%, no more than 60%)
Fixed Income
Securities 50% (no less than 40%)
</TABLE>
--------------------------------------------------------------------------------
NOTE: The actual percentage of assets invested in
fixed income and equity securities will vary from
time to time, depending on the judgment of the
Adviser as to the general market and economic
conditions, trends and yields, interest rates and
fiscal and monetary developments.
Equity Securities
The Fund primarily invests in The Adviser looks
common stock of domestic for companies with
companies the Adviser attractive
considers to be well managed fundamental
and to have "attractive financial
fundamental financial characteristics such
characteristics." The Adviser as:
also generally looks for 1. low debt
companies with stock market 2. high return on
capitalizations over $750 equity
million. Stock market 3. consistent
capitalizations are calculated revenue and
by multiplying the total earnings per
number of common shares share growth
outstanding by the market over the prior
price per share. three to five
years
................................................................................
44
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
The Fund may also acquire bonds, notes, debentures and preferred stocks
convertible into common stocks if they provide a current interest or dividend
stream, and may invest up to 5% of its net assets in other types of domestic
securities having common stock characteristics, such as rights and warrants to
purchase equity securities.
Fixed Income
The Fund may purchase the following types of fixed-income securities. There are
no maturity limitations.
.Corporate .U.S. Treasury
.U.S. government agency .Stripped U.S. government
.Asset-backed and .Money market instruments
mortgage-backed
obligations
.U.S. government
Except for convertible securities, the Fund will purchase only debt obligations
rated investment grade by at least one rating agency or unrated obligations
deemed by the Adviser to be comparable in quality. See "Short-Term Bond Fund,
Intermediate Bond Fund and Bond IMMDEX(TM) Fund" for a description of
investment-grade securities. After purchase, a security may cease to be rated
or may have its rating reduced below the minimum rating required for purchase
by the Fund. The Adviser will consider whether to continue to hold the
security.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to market risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. Fixed-income securities in which the Fund invests are
subject to credit risk and interest rate risk. Credit risk is the risk that an
issuer of fixed income securities may default on its obligation to pay interest
and repay principal. Interest rate risk is the risk that, when interest rates
increase, fixed income securities will decline in value. In particular,
convertible securities frequently have speculative characteristics and may be
acquired without regard to minimum quality ratings. The Fund intends to invest
no more than 5% of net assets in securities rated non-investment grade by at
least one rating agency at the time of purchase or unrated securities of
comparable quality. Convertible securities and obligations rated in the lowest
of the top four rating categories are subject to greater credit and interest
rate risk than higher rated securities. Stripped securities are subject to
greater interest rate risk than other more typical fixed income securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Extension risk is the risk that an issuer
will exercise its right to pay principal on an obligation held by a Fund (such
as a mortgage- or asset-backed security) later than expected. This may happen
when there is a rise in interest rates. Under such circumstances, the value of
the obligation will decrease and a Fund will also suffer from the inability to
invest in higher yielding securities. Prepayment risk is the risk that an
issuer will exercise its right to pay principal on an obligation held by a Fund
(such as a mortgage- or asset-backed security) earlier than expected. This may
happen when there is a decline in interest rates. These events may make a Fund
unable to recoup its initial investment and may result in reduced yields.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
............................................................................. 45
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
90 4.75
91 31.95
92 8.92
93 8.79
94 -1.74
95 25.48
96 17.83
97 23.47
98 15.58
99 1.40
The Balanced Income Funds total return for Institutional Shares for the nine-
month period ended September 30, 2000 was 6.83%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '97 10.40%
Worst Quarter: Q 3 '90 -5.43%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
---------------------------------------------------
<S> <C> <C> <C>
Balanced Income Fund
Institutional Shares 1.40% 16.66% 13.27%
S&P 500 Index 21.04% 28.86% 18.21%
Lipper Balanced Fund Index 8.98% 16.33% 12.26%
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The Lipper Balanced Fund Index is composed of the 30 largest mutual
funds whose primary objective is to conserve principal by maintaining a
balanced portfolio of stocks and bonds. The S&P 500 Index figures do not
reflect any fees or expenses. Investors cannot invest directly in the Index.
The performance of Firstar Balanced Income Fund for the period prior to
December 1, 1997 is the performance of a common trust fund managed by Firstar
Investment Research & Management Company, LLC, ("FIRMCO"), which operated
during the periods prior to commencement of operations of the Firstar Balanced
Income Fund using materially equivalent investment objectives, policies,
guidelines and restrictions as Firstar Balanced Income Fund. The common trust
fund transferred its assets to the Balanced Income
................................................................................
46
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Fund at the commencement of operations. At the time of the transfer, the
Adviser did not manage any other collective investment or common trust funds
using materially equivalent investment objectives, policies, guidelines and
restrictions to those of the Balanced Income Fund. The common trust fund was
not registered under the Investment Company Act of 1940 (the "1940 Act"), and
was not subject to certain restrictions that are imposed by the 1940 Act and
the Internal Revenue Code. If the common trust fund had been registered under
the 1940 Act, performance may have been adversely affected. The performance of
the common trust fund has been restated to reflect Firstar Balanced Income
Fund's expenses for its first year of operations.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the Balanced Income Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
---------------------------------------------------------
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.33%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.08%
Fee Waivers and Expense Reimbursements/4/ (0.11)%
-------
Net Annual Fund Operating Expenses/4/ 0.97%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Balanced
Income Fund is 0.64% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Balanced Income Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be
no more than 0.97% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
............................................................................. 47
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Income Fund -
Institutional Shares $98 $332 $584 $1,306
</TABLE>
Balanced Growth Fund
Objective
[GRAPHIC]
The investment objective of the Balanced Growth Fund is to achieve a balance of
capital appreciation and current income with relatively low volatility of
capital. This investment objective may be changed by the Board of Directors
without approval of Shareholders, although no change is anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in a diversified portfolio of fixed-income and
equity securities. Equity securities are selected on the basis of their
potential for capital appreciation. The Fund selects fixed-income securities
which the Adviser believes will provide an annual rate of total return similar
to that of the Lehman Brothers Government/Credit Bond Index. That Index is
described under "Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM)
Fund - Description of Bond Indices."
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
The Fund's policy is to invest at least 25% of the value of its total assets in
fixed-income senior securities and at least 50% and no more than 65% in equity
securities at all times.
Investment Policy
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Fixed Income at least 25%
Equity Securities at least 50% (no more than 65%)
</TABLE>
--------------------------------------------------------------------------------
NOTE: The actual percentage of assets invested in fixed-income and equity
securities will vary from time to time, depending on the judgment of the
Adviser as to the general market and economic conditions, trends and yields,
interest rates and fiscal and monetary developments.
Equity Securities
The Fund primarily invests in common stock of domestic and foreign companies
that the Adviser considers to be well managed and to have attractive
fundamental financial characteristics (see box on page 44 for examples of these
characteristics). The Adviser also generally looks for companies with stock
market capitalizations between $100 million and $100 billion. The Fund may also
invest from time to time a portion of its assets in companies with larger or
smaller market capitalizations.
The Fund may also acquire preferred stocks. In addition, the Fund may invest in
domestic securities convertible into common stock, such as certain bonds and
preferred stocks, and may invest up to 5% of its
................................................................................
48
<PAGE>
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net assets in other types of domestic securities having common stock
characteristics, such as rights and warrants to purchase equity securities.
Fixed Income
The Fund may purchase the following types of fixed income securities. There are
no maturity limitations.
.Corporate .U.S. Treasury
.U.S. government agency .Stripped U.S. government
.Asset-backed and .Money market instruments
mortgage-backed
obligations
.U.S. government
Except for convertible securities the Fund will only acquire debt obligations
that are rated "investment-grade" by at least one rating agency or unrated
obligations deemed by the Adviser to be comparable in quality. See "Short-Term
Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund" for a description
of investment grade securities. After purchase, a security may cease to be
rated or may have its rating reduced below the minimum rating required for
purchase by the Fund. The Adviser will consider whether to continue to hold the
security.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to market risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. Fixed income securities in which the Fund invests are
subject to credit risk and interest rate risk. Credit risk is the risk that an
issuer of fixed income securities may default on its obligation to pay interest
and repay principal. Interest rate risk is the risk that, when interest rates
increase, fixed income securities will decline in value. In particular,
convertible securities frequently have speculative characteristics and may be
acquired without regard to minimum quality ratings. The Fund intends to invest
no more than 5% of net assets in securities rated non-investment grade by at
least one rating agency at the time of purchase or unrated securities of
comparable quality. Convertible securities and obligations rated in the lowest
of the top four rating categories are subject to greater credit and interest
rate risk than higher rated securities. Stripped securities are subject to
greater interest rate risk than other more typical fixed income securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise react in tandem with
interest rate changes or market moves and may be leveraged. Extension risk is
the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage- or asset-backed security) later
than expected. This may happen when there is a rise in interest rates. Under
such circumstances, the value of the obligation will decrease and a Fund will
also suffer from the inability to invest in higher yielding securities.
Prepayment risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Fund (such as a mortgage- or asset-backed
security) earlier than expected. This may happen when there is a decline in
interest rates. These events may make a Fund unable to recoup its initial
investment and may result in reduced yields.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
............................................................................. 49
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Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares
[GRAPH]
93 8.24
94 -4.27
95 26.52
96 12.63
97 17.47
98 16.51
99 4.28
The Balanced Growth Fund's total return for Institutional Shares for the nine-
month period ended September 30, 2000 was 12.24%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 14.09%
Worst Quarter: Q 3 '98 -7.98%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (March 30, 1992)
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Growth Fund -
Institutional Shares 4.28% 15.25% -- 11.51%
S&P 500 Index 21.04% 28.86% -- 20.78%
Lipper Balanced Fund Index 8.98% 16.33% -- 12.52%
--------------------------------------------------------------------
</TABLE>
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The Lipper Balanced Fund Index is composed of the 30 largest mutual
funds whose primary objective is to conserve principal by maintaining a
balanced portfolio of stocks and bonds. The S&P 500 Index figures do not
reflect any fees or expenses. Investors cannot invest directly in the Index.
................................................................................
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the Balanced Growth Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.27%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.02%
Fee Waivers and Expense Reimbursements/4/ (0.05)%
-------
Net Annual Fund Operating Expenses/4/ 0.97%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Balanced
Growth Fund is 0.70% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Balanced Growth Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be
no more than 0.97% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Growth Fund -
Institutional Shares $99 $320 $558 $1,243
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 51
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Growth & Income Fund
Objective
[GRAPHIC]
The investment objective of the Growth & Income Fund is to seek both reasonable
income and long-term capital appreciation. This investment objective may be
changed by the Board of Directors without approval of Shareholders, although no
change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Common Stocks
The Fund selects common stocks primarily from a universe of domestic companies
that have established dividend-paying histories. During normal market
conditions, at least 50% of the Fund's net assets will be invested in equities.
The Fund will not purchase a non-dividend paying security if immediately after
giving effect to such purchase less than 80% of the net assets of the Fund will
be invested in dividend-paying securities.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
Medium- to Large-Sized Companies
The Fund generally invests in medium- to large-sized companies with stock
market capitalizations over $1 billion that the Adviser considers to be well
managed and to have attractive fundamental financial characteristics (see box
on page 44 for examples of these characteristics). The Fund may also invest a
portion of its assets in companies with smaller market capitalizations.
Other
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks, if they provide a current interest or dividend
payment.
To the extent consistent with its objective, the Fund may purchase non-
convertible debt and preferred stocks that in the opinion of the Adviser
present opportunities for capital appreciation. These obligations must be
investment grade at time of purchase or unrated but deemed comparable by the
Adviser. See "Short-Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM)
Fund" for a description of investment-grade securities. After purchase, a
security may cease to be rated or may have its rating reduced below the minimum
rating required by the Fund for purchase. The Adviser will consider whether to
continue to hold the security.
Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. The Fund intends to invest no more than 5% of net
assets in securities rated non-investment grade at the time of purchase or
unrated securities of comparable quality. Convertible securities and
obligations rated in the lowest of the top four rating categories have
speculative characteristics and are subject to greater credit and interest rate
risk than higher rated securities. The Fund's options and futures transactions
involve derivatives risk. Derivatives risk is the risk of loss from
transactions
................................................................................
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<PAGE>
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--------------------------------------------------------------------------------
which may be more sensitive to or otherwise not react in tandem with interest
rate changes or market moves and may be leveraged.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
90 -0.28
91 22.22
92 5.48
93 6.64
94 0.14
95 34.83
96 25.03
97 33.54
98 22.77
99 3.01
The Growth & Income Fund's total return for Institutional Shares for the nine-
month period ended September 30, 2000 was 8.74%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 17.77%
Worst Quarter: Q 3 '99 -9.72%
------------------------------
</TABLE>
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
---------------------------------------------
<S> <C> <C> <C>
Growth & Income Fund
Institutional Shares 3.01% 23.26% 14.59%
S&P 500 Index 21.04% 28.56% 18.21%
Custom Index 16.88% 25.75% 16.79%
---------------------------------------------
</TABLE>
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The Custom Index is comprised of 50% of returns of the S&P 500 index
and 50% of returns of
............................................................................. 53
<PAGE>
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the S&P BARRA Value Index. The S&P BARRA Value Index is an unmanaged market
capitalization weighted index consisting of approximately 50% of the stocks in
the S&P 500 index with low price-to-book ratios. The Index figures do not
reflect any fees or expenses. Investors cannot invest directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the Growth & Income Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
------------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.19%
-----
Total Annual Fund Operating Expenses/3/ 0.94%
=====
------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Growth & Income Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be
no more than 0.94% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------
<S> <C> <C> <C> <C>
Growth & Income Fund -
Institutional Shares $96 $300 $520 $1,155
</TABLE>
--------------------------------------------------------------------------------
................................................................................
54
<PAGE>
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Equity Income Fund
Objective
[GRAPHIC]
The investment objective of the Equity Income Fund is to seek to provide an
above-average level of income consistent with long-term capital appreciation.
This investment objective may be changed by the Board of Directors without
approval of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Market capitalization is a common measure of the size of a company. It is the
market price of a share of the company's stock multiplied by the number of
outstanding shares.
The Fund invests primarily
in the common stocks of
value companies with large
market capitalizations
(generally, $5 billion or
higher). In selecting these
stocks, the Adviser
evaluates a number of
quantitative factors,
including dividend yield,
current and future earnings
potential compared to stock
prices and total return
potential. The Adviser also
examines other measures of
valuation, including cash
flow, asset value and book
value.
Value stocks are those that appear to be underpriced based on valuation
measures, such as lower price-to-earnings and price-to-book value ratios.
Under normal market
conditions, the Fund invests
at least 65% of its total
assets in income-producing
(dividend-paying) equity
securities, primarily common
stocks. These stocks
generally will be listed on
a national stock exchange or
will be unlisted stocks with
established over-the-counter
markets. Many such stocks
may offer above-average dividend yields, with corresponding above-average levels
of income, in each case as compared to the S&P 500 Index.
The Fund may emphasize, from time to time, particular companies or market
sectors, in attempting to achieve its investment objective.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk and value style investing risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. In addition, different types of equity securities tend to
shift in and out of favor depending on market and economic conditions. Value
style investing risk is the risk that the performance resulting from the Fund's
"value" investment style may sometimes be lower than that of other types of
equity funds, such as those focusing more exclusively on growth in earnings.
To the extent that the Fund emphasizes particular companies or market sectors,
such as technology, it will be especially susceptible to market sector risk.
Stocks of technology companies may be subject to greater price volatility than
stocks of companies in other sectors. Technology companies may produce or use
products or services that prove commercially unsuccessful, become obsolete or
become adversely impacted by government regulation. Technology stocks may
experience significant price movements caused by disproportionate investor
optimism or pessimism.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
............................................................................. 55
<PAGE>
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--------------------------------------------------------------------------------
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The Fund began operations on February 27, 1997 as the Mercantile
Equity Income Portfolio, a separate portfolio (the "Predecessor Mercantile
Portfolio") of Mercantile Mutual Funds, Inc. On December 11, 2000, the
Predecessor Mercantile Portfolio was reorganized as a new portfolio of Firstar
Funds, Inc. upon the closing of reorganizations between Firstar Funds, Inc. and
each of Mercantile Mutual Funds, Inc. and Firstar Stellar Fund (together, the
"Firstar Reorganization"). The performance set forth below is based on the
performance of a corresponding class of the Predecessor Mercantile Portfolio.
The Predecessor Mercantile Portfolio was managed by a different investment
adviser for the periods shown below until March 1, 2000. See "Management of the
Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
98 11.12
99 -2.80
The Equity Income Fund's total return for Institutional Shares for the nine-
month period ended September 30, 2000 was 5.24%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '97 14.33%
Worst Quarter: Q 3 '98 -8.70%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Income Fund
Institutional Shares -2.80% -- -- 10.11%
(February 27, 1997)
Russell 1000 Value Index 7.35% -- -- 17.41%
(February 28, 1997)
S&P BARRA Value Index 12.72% -- -- 17.87%
(February 28, 1997)
</TABLE>
--------------------------------------------------------------------------------
The Russell 1000 Value Index is a widely-recognized unmanaged index that
measures the performance of the stocks in the Russell 1000 Index with less than
average growth orientation. Companies in this Index
................................................................................
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<PAGE>
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--------------------------------------------------------------------------------
generally have low price to book and price/earnings ratios, higher dividend
yields and lower forecasted growth values. The Russell 1000 Index consists of
the 1,000 largest U.S. companies as ranked by total market capitalization. The
comparative index for the Equity Income Fund has been changed from the Russell
1000 Value Index to the S&P BARRA Value Index. The S&P BARRA Value Index, an
unmanaged capitalization weighted index, is a more widely-recognized index
which represents the value components of the market capitalizations reflected
in the Fund. The Index figures do not reflect any fees or expenses. Investors
cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Equity Income Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.28%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.03%
Fee Waivers and Expense Reimbursements/4/ (0.03)%
-------
Net Annual Fund Operating Expenses/4/ 1.00%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Equity Income
Fund is 0.72% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Equity Income Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.00% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
............................................................................. 57
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--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Example
The following example is intended to help you compare the cost of investing in
the Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in the Institutional Shares
of the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Income Fund -
Institutional Shares $102 $325 $566 $1,256
</TABLE>
Relative Value Fund
Objective
[GRAPHIC]
The investment objective of the Relative Value Fund is to obtain the highest
total return from a combination of income and capital appreciation. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
To achieve its objective, the Fund invests primarily in common stocks. The
stocks in which the Fund may invest include stocks that the Adviser believes
represent the best values within each industry sector. In the Adviser's
opinion, stocks with the best values present characteristics consistent with
low volatility, above average yields, and are under valued relative to the
stocks comprising the Standard & Poor's 500 Composite Stock Price Index. Under
normal circumstances, the Fund will invest at least 70% of its assets in common
stocks, which to a limited extent may include stocks of foreign issuers. To
obtain income, the Fund may invest a significant portion of its assets in
investment grade fixed-income securities such as domestic issues of corporate
debt obligations with short and intermediate terms. In this manner, the Fund
will attempt to obtain the highest total return that it can within the
constraints of its investment policies and restrictions.
The Adviser uses traditional research techniques when choosing which stocks to
invest in. The Adviser selects securities and attempts to maintain an
acceptable level of risk largely through the use of automated quantitative
measurement techniques. The Adviser considers the following "value"
characteristics when using this research technique:
.price/earnings ratios,
.dividend yield,
.book value,
.assets to liabilities ratio,
.management ownership,
.average daily trading volume, and
.credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The Adviser uses the quantitative model together with economic forecasts and
assessment of the risk and volatility of the company's industry. The Adviser
assesses the earnings and dividend growth prospects of the various companies'
stock and then considers the risk and volatility of the company's industry. The
Adviser typically invests in common stocks of companies that are in the top 25%
of their industries with regard to revenues. The Adviser also considers other
factors such as product position or market share.
................................................................................
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<PAGE>
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Temporary Investments
To respond to adverse market, economic, political or other conditions, the Fund
may invest up to 100% of its assets in short-term temporary investments. Some
of the short-term money market instruments include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements
To the extent that the Fund engages in this temporary, defensive strategy, the
Fund may not achieve its investment objective.
Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk and value style investing risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. In addition, different types of equity securities tend to
shift in and out of favor depending on market and economic conditions. Value
style investing risk is the risk that the performance resulting from the Fund's
"value" investment style may sometimes be lower than that of other types of
equity funds, such as those focusing more exclusively on growth in earnings.
The Fund's investments in debt securities are subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. The Fund intends to invest no more than 5% of net
assets in securities rated non-investment grade at the time of purchase or
unrated securities of comparable quality. Convertible securities and
obligations rated in the lowest of the top four rating categories have
speculative characteristics and are subject to greater credit and interest rate
risk than higher rated securities. The Fund's options and futures transactions
involve derivatives risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise not react in tandem
with interest rate changes or market movements and may be leveraged.
The Fund's investments in foreign securities are subject to foreign risks.
Foreign stocks involve special risks not typically associated with U.S. stocks.
The stocks held by the Fund may underperform other types of stocks, and they
may not increase or may decline in value. Foreign investments may be riskier
than U.S. investments because of factors such as foreign government
restrictions, changes in currency exchange rates, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
............................................................................. 59
<PAGE>
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--------------------------------------------------------------------------------
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The Fund began operations on June 5, 1991 as the Firstar Stellar
Relative Value Fund (a "Predecessor Stellar Fund"), a separate portfolio of
Firstar Stellar Funds. On December 11, 2000, the Predecessor Stellar Fund was
reorganized as a new portfolio of Firstar Funds, Inc. upon the closing of
reorganizations between Firstar Funds, Inc. and each of Mercantile Mutual
Funds, Inc. and Firstar Stellar Funds (together, the "Firstar Reorganization").
The performance set forth below is based on the performance of a corresponding
class of the Predecessor Stellar Fund.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart. If these amounts were reflected, returns would be less than
those shown.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
98 18.50
99 7.42
The Relative Value Fund's total return for Institutional Shares for the nine-
month period ended September 30, 2000 was -3.02%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 21.37%
Worst Quarter: Q 3 '98 -12.22%
-------------------------------
</TABLE>
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Relative Value Fund -
Institutional Shares 7.42% -- -- 13.91%
(August 18, 1997)
S&P 500 Index 21.04% -- -- 25.17%
(August 30, 1997)
Lipper Growth & Income Average 11.23% -- -- 25.90%
(August 30, 1997)
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is a widely-recognized unmanaged index of 500 domestic stocks
created by Standard & Poor's Corporation. The Index is heavily weighted toward
stocks with large market capitalization and represents approximately two-thirds
of the total market value of all domestic common stocks. The Lipper
................................................................................
60
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Growth & Income Average is composed of the 30 largest mutual funds whose
primary objective combines growth of earnings and dividend income. The Index
figures do not reflect any fees or expenses. Investors cannot invest directly
in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Relative Value Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
------------------------------------------------------
<CAPTION>
Institutional
Shares
------------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.22%
-----
Total Annual Fund Operating Expenses/3/ 0.97%
=====
------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Relative Value Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.97% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in the Institutional Shares
of the Fund for the time periods indicated, reinvest all of your dividends and
distributions and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Relative Value Fund -
Institutional Shares $99 $309 $536 $1,190
--------------------------------------------------------------------------
</TABLE>
............................................................................. 61
<PAGE>
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Equity Index Fund
Objective
[GRAPHIC]
The investment objective of the Equity Index Fund is to seek returns, before
Fund expenses, comparable to the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the S&P 500 Index. The
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Under normal market conditions, the Fund intends to invest substantially all of
its total assets in securities included in the S&P 500 Index, and in any event
the Fund will invest at least 80% of its net assets in securities included in
that index. The Fund uses the S&P 500 Index as the standard performance
comparison because it represents approximately two-thirds of the total market
value of all domestic common stocks and is well known to investors.
The S&P 500 Index consists of 500 selected common stocks, most of which are
listed on the New York Stock Exchange. Standard & Poor's selects the stocks
included in the S&P 500 Index on a market capitalization basis, and the S&P 500
Index is heavily weighted toward stocks with large market capitalizations.
Rather than using traditional methods of investment management, index funds
such as the Equity Index Fund are managed with the aid of a computer program.
The Adviser purchases and sells securities for the Fund in an attempt to
produce investment results that substantially duplicate the performance of the
common stocks of the issuers represented in the S&P 500 Index.
In general, the Fund expects to hold all of the stocks included in the S&P 500
Index. The Adviser believes that it will be able to construct and maintain the
Fund's investment portfolio so that it reasonably tracks the performance of the
S&P 500 Index by using a capitalization weighting and sector balancing
technique.
The Adviser believes the quarterly performance of the Fund and the S&P 500
Index will be within (+/-)0.3% under normal market conditions. The Adviser
believes that through the application of a capitalization weighting and sector
balancing technique that it will be able to construct and maintain the Fund's
investment portfolio so that it reasonably tracks the performance of the S&P
500 Index. In the event the performance of the Fund is not comparable to the
performance of the S&P 500 Index, the Board of Directors will examine the
reasons for the deviation and the availability of corrective measures. These
measures would include additional fee waivers by the Adviser and Administrator
or adjustments to the Adviser's portfolio management practices. If substantial
deviation in the Fund's performance continued for extended periods, it is
expected the Board of Directors would consider possible changes to the Fund's
investment objective.
The Fund may invest in futures contracts. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell an asset in the
future at an agreed upon price. The Fund may invest in futures contracts and
options on futures contracts for hedging purposes, to have fuller exposure to
price movements in a stock or bond index, to increase total return or to
maintain liquidity to meet potential shareholder redemptions, invest cash
balances or dividends or minimize trading costs. In addition, the Fund may
purchase and sell futures and related options (based only on the S&P 500 Index)
to maintain cash reserves while simulating full investment in the stocks
underlying the S&P 500 Index, to keep substantially all of its assets exposed
to the market (as represented by the S&P 500 Index), and to reduce transaction
costs.
Principal Risks
[Graphic]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. Your
investment follows the large-cap portion of the U.S. stock market, as measured
by the S&P
................................................................................
62
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
500 Index, during upturns as well as downturns. Because of its indexing
strategy, the Fund cannot take steps to reduce market volatility or to lessen
the effects of a declining market. Whenever large-cap stocks perform less than
mid- or small-cap stocks, the Fund may under-perform funds that have exposure
to those segments. Further, the Fund will not necessarily dispose of a security
in response to adverse events affecting the issuer of a security (such as
adverse credit factors or failure to pay dividends).
If a large number of shareholders were to redeem shares, however, the Adviser
may be forced to reduce the number of issuers represented in the portfolio.
This could have an adverse effect on the accuracy with which the Fund matches
the performance of the S&P 500 Index.
The Adviser may be required to sell common stock if the issuer is eliminated
from the S&P 500 Index. Such sales may result in:
.lower prices, or
.losses, that may not have been incurred if the Adviser did not have to
purchase or sell the securities.
The Fund's futures transactions involve derivatives risk. Derivatives risk is
the risk of loss from transactions which may be more sensitive to or otherwise
not react in tandem with interest rate changes or market moves and may be
leveraged. Futures contracts could cause the Fund to track the Index less
closely if they don't perform as expected.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Standard & Poor's makes no representation or warranty regarding the
advisability of investing in index funds or the ability of the S&P 500 Index to
track general stock market performance.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
90 -3.29
91 29.96
92 6.97
93 9.11
94 1.02
95 36.98
96 22.65
97 32.59
98 28.72
99 20.41
The Equity Index Fund's total return for Institutional Shares for the nine-
month period ended September 30, 2000 was -1.53%.
............................................................................. 63
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 4 '98 21.52%
Worst Quarter: Q 3 '90 -13.60%
-------------------------------
</TABLE>
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5
1 Year Years 10 Years
---------------------------------------------
<S> <C> <C> <C>
Equity Index Fund -
Institutional Shares 20.41% 28.11% 17.72%
S&P 500 Index 21.04% 28.56% 18.21%
---------------------------------------------
</TABLE>
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. Index figures do not reflect any fees or expenses. Investors cannot
invest directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the Equity Index Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.25%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.17%
-------
Total Annual Fund Operating Expenses
(before waivers) 0.42%
Fee Waiver and Expense Reimbursements/4/ (0.05)%
-------
Net Annual Fund Operating Expenses/4/ 0.37%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Equity Index
Fund is 0.20% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Equity Index Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.37% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
................................................................................
64
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Index Fund -
Institutional Shares $38 $130 $230 $525
</TABLE>
--------------------------------------------------------------------------------
Large Cap Core Equity Fund
Objective
[GRAPHIC]
The Large Cap Core Equity Fund (formerly Growth Fund) seeks capital
appreciation through investment in securities of large-sized companies. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Equity Securities
During normal market conditions, the Fund invests at least 65% of total assets
in equity securities of large-sized companies. Most of these equity securities
are publicly traded common stocks of companies incorporated in the U.S.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
Large-Sized Companies
The Fund generally invests in large-sized companies with stock market
capitalizations over $3 billion that the Adviser considers to be well-managed
and to have attractive fundamental financial characteristics (see box on
page 44 for examples of these characteristics). The Fund may also invest a
portion of its assets in companies with market capitalizations below $3
billion.
Other
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks, if, in the Adviser's opinion, they present
opportunities for capital appreciation.
To the extent consistent with its objective, the Fund may purchase non-
convertible debt and preferred stocks that, in the opinion of the Adviser,
present opportunities for capital appreciation. These obligations must be
investment grade at time of purchase or unrated but deemed comparable by the
Adviser. See "Short-Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM)
Fund" for a description of investment grade securities. After purchase, a
security may cease to be rated or may have its rating reduced below the minimum
rating required by the Fund for purchase. The Adviser will consider whether to
continue to hold the security.
............................................................................. 65
<PAGE>
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Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. The Fund intends to invest no more than 5% of net
assets in securities rated non-investment grade at the time of purchase, or
unrated securities of comparable quality. Convertible securities and
obligations rated in the lowest of the top four rating categories have
speculative characteristics, and are subject to greater credit and interest
rate risk than higher rated securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
93 9.98
94 -5.34
95 30.03
96 18.15
97 22.91
98 30.46
99 14.29
The Large Cap Core Equity Fund's total return for Institutional Shares for the
nine-month period ended September 30, 2000 was 9.93%.
................................................................................
66
<PAGE>
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--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 24.04%
Worst Quarter: Q 3 '98 -11.12%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (Dec. 29, 1992)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Core Equity
Fund
Institutional Shares 14.29% 22.99% -- 16.66%
S&P 500 Index 21.04% 28.56% -- 21.53%
--------------------------------------------------------------
</TABLE>
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The Index figures do not reflect any fees or expenses. Investors cannot
invest directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the Large Cap Core Equity Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
------------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.19%
-----
Total Annual Fund Operating Expenses/3/ 0.94%
=====
------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Large Cap Core Equity Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 0.94% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
............................................................................. 67
<PAGE>
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--------------------------------------------------------------------------------
Expense Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Core Equity Fund -
Institutional Shares $96 $300 $520 $1,155
</TABLE>
--------------------------------------------------------------------------------
Large Cap Growth Fund
Objective
[GRAPHIC]
The investment objective of the Large Cap Growth Fund is to maximize capital
appreciation. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund attempts to achieve its investment goal by investing at least 65% of
the value of its total assets in growth-oriented large capitalization domestic
equity securities. "Growth-oriented large capitalization" securities are
securities of U.S. companies that have market capitalization of $1.5 billion or
more and, based on traditional research techniques, the Fund's Adviser believes
have earnings growth potential superior to the S&P 500. The Fund will maximize
the amount of capital appreciation that it can within the constraints of its
investment policies and restrictions.
The Adviser selects securities and attempts to maintain an acceptable level of
risk largely through proprietary fundamental research and "bottom-up" stock
selection. The Adviser considers the following factors when assessing a
particular security:
What are "growth-oriented" securities? Securities of U.S. companies with market
capitalization of $1.5 billion or greater that show superior growth in earnings
and revenues.
.price/earnings ratios,
.historical and projected earnings growth rates,
.historical sales growth rates,
.historical return on equity,
.market capitalization,
.average daily trading volume, and
.credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The Adviser uses fundamental research together with economic forecasts and
assessment of the risk and volatility of the company's industry.
The Fund's domestic equity securities usually consist of U.S. common and
preferred stocks and warrants of companies with market capitalization of $1.5
billion or greater. The stocks are listed on the New York or American Stock
Exchanges or traded in the over-the-counter market.
To a limited degree, the Fund may also invest in: bonds, notes, debentures and
preferred stocks convertible into common stocks, if, in the Adviser's opinion,
they present opportunities for capital appreciation.
................................................................................
68
<PAGE>
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Temporary Investments
To respond to adverse market, economic, political or other conditions, the Fund
may invest up to 100% of its assets in U.S. and foreign short-term money market
instruments. The Fund may invest up to 35% of its assets in these securities to
maintain liquidity. Some of the short-term money market instruments include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements
To the extent the Fund engages in this temporary, defensive strategy, the Fund
may not achieve its investment objective.
The Fund may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. Convertible securities and obligations rated in the
lowest of the top four rating categories have speculative characteristics, and
are subject to greater credit and interest rate risk than higher rated
securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise react in tandem with
interest rate changes or market movements and may be leveraged. Extension risk
is the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage- or asset-backed security) later
than expected. This may happen when there is a rise in interest rates. Under
such circumstances, the value of the obligation will decrease and a Fund will
also suffer from the inability to invest in higher yielding securities.
Prepayment risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Fund (such as a mortgage- or asset-backed
security) earlier than expected. This may happen when there is a decline in
interest rates. These events may make a Fund unable to recoup its initial
investment and may result in reduced yields.
The Fund's investments in foreign securities are subject to foreign risks.
Foreign stocks involve special risks not typically associated with U.S. stocks.
The stocks held by the Fund may underperform other types of stocks, and they
may not increase or may decline in value. Foreign investments may be riskier
than U.S. investments because of factors such as foreign government
restrictions, changes in currency exchange rates, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
To the extent the Fund invests in REITs, it is subject to real estate
investment trust risks. Some of the risks of equity and mortgage REITs are that
they depend on management skills and are not diversified. As a
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result, REITs are subject to the risk of financing either single projects or
any number of projects. REITs depend on heavy cash flow and may be subject to
defaults by borrowers and self-liquidation. Additionally, equity REITs may be
affected by any changes in the value of the underlying property owned by the
trusts. Mortgage REITs may be affected by the quality of any credit extended.
The Adviser tries to minimize these risks by selecting REITs diversified by
sector (i.e., shopping malls, apartment building complexes, health care
facilities) and geographic location. The Fund will generally be subject to
risks associated with direct ownership of real estate, such as decreases in
real estate values or fluctuations in rental income caused by a variety of
factors, including increases in interest rates, increases in property taxes and
other operating costs, casualty or condemnation losses, possible environmental
liabilities and changes in supply and demand for properties.
The Fund is subject to futures and options on futures risks, as the Fund may
use futures and options on futures for hedging purposes only. The hedging
strategy may not be successful if the Adviser is unable to accurately predict
movements in the prices of individual securities held by the Fund or if the
strategy does not correlate well with the Fund's investments. The use of
futures and options on futures may produce a loss for the Fund, even when used
only for hedging purposes and you could lose money because of the Fund's use of
options.
The Fund's holdings are subject to small and midcap stock risks. Small and
medium-size companies often have narrower markets and more limited managerial
and financial resources than larger, more established companies. As a result,
their performance can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund's portfolio.
To the extent that the Fund emphasizes particular companies or market sectors,
such as technology, it will be especially susceptible to the risks associated
with investments in those companies or market sectors.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The Fund began operations on December 12, 1994 as the Firstar
Stellar Growth Equity Fund (the "Predecessor Stellar Fund"), a separate
portfolio of Firstar Stellar Funds. On December 11, 2000, the Predecessor
Stellar Fund was reorganized as a new portfolio of Firstar Funds, Inc. upon the
closing of reorganizations between Firstar Funds, Inc. and each of Mercantile
Mutual Funds, Inc. and Firstar Stellar Funds (together, the "Firstar
Reorganization).
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
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Year-by-year total return as of 12/31 each year (%) (Institutional Shares)
[GRAPH]
98 28.22
99 25.84
The Large Cap Growth Fund's total return for Institutional Shares for the nine-
month period ended September 30, 2000 was 4.69%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 29.76%
Worst Quarter: Q 3 '98 -6.72%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Growth Fund
Institutional Shares 25.84% -- -- 25.09%
(August 18, 1997)
S&P 500 Index 21.04% -- -- 25.17%
(August 31, 1997)
S&P BARRA Growth Index 28.25% -- -- 34.10%
(August 31, 1997)
-----------------------------------------------------------------
</TABLE>
The S&P 500 Index is a widely-recognized unmanaged index of 500 domestic stocks
created by Standard & Poor's Corporation. The Index is heavily weighted toward
stocks with large market capitalizations and represents approximately two-
thirds of the total market value of all domestic common stocks. The S&P BARRA
Growth Index, an unmanaged market capitalization weighted index, is replacing
the S&P 500 as the Fund's performance benchmark. The S&P BARRA Growth Index is
composed of the stocks in the S&P 500 with the highest valuations and, in the
adviser's view, the greatest growth opportunities. This benchmark is more
closely aligned to the management of the Large Cap Growth Fund, which seeks
appreciation by investing primarily in fast growing large cap securities. The
Index figures do not reflect any fees or expenses. Investors cannot invest
directly in an Index.
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Large Cap Growth Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.95%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.23%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.18%
Fee Waivers and Expense Reimbursements/4/ (0.04)%
-------
Net Annual Fund Operating Expenses/4/ 1.14%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Large Cap
Growth Fund is 0.91% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Large Cap Growth Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 1.14% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Growth Fund -
Institutional Shares $116 $371 $645 $1,428
---------------------------------------------------------
</TABLE>
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International Value Fund
Objective
[GRAPHIC]
The investment objective of the International Value Fund (formerly
International Equity Fund) is to seek capital appreciation through investing in
foreign securities which the Sub-Adviser believes are undervalued. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund's policy under normal market conditions is to invest at least 65% of
its total assets in foreign common stocks, convertible securities, rights to
purchase equity securities, and warrants. Under normal market conditions, at
least 80% of assets will be invested in three countries other than the U.S.
Hansberger Global Investors, Inc. (the "Sub-Adviser" or "HGI") chooses
securities based on a long-term investment perspective. The Sub-Adviser seeks
opportunities to invest in many countries and believes that this international
search provides flexibility to shift portfolio investments not only from company
to company and industry to industry, but also country to country, in search of
undervalued securities.
The Sub-Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Sub-Adviser may sell for reasons relating
to valuation when for example a security's price has reached a target specified
by the Sub-Adviser, and the Sub-Adviser believes potential increases in price
are limited.
The Fund generally invests in common stocks, but may also invest in preferred
stocks and certain rated or unrated debt securities when the Sub-Adviser
believes there's a potential for appreciation. The Fund may also invest in
warrants or rights to subscribe to or purchase such securities, and sponsored
or unsponsored:
.American Depository Receipts
.European Depository Receipts
.Global Depository Receipts, and
.other depository receipts
American Depository Receipts are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issues by a foreign
issuer. American Depository Receipts may be listed on a national securities
exchange or may trade in the over-the-counter market. American Depository
Receipts are denominated in U.S. dollars. The underlying securities may be
denominated in a foreign currency.
The Fund may also invest in:
.closed-end investment companies holding foreign securities
.options on securities and securities indices
.futures contracts and related options
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest for the
long-term and are not seeking to speculate on short-term stock market
movements. The Fund's value is expected to be volatile as a result of its
investment in foreign securities.
The Fund is subject to market risk. The Fund's investments in foreign
securities, ADRs, EDRs and GDRs are subject to foreign risks. In unsponsored
ADR programs, the issuer may not be directly involved in arranging its
securities to be traded in the form of depository receipts. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored
............................................................................. 73
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programs and there may not be a correlation between such information and the
market value of the Depository Receipts. 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.
The Fund's investments in convertible securities are subject to credit risk.
Convertible securities frequently have speculative characteristics and may be
acquired without regard to minimum quality ratings. The Fund intends to invest
no more than 5% of net assets in securities rated non-investment grade (or
equivalent rating by an agency recognized in the local market) at the time of
purchase (or unrated securities deemed to be of comparable quality).
Convertible securities and obligations rated in the lowest of the top four
rating categories are subject to greater credit and interest rate risk than
higher rated securities.
The emerging country securities in which the Fund may invest are subject to
significant risk and will not be required to meet any minimum rating standard.
The Fund's investments in options and futures involve derivatives risk. This is
the risk of loss from transactions which may be more sensitive to or otherwise
not react in tandem with interest rate changes or market moves and may be
leveraged.
Secondary markets generally do not exist for forward foreign currency
contracts, and there is no assurance that the Fund will be able to close out a
forward currency contract or close it out at a favorable price.
Warrants are options to purchase equity securities at a specific price valid
for a specific period of time. The purchase of warrants involves the risk that
the Fund could lose the purchase value of the 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.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
Effective September 2, 1997, Hansberger Global Investors, Inc. became
investment Sub-Adviser to the Fund.
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Year-by-year total return as of 12/31 each year (%) (Institutional Shares)
[GRAPH]
95 4.49
96 5.00
97 -10.46
98 -9.55
99 30.07
The International Value Fund's total return for Institutional Shares for the
nine-month period ended September 30, 2000 was -13.78%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '99 14.98%
Worst Quarter: Q 3 '98 -21.06%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (April 28, 1994)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Value Fund -
Institutional Shares 30.07% 2.94% -- 1.80%
MSCI/EAFE Index 26.96% 12.83% -- 11.21%
---------------------------------------------------------------------
</TABLE>
The Morgan Stanley Capital International Europe, Australia and Far East Index
("MSCI/EAFE") is a widely recognized unmanaged index composed of 20 European
and Pacific Basin countries.
The Index figures do not reflect any fees or expenses. Investors cannot invest
directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the International Value Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 1.34%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.42%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.76%
Fee Waivers and Expense Reimbursements/4/ (0.19)%
-------
Net Annual Fund Operating Expenses/4/ 1.57%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the International
Value Fund is 1.15% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the International Value Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 1.57% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------
<S> <C> <C> <C> <C>
International Value Fund -
Institutional Shares $160 $535 $935 $2,054
</TABLE>
--------------------------------------------------------------------------------
Global Equity Fund
Objective
[GRAPHIC]
The investment objective of the Global Equity Fund is to achieve long-term
capital appreciation. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPHIC]
To achieve its investment goal, the Fund invests, under normal market
conditions, at least 65% of the value of its total assets in shares of other
mutual funds whose portfolios consist of equity securities of non-U.S., U.S.
and global issuers. As an operational policy, the Fund will likely invest
substantially all of its assets in global and international equity funds, but
may invest a small portion in individual foreign securities.
The Fund may purchase shares of both load and no-load funds, including those
with a contingent deferred sales charge. However, the Fund anticipates that it
will generally purchase no-load fund shares that do not charge a sales charge.
The 1940 Act restricts the Fund's ability to purchase securities of another
mutual fund, if as a result, the Fund (together with any affiliates) would own
more than 3% of the total outstanding securities of that mutual fund.
The Fund primarily invests in other global and international equity funds
(i.e., funds that invest primarily in equity securities of companies located in
3 or more countries outside the U.S.)
................................................................................
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The Adviser identifies and selects a varied portfolio of international and
global equity funds which represent the greatest long-term capital growth
potential based on the Adviser's analysis of many factors. For instance, the
Adviser may look for international or global equity funds that invest primarily
in emerging markets or funds that focus their investments on geographic
regions.
Investing in non-U.S. securities provides you with 3 potential opportunities:
1. The opportunity to invest in foreign issuers believed by the adviser to
have superior growth potential;
2. The opportunity to invest in foreign countries with economic policies or
business cycles different from the U.S.; and
3. The opportunity to reduce portfolio volatility to the extent that the
securities markets inside and outside the U.S. do not move in harmony.
Before investing in an international or global equity fund, the Adviser:
First: assesses the relative attractiveness of individual countries,
geographic regions and/or emerging markets by examining the opinions
of various foreign market analysts.
Second: considers the expected returns and risks of the fund relative to the
industries in which the fund invests. The Adviser considers whether
the fund and the companies in which it invests have solid management,
new product lines. The Adviser also performs a quantitative analysis
by considering a company's price/earnings ratios and projected
earnings.
Third: involves an initial peer group screening process that assesses fund
investment style, objectives, policies and management. The peer group
also considers independent rating services.
If, in the Adviser's view, the mutual fund meets these criteria, then the
Adviser will further evaluate the mutual fund's investment policies, historic
total return, size, volatility and operating expenses over various time
periods. The Adviser also considers the differences between the fund's and
another mutual fund's investment restrictions when making any investment
decisions.
Underlying Funds
The underlying international and global equity funds in which the Fund invests
may have similar policies as the Fund, although this is not required. The
underlying international equity funds may invest up to 100% of their total
assets in equity securities of foreign issuers, including international stocks.
The underlying global equity funds may invest a substantial portion of their
total assets in equity securities of U.S. issuers.
Although the Fund is a diversified investment portfolio, it may invest in non-
diversified mutual funds or in funds that invest a substantial portion of their
assets in a single country. This may result in greater fluctuation in the total
market value of the underlying fund's portfolio because of the higher
percentage of investments among fewer issuers or in a single country. The Fund
intends to reduce these risks by holding shares of multiple funds.
The underlying funds may also be authorized to invest up to 100% of their
respective assets in securities of foreign issuers and engage in foreign
currency transactions with respect to these investments. The underlying funds
may invest primarily in either the securities of emerging market countries or
in the securities of a single country. The funds may invest 35% or more of
their respective assets in high yield securities (junk bonds) or warrants. They
may engage in short selling and in leveraged borrowing and enter into interest
rate swaps, currency swaps and other types of swap agreements such as caps,
collars and floors.
The Fund will normally invest in open-end management investment companies, but
may also invest in closed-end management investment companies and/or unit
investment trusts. Unlike open-end funds that offer and sell their shares at
net asset value plus any applicable sales charge, the shares of closed-end
funds may trade at a market value that represents a premium, discount or spread
to net asset value.
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Temporary Investments
To respond to adverse market, economic, political or other conditions, the Fund
may invest up to 100% of its total assets in money market mutual funds or in
short-term debt securities. The Fund may invest up to 35% of the total assets
in these securities to maintain liquidity. Short-term debt securities include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements
.other short-term instruments
To the extent the Fund engages in this temporary, defensive strategy, the Fund
may not achieve its investment objective.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to underlying funds risks. The Fund's performance directly
relates to the performance of the funds in which it invests. This investment
strategy also subjects the Fund to additional expenses and certain tax
consequences that would not exist if you invested in those funds directly. By
investing in the Fund, you bear not only the Fund's total operating expenses,
but the operating expenses of the underlying funds as well.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which the Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions.
Investments in foreign securities are subject to foreign risks. Investing in
foreign securities can carry higher returns than those associated with domestic
investments. However, foreign securities may be substantially riskier than
domestic investments. The economies of foreign countries may differ from the
U.S. economy in such respects as growth of gross domestic product, rate of
inflation, currency depreciation, capital reinvestment, resource self-
sufficiency, and balance of payments position. Furthermore, the economies of
developing countries generally are heavily dependent on international trade
and, accordingly, have been, and may continue to be, adversely affected by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protective measures imposed or negotiated by the countries
with which they trade. These economies also have been, and may continue to be,
adversely affected by economic conditions in the countries with which they
trade.
Funds may be required to obtain prior governmental approval for foreign
investments in some countries under certain circumstances. Governments may
require approval to invest in certain issuers or industries deemed sensitive to
national interests, and the extent of foreign investment in certain debt
securities and domestic companies may be subject to limitation. Individual
companies may also limit foreign ownership to prevent, among other things,
violation of foreign investment limitations.
Some foreign investments may risk being subject to repatriation controls that
could render such securities illiquid. Other countries might undergo
nationalization, expropriation, political changes, governmental regulation,
social instability or diplomatic developments (including war) that could
adversely affect the economies of such countries or the value of the
investments in those countries. For this reason, funds that invest primarily in
the securities of a single country will be greatly impacted by any political,
economic or regulatory developments affecting the value of the securities.
Additional risks include currency fluctuations, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
................................................................................
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The Fund is subject to futures and options on futures risks, as the Fund may,
via underlying funds, use futures and options on futures for hedging purposes
only. The hedging strategy may not be successful if the Adviser is unable to
accurately predict movements in the prices of individual securities held by the
Fund or if the strategy does not correlate well with the Fund's investments.
The use of futures and options on futures may produce a loss for the Fund, even
when used only for hedging purposes and you could lose money because of the
Fund's use of options.
The Fund's investments in debt securities are subject to credit risk, interest
rate risk and high-yield bond risk. Credit risk is the risk that an issuer of
fixed income securities may default on its obligation to pay interest and repay
principal. Interest rate risk is the risk that, when interest rates increase,
fixed income securities will decline in value. In particular, convertible
securities frequently have speculative characteristics and may be acquired
without regard to minimum quality ratings. Obligations rated in the lowest of
the top four rating categories are subject to greater credit and interest rate
risk than higher rated securities. High-yield bond risk involves the Fund's
investment (via underlying funds) in high-yield bonds (generally referred to as
junk bonds). Junk bonds are considered predominantly speculative by traditional
investment standards. The market value of these low-rated securities tends to
be more sensitive to individual corporate developments and changes in interest
rates and economic conditions than higher-rated securities. In addition, they
generally present a higher degree of credit risk. Issuers of low-rated
securities are often highly leveraged, so their ability to repay their debt
during an economic downturn or periods of rising interest rates may be
impaired.
The Fund's holdings are subject to small and midcap stock risks. Small and
medium-size companies often have narrower markets and more limited managerial
and financial resources than larger, more established companies. As a result,
their performance can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund's portfolio.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The Fund began operations on December 3, 1997 as the Firstar
Stellar International Equity Fund (the "Predecessor Stellar Fund"), separate
portfolio of Firstar Stellar Funds. On December 11, 2000, the Predecessor
Stellar Fund was reorganized as a new portfolio of Firstar Funds, Inc. upon the
closing of reorganization between Firstar Funds, Inc. and each of Mercantile
Mutual Funds, Inc. and Firstar Stellar Funds (together, the "Firstar
Reorganization"). The Predecessor Stellar Fund did not offer a share class
corresponding to Institutional Shares. The performance set forth below is based
on the performance of a different class of the Predecessor Stellar Fund (Retail
A Shares). The performance of this other class shown here would be
substantially similar to that of the Institutional class because both classes
will be invested in the same portfolio of securities. Annual returns will
differ only to the extent that the classes do not have the same expenses.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart and table. If these amounts were reflected, returns would be
less than those shown.
............................................................................. 79
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
98 8.51
99 37.25
The Global Equity Fund's total return for Institutional Shares for the nine-
month period ended September 30, 2000 was -8.54%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 4 '99 25.23%
Worst Quarter: Q 3 '98 -15.65%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (December 3, 1997)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Equity Fund -
Institutional Shares 37.25% -- -- 21.13%
EAFE Index 25.26% -- -- 21.25%
</TABLE>
--------------------------------------------------------------------------------
The Morgan Stanley Europe, Australia and Far East ("EAFE") Index is a widely-
recognized unmanaged index used to measure the performance of European,
Australian, New Zealand and Far Eastern stock markets. The Index is composed of
securities drawn from 21 countries in the above regions. The Index figures do
not reflect any fees or expenses. Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Global Equity Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
................................................................................
80
<PAGE>
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--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.33%
-------
Total Annual Fund Operating Expenses
(before waivers)/5/ 1.08%
Fee Waivers and Expense Reimbursements/4/ (0.06)%
-------
Net Annual Fund Operating Expenses/4/,/5/ 1.02%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Global Equity
Fund is 0.69% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Global Equity Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.02% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
5 Because the Fund invests in other investment companies your investment in
the Fund is also indirectly subject to the operating expenses of those
investment companies. Such expenses have typically ranged from 0.37% to
3.07%. The above table does not reflect these indirect expenses.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------
<S> <C> <C> <C> <C>
Global Equity Fund -
Institutional Shares $104 $337 $589 $1,311
</TABLE>
--------------------------------------------------------------------------------
International Growth Fund
Objective
[GRAPHIC]
The investment objective of the International Growth Fund (formerly Core
International Equity Fund) is to provide capital growth consistent with
reasonable investment risk. The investment objective may be changed by the
Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Sub-Adviser
FIRMCO has appointed Clay Finlay Inc. ("Clay Finlay" or the "Sub-Adviser") as
sub-adviser to assist in the day-to-day management of the Fund.
Principal Investment Strategies
[GRAPHIC]
The Fund invests primarily in foreign common stocks, most of which will be
denominated in foreign currencies. Under normal market conditions, the Fund
invests substantially all (at least 80%) of its total assets in the securities
of companies that derive more than 50% of their gross revenues outside the
United States or have more than 50% of their assets outside the United States.
Under normal market conditions, the Fund invests in equity securities from at
least three foreign countries. Generally, at least 50% of the Fund's total
assets will be invested in securities of companies located either in the
developed countries of Western Europe or in Japan. The Fund also may invest in
other developed countries in the Far East and in countries with emerging
markets or economies.
............................................................................. 81
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
By investing in various foreign stocks, the Fund attempts to achieve broad
diversification and to take advantage of differences between economic trends
and the performance of securities markets in different countries, regions and
geographic areas. In selecting stocks, the Sub-Adviser determines which
companies represent the best values relative to their long-term growth
prospects and local markets through the use of a screening tool which focuses
on valuation ranges. The Sub-Adviser focuses on companies with steady,
sustainable earnings growth rates that sell at a multiple lower than the
average for that growth rate in the local market. The Sub-Adviser also uses
fundamental analysis by evaluating balance sheets, market share and strength of
management.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest for the
long-term and are not seeking to speculate on short-term stock movements. The
Fund's value is expected to be volatile as a result of its investment in
foreign securities.
The Fund is subject to market risk and management risk. Market risk is the risk
that the value of the securities in which the Fund invests may go up or down in
response to the prospects of individual companies and/or general economic
conditions. Management risk is the risk that the evaluation by the investment
adviser of the rewards and risks presented by all securities purchased by the
Fund and how they advance the Fund's investment objectives may prove to be
inaccurate. The Fund's investments in foreign securities are subject to foreign
risk. Foreign stocks involve special risks not typically associated with U.S.
stocks. The stocks held by the Fund may underperform other types of stocks, and
they may not increase or may decline in value. Foreign investments may be
riskier than U.S. investments because of factors such as foreign government
restrictions, changes in currency exchange rates, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks. Foreign risks will normally be greatest when the Fund invests in issues
located in emerging countries. The governments and economies of emerging
countries feature greater instability than those of more developed countries.
Such investments tend to fluctuate in price more widely and to be less liquid
than other foreign investments. The Fund is also subject to currency risk which
is the potential for price fluctuations in the dollar value of the foreign
securities which the Fund holds because of changing currency exchange rates.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index.
On November 27, 2000, the Mercantile International Equity Portfolio (a
"Predecessor Mercantile Portfolio"), a portfolio of Mercantile Mutual Funds,
Inc., reorganized into the Firstar International Growth Fund (formerly Firstar
Core International Equity Fund). At that time, the Firstar International Growth
Fund adopted an investment objective and certain non-fundamental investment
policies and restrictions that are substantially the same as those of the
Predecessor Mercantile Portfolio. The Predecessor Mercantile Portfolio began
operations on April 4, 1994. The performance set forth below is based on the
performance of a corresponding class of the Predecessor Mercantile Portfolio.
The Predecessor Mercantile Portfolio was managed by a different investment
adviser for the periods shown below until March 1, 2000. See "Management of the
Funds" for more information.
................................................................................
82
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%) (Institutional Shares)
[GRAPH]
95 9.59
96 10.36
97 4.88
98 17.91
99 50.93
The International Growth Fund's total return for Institutional Shares for the
nine-month period ended September 30, 2000 was -10.14%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q4 '99 27.60%
Worst Quarter: Q3 '98 -16.98%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5 Since inception
1 Year Years 10 Years (inception date)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Growth Fund -
Institutional Shares 50.93% 17.68% -- 15.29%
(April 4, 1994)
EAFE Index 26.96% 12.83% -- 11.85%
(March 31, 1994)
</TABLE>
--------------------------------------------------------------------------------
The Morgan Stanley Capital International Europe, Australia and Far East Index,
or EAFE Index, is an unmanaged index consisting of companies in Australia, New
Zealand, Europe and the Far East. The Index figures do not reflect any fees or
expenses. Investors cannot invest directly in an Index.
............................................................................. 83
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the International Growth Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 1.00%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.32%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.32%
Fee Waivers and Expense Reimbursements/4/ (0.06)%
-------
Net Annual Fund Operating Expenses/4/ 1.26%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the International
Growth Fund is 0.94% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the International Growth Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 1.26% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Growth Fund -Institutional
Shares $128 $412 $717 $1,584
</TABLE>
--------------------------------------------------------------------------------
................................................................................
84
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
MidCap Index Fund
Objective
[GRAPHIC]
The investment objective of the MidCap Index Fund is to seek returns, before
Fund expenses, comparable to the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the S&P MidCap 400 Index. The
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Under normal market conditions, the Fund intends to invest substantially all of
its total assets in securities included in the S&P MidCap 400 Index, and in any
event the Fund will invest at least 80% of its net assets in securities
included in that index. The Fund uses the S&P MidCap 400 Index as the standard
performance comparison because it is composed of 400 selected common stocks of
medium-size domestic companies with market capitalizations between
approximately $148 million and $13 billion.
The S&P MidCap 400 Index is an unmanaged, capitalization-weighted index of
common stocks representing all major industries in the mid-range of the U.S.
stock market.
Rather than using traditional methods of investment management, index funds
such as the Firstar MidCap Index Fund are managed with the aid of a computer
program. The Adviser purchases and sells securities for the Fund in an attempt
to produce investment results that substantially duplicate the performance of
the common stocks of the issuers represented in the S&P MidCap 400 Index.
The Fund does not expect to hold all of the stocks included in the S&P MidCap
400 Index at any particular time; however, the Adviser believes it will be able
to construct and maintain the Fund's investment portfolio so that it reasonably
tracks the performance of the S&P MidCap 400 Index by using a capitalization
weighting and sector balancing technique.
The Adviser believes the quarterly performance of the Fund and the S&P MidCap
400 Index will be within (+/-)0.3% under normal market conditions. The Adviser
believes that through the application of a capitalization weighting and sector
balancing technique it will be able to construct and maintain the Fund's
investment portfolio so it reasonably tracks the performance of the S&P MidCap
400 Index. In the event the performance of the Fund is not comparable to the
performance of the S&P MidCap 400 Index, the Board of Directors will examine
the reasons for the deviation and the availability of corrective measures.
These measures would include additional fee waivers by the Adviser and
Administrator or adjustments to the Adviser's portfolio management practices.
If substantial deviation in the Fund's performance continued for extended
periods, it is expected the Board of Directors would consider possible changes
to the Fund's investment objective.
The Fund may invest in futures contracts. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell an asset in the
future at an agreed upon price. The Fund may invest in futures contracts and
options on futures contracts for hedging purposes, to have fuller exposure to
price movements in a stock or bond index, to increase total return or to
maintain liquidity to meet potential shareholder redemptions, invest cash
balances or dividends or minimize trading costs. In addition, the Fund may
purchase and sell futures and related options (based only on the S&P MidCap 400
Index) to maintain cash reserves while simulating full investment in the stocks
underlying the S&P MidCap 400 Index, to keep substantially all of its assets
exposed to the market (as represented by the S&P MidCap 400 Index), and to
reduce transaction costs.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which the Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. Your
investment follows the mid-cap portion of the U.S. stock market, as measured by
the S&P
............................................................................. 85
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
MidCap 400 Index, during upturns as well as downturns. Because of its indexing
strategy, the Fund cannot take steps to reduce market volatility or to lessen
the effects of a declining market. Whenever mid-cap stocks underperform large-
or small-cap stocks, the Fund may underperform funds that have exposure to
those segments. Further, the Fund will not necessarily dispose of a security in
response to adverse events affecting the issuer of a security (such as adverse
credit factors or failure to pay dividends) if disposal would not be consistent
with the Fund's indexing strategy.
The Adviser may be required to sell common stock if the issuer is eliminated
from the S&P MidCap 400 Index. Such sales may result in:
.lower prices, or
.losses that may not have been incurred if the Adviser did not have to sell the
securities.
The Fund's futures transactions involve derivatives risk. Derivatives risk is
the risk of loss from transactions which may be more sensitive to or otherwise
not react in tandem with interest rate changes or market moves and may be
leveraged. Futures contracts could cause the Fund to track the Index less
closely if they don't perform as expected.
The Fund's ability to duplicate the performance of the S&P MidCap 400 Index
will depend to some extent on the size and timing of cash flows into and out of
the Fund, as well as the Fund's expenses.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves investment risks,
including the risk that you may lose money.
Standard & Poor's makes no representation or warranty regarding the
advisability of investing in index funds or the ability of the S&P MidCap 400
Index to track general stock market performance.
There is no performance information in this section for the Fund because it
commenced operations on November 4, 1999.
Fees and Expenses of the Fund
This table describes the expenses you may pay if you buy and hold Institutional
Shares of the MidCap Index Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
................................................................................
86
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
---------------------------------------------------------
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.25%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.35%
-------
Total Annual Fund Operating Expenses
(before waivers) 0.60%
Fee Waivers and Expense Reimbursements/4/ (0.10)%
-------
Net Annual Fund Operating Expenese/4/ 0.50%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the MidCap Index
Fund is 0.15% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the MidCap Index Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.50% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years
--------------------------------------------------------
<S> <C> <C>
MidCap Index Fund - Institutional Shares $51 $182
</TABLE>
--------------------------------------------------------------------------------
MidCap Core Equity Fund
Objective
[GRAPHIC]
The MidCap Core Equity Fund (formerly Special Growth Fund) seeks capital
appreciation. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPHIC]
Equity Securities/Potential Price Appreciation
The Fund selects securities based on their potential for price appreciation.
During normal market conditions, the Fund invests at least 65% of total assets
in equity securities of medium-sized companies. Most of these equity securities
are publicly traded common stocks of companies incorporated in the U.S.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
............................................................................. 87
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Medium-Sized Companies
The Fund generally invests in medium-sized companies with stock market
capitalizations between $700 million and $10 billion that the Adviser considers
to be well-managed and to have attractive fundamental financial characteristics
(see box on page 44 for examples of these characteristics). If the market
capitalization of a company in which the Fund has invested increases above $10
billion, the Fund may continue to hold the security. The Fund may also invest a
portion of its assets in companies with smaller or larger market
capitalizations.
Other
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks, and may invest up to 5% of net assets in other
types of securities having common stock characteristics, such as rights and
warrants to purchase equity securities.
The Fund may purchase non-convertible debt and preferred stocks that, in the
opinion of the Adviser, present opportunities for capital appreciation. These
obligations must be investment-grade at time of purchase or unrated but deemed
comparable by the Adviser. See "Short-Term Bond Fund, Intermediate Bond Fund
and Bond IMMDEX(TM) Fund" for a description of investment grade securities.
After purchase, a security may cease to be rated or may have its rating reduced
below the minimum rating required by the Fund for purchase. The Adviser will
consider whether to continue to hold the security.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume risk in search of
long-term capital appreciation. The Adviser believes, however, that there is
greater potential for price appreciation among medium-sized companies in which
the Fund invests, since they tend to be less widely followed by other
securities analysts and thus may be more likely to be undervalued by the
market.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Convertible securities frequently have
speculative characteristics and may be acquired without regard to minimum
quality ratings. The Fund intends to invest no more than 5% of net assets in
securities rated non-investment grade at the time of purchase or unrated
securities of comparable quality. Convertible securities and obligations rated
in the lowest of the top four rating categories are subject to greater credit
and interest rate risk than higher rated securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
................................................................................
88
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Year-by-year total return as of 12/31 each year (%) (Institutional Shares)
[GRAPH]
90 1.00
91 57.96
92 7.22
93 8.02
94 -2.01
95 29.64
96 18.87
97 17.42
98 4.91
99 2.53
The MidCap Core Equity Fund's total return for Institutional Shares for the
nine-month period ended September 30, 2000 was 31.98%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 4 '99 24.27%
Worst Quarter: Q 3 '98 -19.63%
-------------------------------
</TABLE>
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5
1 Year Years 10 Years
-----------------------------------------------
<S> <C> <C> <C>
MidCap Core Equity Fund
Institutional Shares 2.53% 14.29% 13.44%
S&P 500 Index 21.04% 28.56% 18.21%
S&P MidCap 400 Index 14.72% 23.05% --
-----------------------------------------------
</TABLE>
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The S&P MidCap 400 Index is a capitalization weighted index that
represents the aggregate market value of the common equity of 400 stocks chosen
by S&P with a median capitalization of approximately $700 million and measures
the performance of the mid-range sector of the U.S. stock market. The Index
figures do not reflect any fees or expenses. Investors cannot invest directly
in the Index.
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Fees and Expenses of the Fund
(GRAPHIC)
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the MidCap Core Equity Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service Fees None
Other Expenses/3/ 0.21%
-------
Total Annual
Fund Operating Expenses (before waivers) 0.96%
Fee Waivers and Expense Reimbursements/4/ (0.01)%
-------
Net Annual Fund Operating Expenses/4/ 0.95%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the MidCap Core
Equity Fund is 0.74% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the MidCap Core Equity Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 0.95% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------
<S> <C> <C> <C> <C>
MidCap Core Equity Fund -
Institutional Shares $97 $305 $530 $1,177
</TABLE>
--------------------------------------------------------------------------------
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Small Cap Index Fund
Objective
[GRAPHIC]
The investment objective of the Small Cap Index Fund is to provide investment
results that, before deduction of operating expenses, approximate the price and
yield performance of U.S. common stocks with smaller stock market
capitalizations, as represented by the S&P SmallCap 600 Index. The investment
objective may be changed by the Board of Directors without approval of
Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund uses an "indexing" strategy through the use of sophisticated computer
models to approximate the investment performance of the S&P SmallCap 600 Index.
The Fund will invest at least 80% of its total assets in securities listed in
the S&P SmallCap 600 Index and typically will hold all 600 stocks represented in
the Index. Under certain circumstances, however, the Fund may not hold all 600
stocks in the Index because of shareholder activity or changes in the Index. In
general, each stock's percentage weighting in the Fund is based on its weighting
in the S&P SmallCap 600 Index. When stocks are removed from or added to the
Index, those changes are reflected in the Fund. The Fund periodically
"rebalances" its holdings as dictated by changes in shareholder purchase and
redemption activity and in the composition of the S&P SmallCap 600 Index.
Indexing is a strategy whereby the Fund attempts to weight its securities to
match those of a broadly-based securities index in an attempt to approximate the
index's performance.
To the extent that, from time to time, the stocks in a particular market
sector, such as technology, comprise a significant portion of the S&P SmallCap
600 Index, those stocks will be represented in substantially the same
proportion in the Fund.
Under normal market conditions, it is expected that the quarterly performance
of the Fund, before expenses, will track the performance of the S&P SmallCap
600 Index within a .95 correlation coefficient.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which the Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. Your
investment follows the small-cap portion of the U.S. stock market, as measured
by the S&P SmallCap 600 Index, during upturns as well as downturns. Because of
its indexing strategy, the Fund cannot take steps to reduce market volatility
or to lessen the effects of a declining market. Whenever small-cap stocks
underperform large- or mid-cap stocks, the Fund may underperform funds that
have exposure to those segments. Further, the Fund will not necessarily dispose
of a security in response to adverse events affecting the issuer of a security
(such as adverse credit factors or failure to pay dividends) if disposal would
not be consistent with the Fund's indexing strategy.
The Adviser may be required to sell common stock if the issuer is eliminated
from the S&P SmallCap 600 Index. Such sales may result in:
.lower prices, or
.losses that may not have been incurred if the Adviser did not have to sell the
securities.
The Fund's ability to duplicate the performance of the S&P SmallCap 600 Index
will depend to some extent on the size and timing of cash flows into and out of
the Fund, as well as the Fund's expenses.
To the extent that stocks in a particular market sector, such as technology,
comprise a significant portion of the S&P Small Cap 600 Index and,
correspondingly, the Fund's holdings, the Fund will be especially susceptible
to market sector risk. Stock of technology companies may be subject to greater
price volatility than stocks of companies in other sectors. Technology
companies may produce or use products or services that prove commercially
unsuccessful, become obsolete or become adversely impacted by government
............................................................................. 91
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regulation. Technology stocks may experience significant price movements caused
by disproportionate investor optimism or pessimism.
The Fund's holdings are subject to small cap stock risks. Small capitalization
stocks involve greater risks than those associated with larger, more
established companies. These factors increase risk and may result in more
significant losses than other Firstar Funds. By typically investing in all 600
stocks in the Index, the Fund remains broadly diversified, which may reduce
some of this risk. Small company stocks may be subject to more abrupt or
erratic price movements. Also, securities of small-cap companies are less
liquid, and are subject to liquidity risk. Liquidity risk is the risk that
certain securities may be difficult or impossible to sell at a desirable time
and price. There normally is less publicly available information concerning
these securities. They may be subject to wide fluctuations in market value. The
trading market for any given security may be sufficiently thin as to make it
difficult for the Fund to dispose of a substantial block of such securities.
These securities are less liquid than other more widely traded securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves investment risks,
including the risk that you may lose money.
Standard & Poor's makes no representation or warranty regarding the
advisability of investing in index funds or the ability of the S&P SmallCap 600
Index to track general stock market performance.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The Fund began operations on December 30, 1998 as the Mercantile
Small Cap Equity Index Portfolio, a separate portfolio (the "Predecessor
Mercantile Portfolio") of Mercantile Mutual Funds, Inc. On December 11, 2000,
the Predecessor Mercantile Portfolio was reorganized as a new portfolio of
Firstar Funds, Inc. upon the closing of reorganizations between Firstar Funds,
Inc. and each of Mercantile Mutual Funds, Inc. and Firstar Stellar Funds
(together, the "Firstar Reorganization"). The performance set forth below is
based on the performance of a corresponding class of the Predecessor Mercantile
Portfolio. The Predecessor Mercantile Portfolio was managed by a different
investment adviser for the periods shown below until March 1, 2000. See
"Management of the Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance does not reflect fee waivers in effect. If these fee waivers were
not in place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
99 7.91%
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The Small Cap Index Fund's total return for Institutional Shares for the nine-
month period ended September 30, 2000 was 12.02%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '99 15.24%
Worst Quarter: Q 1 '99 -10.84%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Index Fund -
Institutional Shares 7.91% -- -- 10.47%
(December 30, 1998)
S&P SmallCap 600 Index 12.40% -- -- 12.40%
(December 31, 1998)
--------------------------------------------------------------------
</TABLE>
The S&P SmallCap 600 Index is a widely-recognized unmanaged index that tracks
the performance of 600 domestic companies traded on the New York Stock
Exchange, the American Stock Exchange and Nasdaq. This Index is heavily
weighted with the stocks of small companies with market capitalizations that
currently range between $28 million and $4.2 billion. S&P does not endorse any
stock in the S&P SmallCap 600 Index and is not a sponsor of, or affiliated in
any way with, the Fund. The Index figures do not reflect any fees or expenses.
Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Small Cap Index Fund.
Shareholder fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.40%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.34%
-------
Total Annual Fund Operating Expenses
(before waivers) 0.74%
Fee Waivers and Expense Reimbursements/4/ (0.06)%
-------
Net Annual Fund Operating Expenses/4/ 0.68%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Small Cap Index
Fund is 0.34% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Small Cap Index Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.68% of the Fund's daily net assets for the current fiscal year. These
fee waivers and expense reimbursements may be terminated at any time after
October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Index Fund -
Institutional Shares $69 $230 $406 $913
</TABLE>
Small Cap Core Equity Fund
Objective
[GRAPHIC]
The investment objective of the Small Cap Core Equity Fund (formerly Emerging
Growth Fund) is to seek capital appreciation. The investment objective may be
changed by the Board of Directors without approval of Shareholders, although no
change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund selects securities the Adviser believes have above-average prospects
for capital appreciation. During normal market conditions, the Fund invests at
least 65% of total assets in equity securities. These equity securities may be
listed on a national securities exchange or may be unlisted securities with or
without an established over-the-counter market.
The Fund also invests in stocks the Adviser believes are undervalued or to a
limited extent in initial public offerings (IPOs) of new companies that
demonstrate the potential for price appreciation. The Adviser selects stocks
based on a number of factors, including historical and projected earnings,
asset value, potential for price appreciation and earnings growth, and quality
of the products manufactured or services offered.
Small-Sized Companies
The Fund generally invests at least 65% of its total assets in small- to
medium-sized companies with market capitalizations between $100 million and $2
billion. The Fund may also invest a portion of its assets in
--------------------------------------------------------------------------------
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larger companies that the Adviser believes offer improved growth possibilities
because of rejuvenated management, product changes or other developments likely
to stimulate earnings or asset growth.
The Fund may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume an above-average
level of market risk in search of long-term capital appreciation. The Adviser
believes, however, that there is greater potential for price appreciation among
small-sized companies in which the Fund invests, since they tend to be less
widely followed by other securities analysts and thus may be more likely to be
undervalued by the market.
The Fund is subject to market risk, management risk and small-cap stock risk.
Market risk is the risk that the value of the securities in which a Fund
invests may go up or down in response to the prospects of individual companies
and/or general economic conditions. In addition, different types of equity
securities tend to shift in and out of favor depending on market and economic
conditions. Management risk is the risk that the evaluation by the investment
adviser of the rewards and risks presented by all securities purchased by the
Fund and how they advance the Fund's investment objectives may prove to be
inaccurate. Small-cap stock risk refers to the fact that small capitalization
stocks involve greater risks than those associated with larger, more
established companies. Small company stocks may be subject to more abrupt or
erratic price movements, for reasons including that the stocks are traded in
lower volume and that the issuers are more sensitive to changing conditions and
have less certain growth prospects. Also, there are fewer market makers for
these stocks and wider spreads between quoted bid and asked prices in the over-
the-counter market for these stocks. Small cap stocks tend to be less liquid,
particularly during periods of market disruption. There normally is less
publicly available information concerning these securities. Small companies in
which the Fund may invest have limited product lines, markets or financial
resources, or may be dependant on a small management group. In particular,
investments in unseasoned companies present risks considerably greater than
investments in more established companies.
To the extent that the Fund emphasizes particular companies or market sectors,
such as technology, it will be especially susceptible to sector/technology
risk. Stocks of technology companies may be subject to greater price volatility
than stocks of companies in other sectors. Technology companies may produce or
use products or services that prove commercially unsuccessful, become obsolete
or become adversely impacted by government regulation. Technology stocks may
experience significant price movements caused by disproportionate investor
optimism or pessimism.
The Fund's performance results may reflect periods of above-average performance
attributable to investing a portion of its assets in the securities of
companies offering shares in IPOs. It is possible that the above-average
performance of such companies may not be repeated in the future.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
............................................................................. 95
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Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Institutional Shares of the Fund by showing: (a) changes in
the performance of the Fund's Institutional Shares from year to year; and (b)
how the average annual return of the Fund's Institutional Shares compare to
that of a broad-based securities market index.
On November 27, 2000, the Mercantile Small Cap Equity Portfolio (a "Predecessor
Mercantile Portfolio"), a portfolio of Mercantile Mutual Funds, Inc.,
reorganized into the Firstar Small Cap Core Equity Fund. At that time, the
Firstar Small Cap Core Equity Fund adopted an investment objective and certain
non-fundamental investment policies and restrictions that are substantially the
same as those of the Predecessor Mercantile Portfolio. The Predecessor
Mercantile Portfolio began operations on May 6, 1992. The performance set forth
below for the Small Cap Core Equity Fund is based on the performance of a
corresponding class of the Predecessor Mercantile Portfolio. The Predecessor
Mercantile Portfolio was managed by a different investment adviser for the
periods shown below until March 1, 2000. See "Management of the Funds" for more
information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%)(Institutional Shares)
[GRAPH]
93 23.59
94 2.52
95 17.24
96 10.98
97 20.79
98 -7.77
99 17.10
The Small Cap Core Equity Fund's total return for Institutional Shares for the
nine-month period ended September 30, 2000 was 25.02%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q-2 '99 17.06%
Worst Quarter: Q-3 '98 -24.71%
-------------------------------
</TABLE>
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Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Core Equity Fund -
Institutional Shares 17.10% 11.16% -- 12.72%
(May 6, 1992)
Russell 2000 Index 21.26% 16.69% -- 14.80%
(April 30, 1992)
S&P SmallCap 600 12.40% 17.04% -- 15.07%
(April 30, 1992)
Wilshire Next 1750 Index 25.32% 18.74% -- 16.20%
(April 30, 1992)
</TABLE>
--------------------------------------------------------------------------------
The Russell 2000 Index is an unmanaged index comprised of the 2,000 smallest of
the 3,000 largest U.S. companies based on market capitalization. The S&P
SmallCap 600 Index is a capitalization weighted index that measures the
performance of selected U.S. stocks with small market capitalizations. The
Wilshire Next 1750 Index is an unmanaged index, which shows the next largest
1,750 companies after the Top 750 of the Wilshire 5000 Stock Index. The Index
figures do not reflect any fees or expenses. Investors cannot invest directly
in an Index. Prior to November 27, 2000, the S&P SmallCap 600 and Wilshire Next
1750 Index were the performance benchmarks of the Fund. The Russell 2000 Index
was the performance benchmark of the Predecessor Mercantile Portfolio. The S&P
SmallCap 600 has been selected as the sole performance benchmark for the Fund
as the market capitalization of the Index is closely aligned with that of the
Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Small Cap Core Equity Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
---------------------------------------------------------
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.23%
-------
Total Annual Fund Operating Expenses
(before waivers) 0.98%
Fee Waivers and Expense Reimbursements/4/ (0.02)%
-------
Net Annual Fund Operating Expenses/4/ 0.96%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Small Cap Core
Equity Fund is 0.73% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Small Cap Core Equity Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 0.96% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Core Equity Fund -
Institutional Shares $98 $310 $540 $1,199
</TABLE>
--------------------------------------------------------------------------------
Science & Technology Fund
Objective
[GRAPHIC]
The investment objective of the Science & Technology Fund is to maximize growth
and capital appreciation by investing in equity securities of companies in the
science and technology industry. This investment objective may be changed by
the Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund seeks to achieve its investment objective by investing primarily in
equity securities of companies in the science and/or technology sectors. Under
normal market conditions, the Fund will invest at least 65% of the value of its
total assets in common stock, preferred stocks and warrants of companies of any
size principally engaged in science and technology business activities. The
Fund is a non-diversified investment company. The Fund considers science and
technology sectors to include companies whose primary business is to provide
goods or services in the fields of science (i.e., medical and health) or
technology (i.e., computers and communications). Such companies include those
that:
.make or sell products used in health care;
.make or sell medical equipment and devices and related technologies;
.make or sell software or information-based services and consulting,
communications and related services;
.design, manufacture or sell electronic components and systems;
................................................................................
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.research, design, develop, manufacture or distribute products, processes or
services that relate to hardware technology within the computer industry;
.develop, produce or distribute products or services in the computer, semi-
conductor, electronics, communications, health care and biotechnology sectors;
and
.engage in the development, manufacturing or sale of communications services or
communications equipment.
The Adviser believes that because of rapid advances in technology and science,
an investment in companies with business operations in these areas will offer
substantial opportunities for long-term capital appreciation. It is important
to note that prices of common stocks of even the best managed, most profitable
corporations are subject to market risk, which means their stock prices can
decline.
The Adviser's overall stock selection for the Fund is not based on the
capitalization or size of the company but rather on an assessment of the
company's fundamental prospects. The Fund may invest in small, medium or large
size companies. The Adviser will select securities while attempting to maintain
an acceptable level of risk largely through the use of proprietary fundamental
research and "bottom-up" stock selection. The Adviser will consider the
following factors when assessing a particular security:
.price/earnings ratios,
.historical and projected earnings growth rates,
.historical sales growth rates,
.historical return on equity,
.market capitalization,
.average daily trading volume, and
.credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The Adviser uses fundamental research together with economic forecasts and
assessments of the risk and volatility of the company's industry. To a limited
degree, the Fund may invest in foreign securities and options and futures for
hedging purposes.
The Fund may also participate in the initial public offering (IPO) market, and
a portion of the Fund's returns may have been attributable to its investments
in IPOs.
Temporary Investments
To respond to adverse market, economic, political or other conditions, the Fund
may invest up to 100% of its assets in high quality U.S. short-term money
market instruments. The Fund may invest up to 35% of its assets in these
securities to maintain liquidity. Some of these short-term money market
instruments include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements (collateralized by U.S. Treasury obligations and U.S.
government agencies)
To the extent the Fund engages in this temporary, defensive strategy, the Fund
may not achieve its investment objective.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume market risk,
industry risk and non-diversification risk in search of long-term capital
appreciation. Market risk is that risk that the value of the securities in
which a Fund may invest may go up or down in response to the prospects of
individual companies. Because the Fund invests in a particular industry it is
subject to industry risk, the risk that a group of related stocks will decline
in price due to industry specific developments. Companies in the same or
similar industries may share common
............................................................................. 99
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characteristics and are more likely to react to industry specific market or
economic developments. Non-diversification risk is the risk that, because more
of the Fund's assets may be concentrated in the common stock of any single
issuer, the value of the Fund's shares may be more susceptible to adverse
developments affecting any single issuer, and more susceptible to greater
losses because of these developments than shares of a more diversified fund.
The Fund is subject to science and technology concentration risks. Science and
technology related companies face special risks such as competitive pressures
and technological obsolescence and may be subject to greater governmental
regulation than many other industries. Technology and technology related
companies may be subject to short product cycles and aggressive pricing which
may increase their volatility. For example, their products or services may not
prove commercially successful or may become obsolete quickly. The value of the
Fund's shares may be susceptible to factors affecting the science and
technology areas and to greater risk and market fluctuation than an investment
in a fund that invests in a broader range of portfolio securities not
concentrated in any particular industry. Furthermore, companies within the
science and technology industries face greater risks of competition from new
market entrances and increased research and development costs. Additionally,
companies in these areas are dependent upon consumer and business acceptance as
new technologies evolve.
The Fund is also subject to IPO risk. IPOs may not be consistently available to
the Fund for investing, particularly as the Fund's asset base grows. As the
Fund's assets continue to grow, the effect of the Fund's investments in IPOs on
its total returns likely will decline, which could reduce the Fund's total
returns.
The Fund is subject to futures and options on futures risks, as the Fund may
use futures and options on futures for hedging purposes only. The hedging
strategy may not be successful if the Adviser is unable to accurately predict
movements in the prices of individual securities held by the Fund or if the
strategy does not correlate well with the Fund's investments. The use of
futures and options on futures may produce a loss for the Fund, even when used
only for hedging purposes and you could lose money because of the Fund's use of
options.
The Fund's holdings are subject to small and midcap stock risks. Small and
medium-size companies often have narrower markets and more limited managerial
and financial resources than larger, more established companies. As a result,
their performance can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund's portfolio.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Because the Fund has been in existence for less than one calendar year, no
performance information for the Fund is included in this Prospectus. The Fund
began operations on August 9, 1999 as the Firstar Stellar Science & Technology
Fund (the "Predecessor Stellar Fund"), a separate portfolio of Firstar Stellar
Funds. On December 11, 2000, the Predecessor Stellar Fund was reorganized as a
new portfolio of Firstar Funds, Inc. upon the closing of reorganizations
between Firstar Funds, Inc. and each of Mercantile Mutual Funds, Inc. and
Firstar Stellar Funds (together, the "Firstar Reorganization").
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Science & Technology Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
------------------------------------------------------
<S> <C>
Management Fees 1.05%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.26%
-----
Total Annual Fund Operating Expenses/3/ 1.31%
=====
------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Science & Technology Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 1.31% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Science & Technology Fund -Institutional
Shares $133 $415 $718 $1,579
--------------------------------------------------------------------------
</TABLE>
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MicroCap Fund
The MicroCap Fund is currently closed to new investors. Please see the
"Purchasing Shares" section below for additional information.
Objective
[GRAPHIC]
The investment objective of the MicroCap Fund is capital appreciation. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Common Stocks/Potential Price Appreciation
The Fund selects securities based on their potential for price appreciation.
Most of the securities the Fund holds will be common stocks of companies
incorporated in the U.S.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
Micro Capitalization Companies
At least 65% of the Fund's total assets will be invested in equity and debt
securities of micro capitalization companies that, in general, the Adviser
considers to be well managed and to have attractive fundamental financial
characteristics (see box on page 44 for examples of these characteristics).
Micro capitalization companies are those with capitalizations at the time of
purchase below the median market capitalization of the Russell 2000 Index,
which is currently approximately $481 million. The Fund may invest up to 35% of
its assets at the time of purchase in companies in excess of the median market
capitalization of the Russell 2000 Index. If the market capitalization of a
company in which the Fund has invested increases above the median market
capitalization of the Russell 2000 Index, the Fund may continue to hold the
security.
The Adviser believes that there is greater potential for price appreciation
among small-sized companies in which the Fund invests, since they tend to be
less widely followed by other securities analysts and thus may be more likely
to be undervalued by the market.
The Fund intends to invest no more than 5% of net assets in securities rated
non-investment grade at the time of purchase (or unrated securities of
comparable quality).
Other
The Fund may invest up to 25% of total assets in the securities of foreign
issuers, either directly or through sponsored American Depository Receipts.
American Depository Receipts are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. American Depository Receipts may be listed on a national securities
exchange or may trade in the over-the-counter market. American Depository
Receipts are denominated in U.S. dollars. The underlying securities may be
denominated in a foreign currency.
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks.
The Fund may purchase non-convertible debt and preferred stocks that, in the
opinion of the Adviser, present opportunities for capital appreciation. These
obligations must be investment grade at time of purchase or be unrated but
deemed comparable by the Adviser. See "Short-Term Bond Fund, Intermediate Bond
Fund and Bond IMMDEX(TM) Fund" for a description of investment-grade
securities. After purchase, a security may cease to be rated or may have its
rating reduced below the minimum rating required by the Fund for purchase. The
Adviser will consider whether to continue to hold the security.
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The Fund may acquire securities of unseasoned companies (companies with less
than three years' of continuous operation) when the Adviser believes the
investments offer possibilities of attractive capital appreciation, but will
not invest more than 20% of the value of its total assets in the securities of
unseasoned companies.
The Fund may also participate in the initial public offering (IPO) market, and
a substantial portion of the Fund's returns have been attributable to its
investment in IPOs.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume an above-average
level of market risk in search of long-term capital gain. Market risk is the
risk that the value of the securities in which a Fund invests may go up or down
in response to the prospects of individual companies and/or general economic
conditions. The Fund's expenses in a year may exceed income. There can be no
assurance the investment objective of the Fund will be realized or the value of
the Fund's investments will not decline in value. You should consider the Fund
to be a long-term investment and not a vehicle for seeking short-term profits
and income.
The Fund's investments in debt securities are subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. Obligations rated in the lowest of the top four
rating categories are subject to greater credit and interest rate risk than
higher rated securities.
The Fund's holdings are subject to micro cap stock risks. Micro capitalization
stocks involve greater risks than those associated with larger, more
established companies. Small company stocks may be subject to more abrupt or
erratic price movements. Also securities of micro cap companies are less
liquid, and are subject to liquidity risk. Liquidity risk is the risk that
certain securities may be difficult or impossible to sell at a desirable time
and price. There normally is less publicly available information concerning
these securities. In addition, the Fund's investments in unseasoned companies
present risks considerably greater than investments in more established
companies. Further, the securities in which the Fund invests will often be
traded only in the over-the-counter market or on a regional securities
exchange, may be listed only in the quotation service commonly known as the
"pink sheets," and may not be traded every day or in the volume typical of
trading on a national securities exchange. They may be subject to wide
fluctuations in market value. The trading market for any given security may be
sufficiently thin as to make it difficult for the Fund to dispose of a
substantial block of such securities. These securities are less liquid than
other more widely traded securities. The disposition by the Fund of portfolio
securities to meet redemptions or otherwise may require the Fund to sell these
securities at a discount from market prices or during periods when, in the
Adviser's judgment, such disposition is not desirable or to make many small
sales over a lengthy period of time.
The Fund's investments in foreign securities and American Depository Receipts
are subject to foreign risks. Foreign risks, which are not typically associated
with domestic issuers, result from less government regulation, less public
information and less economic, political and social stability. The Fund will
also be subject to the risk of negative foreign currency fluctuations. Foreign
risks will normally be greatest when the Fund invests in issuers located in
emerging countries.
The Fund is also subject to IPO risk. IPOs may not be consistently available to
the Fund for investing, particularly as the Fund's asset base grows. As the
Fund's assets continue to grow, the effect of the Fund's investment in IPOs on
its total returns likely will decline, which could reduce the Fund's total
returns.
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An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
(GRAPHIC)
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average annual returns
of the Fund's Institutional Shares compare to those of a broad-based securities
market index. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
Year by-year total return as of 12/31 of each year (%) (Institutional Shares)
[GRAPH]
96 57.23
97 13.92
98 -2.45
99 137.79
The MicroCap Fund's total return for Institutional Shares for the nine-month
period ended September 30, 2000 was 30.84%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '99 74.44%
Worst Quarter: Q 3 '98 -30.81%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (August 1, 1995)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
MicroCap Fund
Institutional Shares 137.79% -- -- 43.73%
Russell 2000 Index 21.26% -- -- 14.06%
---------------------------------------------------------------
</TABLE>
The Russell 2000 Index, an unmanaged index, consists of the smallest 2,000
companies in a group of 3,000 U.S. companies in the Russell 3000 Index, as
ranked by total market capitalization. The Index figures do not reflect any
fees or expenses. Investors cannot invest directly in the Index.
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Fees and Expenses of the Fund
(GRAPHIC)
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the MicroCap Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
---------------------------------------------------------
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 1.50%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.19%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.69%
Fee Waivers and Expense Reimbursements/4/ (0.01)%
-------
Net Annual Fund Operating Expenses/4/ 1.68%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the MicroCap Fund
is 1.49% of the Fund's average daily net assets.
3 "Other Expenses" includes administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the MicroCap Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.68% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
MicroCap Fund - Institutional Shares $171 $532 $917 $1,997
---------------------------------------------------------------------
</TABLE>
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Types of Investment Risk
The principal risks of investing in each Fund are described previously in this
Prospectus. The following list provides more detail about some of those risks,
along with information on additional types of risks which may apply to the
Funds. Risks associated with particular types of investments each Fund makes
are described in this section and in the Additional Statement referred to on
the back cover.
General Risks of Investing in Each of the Funds
[GRAPHIC]
Complete Investment Program - All Funds
An investment in a single Fund, by itself, does not constitute a complete
investment plan.
Credit Risk - Money Market Funds, Bond Funds, Balanced Funds, and any other
Fund to the extent that it invests in fixed-income securities
An issuer of fixed-income securities may default on its obligation to pay
interest and repay principal. Also, changes in the financial strength of an
issuer or changes in the credit rating of a security may affect its value.
Credit risk includes "counterparty risk" - the risk that the other party to a
transaction will not fulfill its contractual obligation. This risk applies, for
example, to repurchase agreements into which each Fund may enter.
Securities rated below investment grade are particularly subject to credit
risk. These securities are predominantly speculative and are commonly referred
to as "junk bonds." To the extent a Fund purchases or holds convertible or
other securities that are below investment grade, a greater risk exists as to
the timely repayment of the principal of, and the timely payment of interest or
dividends on, such securities.
Derivatives Risk - All Funds
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 a Fund's investments in options, futures, swaps, structured securities and
other derivative instruments which may be leveraged. A Fund may use derivatives
to: increase yield; hedge against a decline in principal value; invest with
greater efficiency and lower cost than is possible through direct investment;
adjust the Fund's duration; or provide daily liquidity.
Hedging is the use of one investment to offset the effects of another
investment. To the extent that a derivative is used as a hedge against an
opposite position that the Fund also holds, a loss generated by the derivative
should be substantially offset by gains on the hedged investment, and vice
versa. While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains. Hedging also involves correlation risk - the risk that changes
in the value of a hedging instrument may not match those of the asset being
hedged.
Investment by the Short-Term Bond Fund, Intermediate Bond Fund, U.S. Government
Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM) Fund, Strategic Income
Fund and Large Cap Growth Fund in collateralized mortgage obligations and
mortgage- and asset-backed securities are subject to derivatives risk.
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.
Interest Rate Risk - Money Market Funds, Bond Funds, Balanced Funds and any
other Fund to the extent that it invests in fixed-income securities
When interest rates increase, fixed-income securities tend to decline in value
and when interest rates decrease, fixed-income securities tend to increase in
value. A change in interest rates could cause the value of your investment to
change. Fixed-income securities with longer maturities are more susceptible to
interest rate fluctuations than those with shorter maturities. Therefore, the
risk of interest rate fluctuation is greater
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in the case of the Bond IMMDEX(TM) Fund and the Tax-Exempt Intermediate Bond
Fund than in the case of the Money Market Funds or the Short-Term Bond Fund.
Changes in interest rates may also extend or shorten the duration of certain
types of instruments, such as asset-backed securities, thereby affecting their
value and the return on your investment.
Stripped securities in which the Short-Term Bond Fund, Intermediate Bond Fund,
Bond IMMDEX(TM) Fund and Strategic Income Fund may invest and zero coupon
securities in which the Short-Term Bond Fund, Intermediate Bond Fund, Bond
IMMDEX(TM) Fund and Strategic Income Fund may invest are subject to greater
interest rate risk than may of the more typical fixed income securities.
Liquidity Risk - All Funds
Certain securities may be difficult or impossible to sell at the time and price
that a Fund would like. A Fund may have to lower the price, sell other
securities instead or forego an investment opportunity, any of which could have
a negative effect on fund management or performance. This risk applies, for
example, to: variable and floating rate demand notes, variable amount demand
securities and restricted securities which the Funds may purchase, short-term
funding agreements which the Institutional Money Market Fund may purchase, the
guaranteed investment contracts which the Short-Term Bond Fund, Intermediate
Bond Fund and Bond IMMDEX(TM) Fund may purchase and the futures contracts in
which the Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund,
Strategic Income Fund, Growth & Income Fund, Equity Index Fund, Large Cap
Growth Fund, International Value Fund, Global Equity Fund, International Growth
Fund, Science & Technology Fund and MicroCap Fund may engage. Illiquid
securities also include repurchase agreements and time deposits with
notice/termination dates of greater than seven days and certain unlisted over-
the-counter options and other securities traded in the U.S. but which are
subject to trading restrictions because they are not registered under the
Securities Act of 1933. There may be no active secondary market for these
securities. Each Fund may invest up to 15% of its net assets at the time of
purchase in securities that are illiquid, except that each Money Market Fund
may invest up to 10% of its net assets at the time of purchase in securities
that are illiquid. A domestically traded security which is not registered under
the Securities Act of 1933 will not be considered illiquid if the Adviser (or
Sub-Adviser) determines an adequate investment trading market exists for that
security. Because illiquid and restricted securities may be difficult to sell
at an acceptable price, they may be subject to greater volatility and may
result in a loss to a Fund.
Management Risk - All Funds
A strategy which the Adviser (or Sub-Adviser) uses may fail to produce the
intended results. The particular securities and types of securities a Fund
holds may underperform other securities and types of securities. There can be
no assurance a Fund will achieve its investment objective. The Adviser and each
Sub-Adviser may not change certain investment practices of the Fund without
shareholder vote. These policies of each Fund, which may not be changed without
a shareholder vote, are described in the Additional Statement.
Market Risk - All Funds
The value of the securities in which a Fund invests may go up or down in
response to the prospects of individual companies and/or general economic
conditions. Price changes may be temporary or last for extended periods. Each
Fund's performance results may reflect periods of above average performance
attributable to its investment in certain securities during the initial public
offering, the performance of a limited number of the securities in the Fund, or
other non-recurring factors. It is possible that the performance may not be
repeated in the future.
Nonprincipal Strategy Risks - All Funds
This Prospectus describes each Fund's principal investment strategies, and the
types of securities in which each Fund principally invests. Each Fund may, from
time to time, make other types of investments and pursue other investment
strategies in support of its overall investment goal. These supplemental
investment
............................................................................ 107
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strategies - and the risks involved - are described in detail in the Additional
Statement, which is referred to on the back cover of this Prospectus.
Portfolio Turnover Risk - All Funds
The Adviser and Sub-Advisers will not consider the portfolio turnover rate a
limiting factor in making investment decisions for a Fund. A high rate of
portfolio turnover (100% or more) involves correspondingly greater expenses
which must be borne by a Fund and its shareholders. It may also result in
higher short-term capital gains taxable to shareholders. See "Financial
Highlights" for the Funds' historical portfolio turnover rates. The Money
Market Funds may have high portfolio turnover, but brokerage commissions are
not normally paid on Money Market instruments. Portfolio turnover is not
expected to have a material effect on the Money Market Funds' net investment
income.
Valuation Risk - All Funds
This is a risk that a Fund has valued certain securities at a higher or lower
price than the Fund can sell them.
Additional Risks which Apply to Investment in Certain of the Funds
[GRAPHIC]
Extension Risk - Money Market Funds, Short-Term Bond Fund, Intermediate Bond
Fund, U.S. Government Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM)
Fund, Strategic Income Fund, National Municipal Bond, Fund Balanced Funds and
Large Cap Growth Fund
This is the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a municipal security, mortgage- or asset-
backed security) later than expected. This may happen when there is a rise in
interest rates. These events may lengthen the duration and potentially reduce
the value of these securities.
Foreign Risks - Aggregate Bond Fund, Strategic Income Fund, Relative Value
Fund, Large Cap Growth Fund, International Value Fund, Global Equity Fund,
International Growth Fund, Small Cap Core Equity Fund; each other Fund - other
than the Ohio Tax-Exempt Money Market Fund, U.S. Treasury Money Market Fund,
U.S. Government Money Market Fund and Missouri Tax-Exempt Bond Fund - to the
extent it invests in foreign securities
When a Fund invests in foreign securities, it will be subject to special risks
not typically associated with domestic issuers resulting from less government
regulation, less public information and less economic, political and social
stability. Foreign securities, and in particular foreign debt securities, are
sensitive to changes in interest rates. In addition, investment in securities
of foreign governments involves the risk that foreign governments may default
on their obligations or may otherwise not respect the integrity of their debt.
A Fund which invests in foreign securities will also be subject to the
diplomatic risk that an adverse change in the diplomatic relations between the
U.S. and another country might reduce the value or liquidity of investments.
Future political and economic developments, the possible imposition of
withholding taxes on dividend income, the possible seizure or nationalization
of foreign holdings, the possible establishment of exchange controls or freezes
on the convertibility of currency, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks may be
subject to less stringent reserve requirements, and to different accounting,
auditing and recordkeeping requirements.
Foreign risks will normally be greatest when a Fund invests in issuers located
in emerging markets. Securities issued in emerging market countries, in
particular, may be more sensitive to certain economic changes and less liquid.
These countries are located in the Asia/Pacific region, Eastern Europe, Latin
and South America and Africa. In general, the securities markets of these
countries are less liquid, are subject to greater price volatility, have
smaller market capitalizations and have problems with securities registration
and custody. In addition, because the securities settlement procedures are less
developed in these countries, a Fund may be
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required to deliver securities prior to receiving payment and also be unable to
complete transactions during market disruptions. As a result of these and other
risks, investments in these countries generally present a greater risk of loss
to a Fund.
Investment in foreign securities also involves higher costs than investment in
U.S. securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments.
Each of the Funds, other than the money market funds, may invest in foreign
currency denominated securities. A Fund which invests in foreign currency
denominated securities will also be subject to the risk of negative foreign
currency rate fluctuations. A change in the exchange rate between U.S. dollars
and foreign currency may reduce the value of an investment made in a security
denominated in that foreign currency. The International Value Fund and
International Growth Fund may hedge against foreign currency risk, and the
other Funds may do so on unsettled trades, but none of the Funds is required to
do so.
The International Value Fund also may invest in obligations of foreign
countries and political entities ("sovereign debt"), which may trade at a
substantial discount from face value. An issuer of sovereign debt may be
unwilling or unable to repay interests and principal as due. The Fund may
purchase Brady Bonds as part of its investment in sovereign debt of countries
that have restructured or are restructuring their sovereign debt pursuant to
the Brady Plan. The Brady Plan is an initiative announced by former U.S.
Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations
to restructure their external debt. Investments in Brady Bonds can be viewed as
speculative.
European Currency Unification - International Value Fund, Global Equity Fund,
International Growth Fund and each other Fund - other than the Ohio Tax-Exempt
Money Market Fund, U.S. Government Money Market Fund, U.S. Treasury Money
Market Fund and Missouri Tax-Exempt Bond Fund - to the extent it invests in
foreign securities.
Many European countries have adopted a single European currency, the euro. On
January 1, 1999, the euro became legal tender for all countries participating
in the Economic and Monetary Union ("EMU"). A new European Central Bank has
been created to manage the monetary policy of the new unified region. On the
same date, the exchange rates were irrevocably fixed between the EMU member
countries. National currencies will continue to circulate until they are
replaced by euro coins and bank notes by the middle of 2002.
This change is likely to significantly impact the European capital markets in
which a Fund invests and may result in a Fund facing additional risks in
pursuing its investment objective. These risks, which include, but are not
limited to, uncertainty as to proper tax treatment of the currency conversion,
volatility of currency exchange rates as a result of the conversion,
uncertainty as to capital market reaction, conversion costs that may affect
issuer profitability and creditworthiness, and lack of participation by some
European countries, may increase the volatility of a Fund's net asset value per
share.
Initial Public Offering (IPO) Risk - Equity Funds
The Equity Funds may participate in the IPO market. IPOs may have a magnified
performance impact on a Fund with a small asset base. IPOs may not be
consistently available to the Funds for investing, particularly as the Funds'
asset bases grow. The impact of IPOs on a Fund's performance likely will
decrease as the Fund's asset size increases, which could reduce the Fund's
total returns.
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Prepayment Risk - Money Market Funds, Short-Term Bond Fund, Intermediate Bond
Fund, U.S. Government Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM)
Fund, Strategic Income Fund, National Municipal Bond Fund, Balanced Funds,
Large Cap Growth Fund, International Growth Fund and Small Cap Core Equity Fund
This is the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage- or asset-backed security)
earlier than expected. This may happen when there is a decline in interest
rates. These events may make a Fund unable to recoup its initial investment and
may result in reduced yields.
Securities Lending - All Funds Other than the Ohio Tax-Exempt Money Market
Fund, Missouri Tax-Exempt Bond Fund and Relative Value Fund
To obtain interest income, the Fund may lend its securities to broker-dealers,
banks or institutional borrowers pursuant to agreements requiring that the
loans be continuously secured by collateral equal at all times in value to at
least the market value of the securities loaned. There is the risk that, when
lending portfolio securities, the securities may not be available to the Fund
on a timely basis. Therefore, the Fund may lose the opportunity to sell the
securities at a desirable price. Additionally, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition of the
securities may be delayed pending court action.
Small and MidCap Stock Risk - Global Equity Fund, MidCap Index Fund, MidCap
Core Equity Fund, Small Cap Index Fund, Small Cap Core Equity Fund, Science &
Technology Fund, and MicroCap Fund
Smaller and medium capitalization stocks involve greater risks than those
associated with larger, more established companies. Small and medium company
stocks may be subject to more abrupt or erratic price movements, for reasons
including that the stocks are traded in lower volume and that the issuers are
more sensitive to changing conditions and have less certain growth prospects.
Also, there are fewer market makers for these stocks and wider spreads between
quoted bid and asked prices in the over-the-counter market for these stocks.
Small and medium cap stocks tend to be less liquid, particularly during periods
of market disruption. There normally is less publicly available information
concerning these securities. Small and medium companies in which the Funds may
invest may have limited product lines, markets or financial resources, or may
be dependent on a small management group. In particular, investments in
unseasoned companies present risks considerably greater than investments in
more established companies.
Tax Risk - Tax-Exempt Money Market Fund, Ohio Tax-Exempt Money Market Fund,
U.S. Treasury Money Market Fund, Tax-Exempt Intermediate Bond Fund, Missouri
Tax-Exempt Bond Fund and National Municipal Bond Fund
These Funds may be more adversely impacted by changes in tax rates and policies
than the other Funds. Because interest income on municipal obligations is
normally not subject to regular federal income taxation, the attractiveness of
municipal obligations in relation to other investment alternatives is affected
by changes in federal income tax rates applicable to, or the continuing federal
income tax-exempt status of, such interest income. Any proposed or actual
changes in such rates or exempt status, therefore, can significantly affect the
demand for and supply, liquidity and marketability of municipal obligations,
which could in turn affect a Fund's ability to acquire and dispose of municipal
obligations at desirable yield and price levels.
Investment in tax-exempt securities poses additional risks. In many cases, the
Internal Revenue Service has not ruled on whether the interest received on a
tax-exempt obligation is tax-exempt, and accordingly, purchases of these
securities are based on the opinion of bond counsel to the issuers at the time
of issuance. The Fund and the Adviser rely on these opinions and will not
review the basis for them.
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Temporary Investment Risk - All Funds other than the Index Funds
Each of the Funds may, for temporary defensive purposes, invest a percentage of
its total assets, without limitation, in cash or various short-term instruments
(except for the MicroCap Fund, which may invest up to 30% of its assets in
money market instruments for temporary defensive purposes). This may occur for
example, when a Fund is attempting to respond to adverse market, economic,
political or other conditions. In particular, the U.S. Treasury Money Market
Fund may temporarily hold cash; the Tax-Exempt Money Market Fund, Ohio Tax-
Exempt Money Market Fund, Tax-Exempt Intermediate Bond Fund, and the Missouri
Tax-Exempt Bond Fund may, from time to time, hold uninvested cash reserves or
invest in short-term taxable money market obligations (taxable obligations
purchased by each Fund normally will not exceed 20% of total assets at the time
of purchase); and the International Value Fund and International Growth Fund
may invest in money market securities denominated in U.S. or foreign currency.
When a Fund's assets are invested in these instruments, the Fund may not be
achieving its investment objective.
Additional Risks which Apply to Particular Types of Securities
[GRAPHIC]
Government Obligations - Money Market Funds other than the Tax-Exempt Money
Market Fund and Ohio Tax-Exempt Money Market Fund, Short-Term Bond Fund,
Intermediate Bond Fund, U.S. Government Securities Fund, Aggregate Bond Fund,
Bond IMMDEX(TM) Fund, Strategic Income Fund and Balanced Funds
In addition to U.S. Treasury obligations, the Funds may invest in other
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities. No assurance can be given that the U.S. government will
provide financial support to U.S. government-sponsored agencies or
instrumentalities when it is not obligated to do so by law.
Mortgage-Backed and Asset-Backed Securities - Short-Term Bond Fund,
Intermediate Bond Fund, U.S. Government Securities Fund, Aggregate Bond Fund,
Bond IMMDEX(TM) Fund, Strategic Income Fund, Balanced Funds and Large Cap
Growth Fund
Each of these Funds may purchase residential and commercial mortgage-backed as
well as other asset-backed securities (i.e., securities backed by credit card
receivables, automobile loans or other assets). In addition to credit and
market risk, mortgage- and asset-backed securities involve prepayment risk
because the underlying assets (loans) may be prepaid at any time. The value of
these securities may also change because of actual or perceived changes in the
creditworthiness of the originator, the servicing agent, the financial
institution providing the credit support, or the counterparty. 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. The relative payment rights of
certain types of mortgage-backed securities may make them subject to greater
volatility and interest rate risk than other types of mortgage-backed
securities. In addition, non-mortgage asset-backed securities involve certain
risks not presented by mortgage-backed securities. Primarily, these securities
do not have the benefit of the same security interest in the underlying
collateral. Credit card receivables are generally unsecured, and the debtors
are entitled to the protection of a number of state and federal consumer credit
laws. Automobile receivables are subject to the risk that the trustee for the
holders of the automobile receivables may not have an effective security
interest in all of the obligations backing the receivables. In times of
financial stress, the secondary market for asset-backed securities 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.
Municipal Securities - Ohio Tax-Exempt Money Market Fund, Missouri Tax-Exempt
Bond Fund and National Municipal Bond Fund
Each of these Funds may purchase municipal securities including general
obligation securities, revenue securities and private activity bonds. The
ability of a Fund to achieve its investment objective is dependent upon the
ability of issuers of municipal securities to meet their continuing obligations
for the payment of principal and interest. Although the National Municipal Bond
Fund may invest 25% or more of its net assets in (i) municipal securities whose
issuers are in the same state, (ii) municipal securities the interest on
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which is paid solely from revenues of similar projects, and (iii) private
activity bonds, the Fund does not presently intend to do so unless in the
opinion of the Adviser the investment is warranted. To the extent that a Fund's
assets are invested in municipal securities the issuers of which are in the
same state or that are payable from the revenues of similar projects or in
private activity bonds, the Fund will be subject to the peculiar risks
presented by the laws and economic conditions relating to such projects and
bonds to a greater extent than it would be if its assets were not so invested.
Borrowings, Reverse Repurchase Agreements - All Funds
Each Fund may borrow money to the extent allowed (as described in the
Additional Statement) to meet shareholder redemptions from banks and each Fund
other than the National Municipal Bond Fund may enter into reverse repurchase
agreements. These strategies involve leveraging. If the securities held by a
Fund decline in value while these transactions are outstanding, the net asset
value of the Fund's outstanding shares will decline in value by proportionately
more than the decline in value of the securities. In addition, reverse
repurchase agreements involve the risks that the interest income earned by 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 will decline below the price the Fund is obligated to pay to repurchase
the securities, and that the securities may not be returned to the Fund.
Short Sales - MicroCap Fund
Short selling is the selling of securities which have been borrowed on the
expectation that the market price will drop. These transactions may result in
gains if a security's price declines, but may result in losses if a security's
price does not decline in price.
Options - Short-Term Bond Fund, Intermediate Bond Fund, U.S. Government
Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM) Fund, Strategic Income
Fund, Balanced Funds and Equity Funds
An option is a type of derivative instrument that gives the holder the right
(but not the obligation) to buy (a "call") or sell (a "put") an asset in the
future at an agreed upon price prior to the expiration date of the option.
Options can be used to manage exposure to certain markets, enhance income or
hedge against a decline in value of portfolio securities. Options may relate to
particular securities or various stock or bond indices and may or may not be
listed on a national securities exchange and issued by the Options Clearing
Corporation. Purchasing options is a specialized investment technique which
entails a substantial risk of a complete loss of the amount paid as premiums to
the writer of the option.
The value of options can be highly volatile, and their use can result in loss
if the Adviser or Sub-Adviser is incorrect in its expectation of price
fluctuations. The successful use of options for hedging purposes also depends
in part on the ability of the Adviser or Sub-Adviser to manage future price
fluctuations and the degree of correlation between the options and securities
markets.
The Funds, other than the U.S. Government Securities Fund, Aggregate Bond Fund,
International Growth Fund and Small Cap Core Equity Fund may purchase put and
call options in an amount not to exceed 5% of their respective net assets. The
U.S. Government Securities Fund, Aggregate Bond Fund, International Growth
Fund, and the Small Cap Core Equity Fund may purchase put and call options in
an amount not to exceed 10% of each Fund's net assets. The International Value
Fund may purchase put and call options without limit.
The Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund,
Strategic Income Fund and International Value 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 a liquid secondary trading
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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.
In addition, each Fund may write call options on securities and on various
stock or bond indices. Each Fund may write a call option only if the option is
covered. A Fund may cover a call option by owning the security underlying the
option or through other means which would allow for immediate satisfaction of
its obligation. Such options will be listed on a national securities exchange.
The aggregate value of the Fund's assets subject to options written by the
Short-Term Bond Fund, Intermediate Bond Fund, U.S. Government Securities Fund,
Aggregate Bond Fund, Bond IMMDEX(TM) Fund, Growth & Income Fund, Equity Index
Fund, International Growth Fund, MidCap Index Fund, MidCap Core Equity Fund,
Small Cap Core Equity Fund and MicroCap Fund will not exceed 5%, 5%, 5%, 25%,
25%, 25%, 5%, 25%, 5%, 5%, 5% and 5%, respectively, of the value of its net
assets during the current year. The International Value Fund and International
Growth 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. During the current year the aggregate value of the International Value
Fund's assets subject to options written by the Fund will not exceed 5% of the
value of its net assets. In order to close out an option position, a Fund will
be required to enter into a "closing purchase transaction" (the purchase of a
call option on a security or an index with the same exercise price and
expiration date as the call option which it previously wrote on the same
security or index).
The Balanced Funds, International Value Fund, International Growth Fund, MidCap
Core Equity Fund, Small Cap Core Equity Fund and MicroCap Fund may invest in
warrants. Warrants are options to purchase equity securities at a specific
price valid for a specific period of time. The purchase of warrants involves
the risk that the Fund could lose the purchase value of the 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.
The International Value Fund may also write (i.e., sell) covered put options on
securities and various securities indices. The writer of a put incurs an
obligation to buy the security underlying the option from the put's purchaser
at the exercise price at any time on or before the termination date, at the
purchaser's election (certain options the Fund writes will be exercisable by
the purchaser only on a specific date). Generally, a put is "covered" if the
Fund maintains cash, U.S. government securities or other liquid high grade debt
obligations equal to the exercise price of the option or if the Fund holds a
put on the same underlying security with a similar or higher exercise price. By
writing a covered put option on a security, the Fund receives a premium for
writing the option; however the Fund assumes the risk that the value of the
security will decline before the exercise date, in which event, the Fund may
incur a loss in excess of the premium received when the put is exercised.
Risks associated with the use of options on securities include (i) imperfect
correlation between the change in market value of the securities the Fund holds
and the prices of options relating to the securities purchased or sold by the
Fund; and (ii) the possible lack of a liquid secondary market for an option.
The Additional Statement includes additional information relating to option
trading practices and related risks.
Futures Contracts and Related Options - Short-Term Bond Fund, Intermediate Bond
Fund, U.S. Government Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM)
Fund, Strategic Income Fund, Balanced Funds and Equity Funds
A futures contract is a type of derivative instrument that obligates the holder
to buy or sell an asset in the future at an agreed upon price. For example, a
futures contract may obligate a Fund, at maturity, to take or make delivery of
certain domestic or foreign securities, the cash value of a securities index or
a stated
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quantity of a foreign currency. The International Growth Fund may invest in
futures but may not invest in options. When a Fund purchases an option on a
futures contract, it has the right to assume a position as a purchaser or
seller of a futures contract at a specified exercise price during the option
period. When a Fund sells an option on a futures contract it becomes obligated
to purchase or sell a futures contract if the option is exercised.
Futures contracts and options present the following risks: imperfect
correlation between the change in market value of a Fund's securities and the
price of futures contracts and options; the possible inability to close a
futures contract when desired; losses due to unanticipated market movements
which are potentially unlimited; and the possible inability of the investment
management team to correctly predict the direction of securities prices,
interest rates, currency exchange rates and other economic factors. The Funds
(other than the U.S. Government Securities Fund and Aggregate Bond Fund) may
buy and sell futures contracts and related options on foreign exchanges or
boards of trade (which do not offer the same protections as U.S. exchanges).
Each Fund's commodities transactions must constitute bona fide hedging or other
permissible transactions pursuant to regulations promulgated by the Commodities
and Futures Trading Commission ("CFTC"). In addition, a Fund may not engage in
such transactions if the sum of the amount of initial margin deposits and
premiums paid for unexpired commodity options, other than for bona fide hedging
transactions, would exceed 5% of the liquidation value of its assets, after
taking into account unrealized profits and unrealized losses on such contracts
it has entered into; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the percentage limitation. Pursuant to SEC requirements, a Fund
may be required to segregate cash or high quality money market instruments in
connection with its commodities transactions in an amount generally equal to
the value of the underlying commodity. Firstar Funds (the "Company") intends to
comply with the regulations of the CFTC exempting the Fund from registration as
a "commodity pool operator."
The Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund,
Strategic Income Fund, Growth & Income Fund, International Growth Fund and
Small Cap Core Equity 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, International Value
Fund, MidCap Index Fund and Small Cap Index Fund intend to limit their
transactions in futures contracts so that not more than 10%, 25%, 10% and 10%
of each Fund's respective net assets are at risk. For a more detailed
description of futures contracts and futures options, including a discussion of
the limitations imposed by federal tax law, see Appendix B to the Additional
Statement.
Guaranteed Investment Contracts and Zero Coupon Securities - Short-Term Bond
Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund and Strategic Income Fund
The Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund and
Strategic Income Fund may purchase guaranteed investment contracts ("GICs")
issued by highly rated U.S. insurance companies, and zero coupon securities.
GICs are subject to liquidity risk, which is the risk that certain securities
may be difficult or impossible to sell at a desirable time and price.
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Investing With Firstar Funds
This section describes for you the procedures for opening an account and how to
buy, sell or exchange Fund shares.
Share Classes Available
The Firstar Funds offer two classes of Shares in the Money Market Funds, Retail
A Shares and Institutional Shares (except that the Institutional Money Market
Fund and Money Market Fund each offer only one class of shares), and four
classes of Shares in the Non-Money Market Funds; Retail A, Retail B, Y and
Institutional (except that the Global Equity Fund offers only Y and
Institutional Shares). This prospectus offers only Institutional Shares of the
Money Market Funds and Non-Money Market Funds. Other share classes are subject
to different fees and expenses (which affect performance), and are entitled to
different services. Information regarding those other share classes may be
obtained by calling the number on the back cover of this prospectus.
Institutional Shares
.No sales charge
.Available for:
.All shareholders who were exchanged into Institutional Shares during or
about November or December 2000 in connection with the Firstar
Reorganization, and who have continuously maintained an account with the
Company;
.Certain trust, agency or custodial accounts opened through Firstar Bank,
N.A. (check with Firstar Bank, N.A. to see if you qualify for Institutional
Shares);
.Employer-sponsored qualified retirement plans other than those serviced by
certain external organizations who have service agreements with Firstar or
its affiliates, and other than plans administered by Firstar with assets of
less than $1 million at the time Firstar begins plan administration (but
including plans administered by Firstar which owned Institutional shares
prior to June 18, 1999). Plans administered by Firstar with assets of less
than $1 million at the time Firstar begins plan administration will become
eligible for Institutional Shares when such plans grow to $1 million or
greater as further described in the Additional Statement;
.All clients of Firstar Investment Research & Management Company, LLC
("FIRMCO"); and
.Those purchasing through certain broker-dealers who have agreed to provide
certain services with respect to shares of the Funds, including TD
Waterhouse. Check with your broker-dealer to see if you qualify for
Institutional shares.
A securities dealer, broker, financial institution or other industry
professional ("Shareholder Organization") may charge transaction or other fees
for providing administrative or other services in connection with investments
in Fund shares.
Shareholder Organizations
The Funds have adopted a service plan for the Institutional Shares of the Money
Market Funds (the "Plan"), under which the Funds may pay service fees for
shareholder services to Institutional shareholders. Under the Plan, shareholder
organizations may be entitled to receive fees from a Fund at an annual rate of
up to 0.25% of the average daily net asset value of the shares covered by their
agreement for shareholder support services.
Shareholder support services may include:
.assisting investors in processing purchase, exchange and redemption requests
.processing dividend and distribution payments from the Fund
.providing information periodically to customers showing their positions in
Fund shares
.providing sub-accounting
.forwarding sales literature and advertising
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Payments to shareholder organizations, including affiliates of the Adviser,
under the Plan, are not tied directly to their own out-of-pocket expenses and
therefore may be used as they elect (for example, to defray their overhead
expenses), and may exceed their direct and indirect costs.
Under the Plan, a Fund may enter into agreements with shareholder
organizations, including affiliates of the Adviser (such as Firstar Investment
Services, Inc.). The 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. Investors
should read this Prospectus in light of such fee schedules and under the terms
of their shareholder organizations' agreements with Firstar. 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.
Conflict-of-interest restrictions may apply to the receipt of compensation paid
by Firstar to a shareholder organization in connection with the investment of
fiduciary funds in Fund shares. Institutions, including banks regulated by the
Comptroller of the Currency and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult legal counsel before entering into
agreements with Firstar.
Purchasing Shares
The MicroCap Fund currently is closed to new investors. However, this Fund will
continue to accept additional share purchases from existing shareholders in
existing accounts or new accounts of which an existing shareholder is a full or
partial owner. The Fund will also accept purchases through reinvestment of
dividend and capital gain distributions. The Fund may open to new investors in
the future at the discretion of the Adviser based on various factors, including
assets under management and current investment opportunities.
Shares of the Funds are offered and sold on a continuous basis by the
distributor for the Funds, Quasar Distributors, LLC (the "Distributor"), an
affiliate of the Adviser. The Distributor is a registered broker-dealer with
offices at 615 East Michigan Street, Milwaukee, Wisconsin, 53202.
Minimum Investments
There is no minimum initial or subsequent investment for Institutional Shares
of the Funds other than the Institutional Money Market Fund where the minimum
initial investment is $1,000,000 by an individual or combination of accounts.
The maximum investment for MicroCap Fund is $5,000,000.
Buying Shares
Purchase requests for a Money Market Fund received in proper form prior to the
times listed below on a business day for the Funds will generally be processed
on the same day.
.Ohio Tax-Exempt Money Market Fund - 9:00 a.m. Central time
.Tax-Exempt Money Market Fund and U.S. Government Money Market Fund - 11:30
a.m. Central time
.U.S. Treasury Money Market Fund and Institutional Money Market Fund - 1:00
p.m. Central time
In order for a purchase request for a Money Market Fund to be processed on the
same day at the times listed above, payment must be received in immediately
available funds wired to the transfer agent by the close of business. All
checks received will be processed at that day's closing price.
Purchase requests for the Money Market Funds accompanied by a check or wire
payment which are received at or after the times listed above, and purchase
requests accompanied by a check or wire payment for any Non-Money Market Fund,
will be executed the same day, at that day's closing price provided that
payment is received by the close of regular trading hours. Orders received
after 3:00 p.m. Central time and orders for which payment is not received by
the close of regular trading hours on the New York Stock Exchange (normally
3:00 p.m. Central time) will be executed on the next business day after receipt
of both order and payment in proper form.
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Through a Shareholder Organization
[GRAPHIC]
Opening an Account
Contact your Shareholder Organization
By Mail
[GRAPHIC]
Complete an application and mail it along with a check payable to Firstar
Funds, P.O. Box 3011 Milwaukee, WI 53201-3011:
For overnight delivery mail to:
615 E. Michigan St., Milwaukee, WI 53202.
By Wire
[GRAPHIC]
Call 1-800-677-FUND prior to sending the wire in order to obtain a confirmation
number and to ensure prompt and accurate handling of funds. Ask your bank to
transmit immediately available funds by wire in the amount of your purchase to:
Firstar Bank, N.A.
ABA # 0420-00013
Firstar Mutual Funds Services, LLC
Account # 112-952-137
for further credit to [name of Fund]
[name /title on the account].
The Fund and its transfer agent are not responsible for the consequences of
delays resulting from the banking or Federal Reserve Wire system, or from
incomplete wiring instructions.
Internet
www.firstarfunds.com
[GRAPHIC]
Not available
By Telephone Exchange
[GRAPHIC]
Call 1-800-677-FUND to exchange from another Firstar Fund account with the same
registration including name, address and taxpayer ID number.
Through a Shareholder Organization
Adding to an Account
Contact your Shareholder Organization
By Mail
Make your check payable to Firstar Funds. Please include your sixteen-digit
account number on your check and mail it to the address at the left.
By Wire
Call 1-800-677-FUND prior to sending the wire in order to obtain a confirmation
number and to ensure prompt and accurate handling of funds. Ask your bank to
transmit immediately available funds by wire as described at the left. Please
include your sixteen-digit account number. The Fund and its transfer agent are
not responsible for the consequences of delays resulting from the banking or
Federal Reserve Wire system, from incomplete wiring instructions.
Internet
www.firstarfunds.com
Use Firstar Funds Direct to exchange from another Firstar Fund account with the
same registration including name, address and taxpayer ID number. Purchase
additional shares using an electronic funds transfer from your banking
institution for payment. Call 1-800-677-FUND to authorize this service.
By Telephone Exchange
Call 1-800-677-FUND to exchange from another Firstar Fund account with the same
registration including name, address and taxpayer ID number.
Please Note: All checks must be drawn on a bank
located within the United States and must be
payable in U.S. dollars to Firstar Funds. A $25
fee will be imposed by the Funds' transfer agent
if any check used for investment in an account
does not clear, and the investor involved will be
responsible for any loss incurred by a Fund. Prior
to the transfer agent receiving a completed
application, investors may make an initial
investment. However, redemptions will not be paid
until the transfer agent has received the
completed application.
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Additional Information on Buying Shares
.The Funds will not accept payment in cash or third party checks for the
purchase of shares.
.Federal regulations require that each investor provide a Social Security
number or other certified taxpayer identification number upon opening or
reopening an account. The Funds reserve the right to reject applications
without such a number or an indication that a number has been applied for. If
a number has been applied for, the number must be provided and certified
within sixty days of the date of the application. Any accounts opened without
a proper number will be subject to backup withholding at a rate of 31% on all
liquidations and dividend and capital gain distributions.
.Payment for shares of a Fund in the amount of $1,000,000 or more may, at the
discretion of the Adviser, be made in the form of securities that are
permissible investments for the respective Fund.
The Funds may authorize one or more brokers and other shareholder organizations
to accept on their behalf purchase, redemption and exchange orders, and may
authorize such shareholder organizations to designate other intermediaries to
accept purchase, redemption and exchange orders on the Funds' behalf. In these
cases, a Fund will be deemed to have received an order when an authorized
shareholder organization or intermediary accepts the order, and customer orders
will be priced at the Fund's net asset value next computed after they are
accepted by a shareholder organization or intermediary. Shareholder
organizations and intermediaries will be responsible for transmitting accepted
orders to the Funds within the period agreed upon by them. Shareholders should
contact their shareholder organization or intermediaries to learn whether they
are authorized to accept orders for Funds.
It is the responsibility of shareholder organizations to transmit orders and
payment for the purchase of shares by their customers to the transfer agent on
a timely basis and to provide account statements in accordance with the
procedures previously stated.
For Owners of Institutional Shares
All share purchases are effected pursuant to a customer's account at Firstar
Bank, N.A. Trust Department ("Firstar Trust") or at another chosen institution
or broker-dealer pursuant to procedures established in connection with the
requirements of the account. Confirmations of share purchases and redemptions
will be sent to Firstar Trust or the other shareholder organizations involved.
Firstar Trust and the other shareholder organizations or their nominees will
normally be the holders of record of Fund shares, and will reflect their
customers' beneficial ownership of shares in the account statements provided by
them to their customers. The exercise of voting rights and the delivery to
customers of shareholder communications from the Fund will be governed by the
customers' account agreements with Firstar Trust and the other shareholder
organizations. Investors wishing to purchase shares of the Funds should contact
their account representatives.
In the case of participants in certain employee benefit plans investing in
certain Funds, purchase and redemption orders will be processed on a particular
day based on whether a service organization acting on their behalf received the
order by the close of regular trading on that day.
The Funds may authorize one or more brokers and other shareholder organizations
to accept on their behalf purchase, redemption and exchange orders, and may
authorize such shareholder organizations to designate other intermediaries to
accept purchase, redemption and exchange orders on the Funds' behalf. In these
cases, a Fund will be deemed to have received an order when an authorized
shareholder organization or intermediary accepts the order, and customer orders
will be priced at the Fund's net asset value next computed after they are
accepted by a shareholder organization or intermediary. Shareholder
organizations and intermediaries will be responsible for transmitting accepted
orders to the Funds within the period agreed upon by them. Shareholders should
contact their shareholder organization or intermediaries to learn whether they
are authorized to accept orders for Funds.
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It is the responsibility of shareholder organizations to transmit orders and
payment for the purchase of shares by their customers to the transfer agent on
a timely basis and to provide account statements in accordance with the
procedures previously stated.
Redeeming Shares
Selling Shares
Redemption requests for a Money Market Fund received by the transfer agent by
phone on a business day for the Funds prior to the times listed below generally
will be processed at those times.
.Ohio Tax-Exempt Money Market Fund - 9:00 a.m. Central time
.Tax-Exempt Money Market Fund and U.S. Government Money Market Fund - 11:30
a.m. Central time
.U.S. Treasury Money Market Fund and Institutional Money Market Fund - 1:00
p.m. Central time
Redemption requests for the Money Market Funds received at or after the times
listed above on a business day for the Funds will be executed the same day, at
that day's closing price. Orders received after 3:00 p.m. Central time will be
executed on the next business day.
Redemption requests for Non-Money Market Funds received by the transfer agent
before 3:00 p.m. Central time on a business day for the Funds will be executed
the same day, at that day's closing price. Orders received after 3:00 p.m.
Central time will be executed on the next business day.
Through a Shareholder Organization
[GRAPHIC]
Contact your Shareholder Organization
By Phone
[GRAPHIC]
Call 1-800-677-FUND with your account name, sixteen digit account number and
amount of redemption (minimum $500). Redemption proceeds will only be sent to a
shareholder's address or bank account of a commercial bank located within the
United States as shown on the transfer agent's records. (Available only if
telephone redemptions have been authorized on the account application and if
there has been no change of address by telephone within the preceding 15 days).
By Mail
[GRAPHIC]
Mail your instructions to the Firstar Funds, P.O. Box 3011, Milwaukee, WI
53201-3011 (via overnight delivery to 615 E. Michigan Street, Milwaukee, WI
53202). Include the number of shares or the amount to be redeemed, your
sixteen-digit account number and Social Security number or other taxpayer
identification number. Your instructions must be signed by all persons required
to sign for transactions exactly as their names appear on the account. If the
redemption amount exceeds $50,000, or if the proceeds are to be sent elsewhere
than the address of record, or the address of record has been changed by
telephone within the preceding 15 days, each signature must be guaranteed in
writing by either a commercial bank that is a member of the FDIC, a trust
company, a credit union, a savings association, a member firm of a national
securities exchange or other eligible guarantor institution.
Internet
www.firstarfunds.com
[GRAPHIC]
Use Firstar Funds Direct to redeem up to $25,000. Call 1-800-677-FUND to
authorize this service.
Guarantees must be signed by an eligible guarantor institution and "Signature
Guaranteed" must appear with the signature.
The Funds may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees and guardians. A redemption
request will not be deemed to be properly received until the transfer agent
receives all required documents in proper form as specified above. Purchases of
additional Retail A Shares concurrently with withdrawals could be
disadvantageous because of the sales charge involved in the additional
purchases.
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Additional Transaction Information
Telephone Requests
In order to arrange for telephone redemptions after you have opened your
account or to change the bank or account designated to receive redemption
proceeds, send a written request to Firstar Mutual Fund Services, LLC ("FMFS")
or contact your shareholder organization. Each shareholder of the account must
sign the request. The Funds may request further documentation from
corporations, executors, administrators, trustees and guardians.
The Funds reserve the right to refuse a telephone redemption if they believe it
is advisable to do so. Procedures for redeeming shares by telephone may be
modified or terminated by the Funds at any time upon notice to shareholders.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If a shareholder is unable to contact the
transfer agent by telephone, shares may also be redeemed by delivering the
redemption request to the transfer agent.
In an effort to prevent unauthorized or fraudulent purchase and redemption
requests by telephone, Firstar employs reasonable procedures to confirm that
such instructions are genuine. Among the procedures used to determine
authenticity, investors electing to transact by telephone will be required to
provide their account number (unless opening a new account). All telephone
transactions will be recorded and, except for transactions in Money Market
Funds, confirmed in writing. Statements of accounts shall be conclusive if not
objected to in writing within 10 days after transmitted by mail. Firstar Funds
may implement other procedures from time to time. If reasonable procedures are
not implemented, Firstar Funds may be liable for any loss due to unauthorized
or fraudulent transactions. In all other cases, the shareholder is liable for
any loss for unauthorized transactions.
Check Redemption (U.S. Treasury Money Market Fund Only)
You may request on the purchase application or by written request that a Fund
provides Redemption Checks ("Checks"). Checks may be made payable in the amount
of $250 or more. Any Checks drawn on a joint account will only require one
signature. There is no charge for the use of the Checks; however, the transfer
agent will impose a $25 charge for stopping payment of a Check upon your
request, or if the transfer agent cannot honor a Check due to insufficient
funds or other valid reason. Because dividends on each Fund accrue daily,
Checks may not be used to close an account, as a small balance is likely to
result.
Checks are not available for any other Firstar Fund, IRAs or other retirement
plans for which Firstar acts as custodian.
Certificates
Certificates are only issued upon shareholder request. If certificates have
been issued, the transfer agent must receive the certificates, properly
endorsed or accompanied by a properly executed stock power and accompanied by
signature guarantees, prior to a redemption request.
Additional Redemption Information
The Funds will make payment for redeemed shares typically within one or two
business days, but no later than the seventh day after receipt by the transfer
agent of a request in proper form as specified above, except as provided by SEC
rules. However, if any portion of the shares to be redeemed represents an
investment made by check, the Funds will delay the payment of the redemption
proceeds until the transfer agent is reasonably satisfied that the check has
been collected, which may take up to twelve days from the purchase date. An
investor must have filed a purchase application before any redemption requests
can be paid.
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Exchanging Shares
Generally, any share class of a Firstar Fund is exchangeable for the same share
class of another Firstar Fund, provided you are eligible to purchase that share
class or Fund at the time of the exchange. In addition, Y Shares of a Non-Money
Market Fund are exchangeable for Institutional Shares of a Money Market Fund.
Telephone exchange privileges automatically apply to each shareholder of record
unless the transfer agent receives written instructions canceling the
privilege.
Firstar reserves the right to terminate the exchange privilege of any party who
requests more than four exchanges within a calendar year. Firstar may do so
with prior notice based on a consideration of both the number of exchanges and
the time period over which those exchange requests have been made, together
with the level of expense to the Funds or other adverse effects which may
result from the additional exchange requests.
For federal income tax purposes, an exchange of shares is a taxable event and,
accordingly, an investor may realize a capital gain or loss. Before making an
exchange request, an investor should consult a tax or other financial adviser
to determine the tax consequences of a particular exchange. No exchange fee is
currently imposed by Firstar on exchanges. However, Firstar reserves the right
to impose a charge in the future. In addition, shareholder organizations may
charge a fee for providing administrative or other services in connection with
exchanges. The Fund reserves the right to reject any exchange request with
prior notice to a shareholder and the exchange privilege may be modified or
terminated at any time. At least sixty days' notice will be given to
shareholders of any material modification or termination except where notice is
not required under SEC regulations. Also keep in mind:
.Exchanges are available only in states where exchanges may be legally made.
.The minimum amount which may be exchanged is $1,000.
.If any portion of the shares to be exchanged represents an investment made by
check, a Fund will delay the acquisition of new shares in an exchange until
the transfer agent is reasonably satisfied that the check has been collected,
which may take up to twelve days from the purchase date.
.It may be difficult to make telephone exchanges in times of drastic economic
or market changes. If this happens, you may initiate transactions in your Fund
accounts by mail or as otherwise described in this Prospectus.
Additional Shareholder Services
[GRAPHIC]
Shareholder Reports
Shareholders will be provided with a report showing portfolio investments and
other information at least semiannually; and after the close of the Fund's
fiscal year with an annual report containing audited financial statements.
Account statements will be mailed to Money Market Shareholders monthly,
summarizing all transactions. For all other funds, account statements will be
mailed after each purchase, reinvestment of dividends and redemption.
Statements of accounts shall be conclusive if not objected to in writing within
10 days after transmitted by mail. Generally, a Fund does not send statements
for funds held in brokerage, retirement or other similar accounts.
[GRAPHIC]
Firstar Funds Website (www.firstarfunds.com)
The site offers educational information and interactive financial planning
tools as well as product-specific information.
Generally, Shareholders can request purchases, exchanges and redemptions of
Fund shares online via the Internet after an account is opened. Redemption
requests of up to $25,000 will be accepted through the Internet. Payment for
shares purchased online must be made by electronic funds transfer from your
banking institution. To authorize this service, call FMFS at 1-800-677-FUND.
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Firstar Funds and their agents will not be responsible for any losses resulting
from unauthorized on-line transactions when procedures are followed which are
designed to confirm that the on-line transaction request is genuine. Statements
of accounts shall be conclusive if not objected to in writing within 10 days
after transmitted by mail. During periods of significant economic or market
change, it may be difficult to reach the Funds online. If this happens, you may
initiate transactions in your Fund accounts by mail or as otherwise described
in the prospectus.
Automated Teleresponse Service
Shareholders using a touch-tone(R) telephone can access information on the
Funds twenty-four hours a day, seven days a week. When calling FMFS at 1-800-
677-FUND, shareholders may choose to use the automated information feature or,
during regular business hours (8:00 a.m. to 7:00 p.m. Central time, Monday
through Friday), speak with a Firstar Funds representative.
Retirement Plans
The Fund offers individual retirement accounts including Traditional, Roth,
SIMPLE and SEP IRAs. For details concerning Retirement Accounts (including
service fees), please call FMFS at 1-800-677-FUND.
--------------------------------------------------------------------------------
Additional Information
Dividends, Capital Gains Distributions And Taxes
Reinvested dividends and distributions receive the same tax treatment as those
paid in cash.
Dividends and Capital Gains Distributions Dividends from net investment income,
including net realized gains and losses, if any, earned on the investments held
by the Money Market Funds are declared on each business day on the shares that
are outstanding immediately after 11:30 a.m. Central time (9:00 a.m. Central
time for the Ohio Tax-Exempt Money Market Fund and 1:00 p.m. Central time for
the Institutional Money Market Fund and U.S. Treasury Money Market Fund) on the
declaration date.
Dividends from net investment income of the Bond Funds are declared and paid
monthly. Dividends from net investment income of the Balanced Income, Balanced
Growth, Growth & Income, Equity Income, Relative Value, Equity Index, MidCap
Index and Small Cap Index Funds are declared and paid quarterly. Dividends from
net investment income of the Large Cap Core Equity, Large Cap Growth,
International Value, Global Equity, International Growth, MidCap Core Equity,
Small Cap Core Equity, Science & Technology and MicroCap Funds are declared and
paid annually. Any capital gains are distributed annually. A shareholder's
dividends and capital gains distributions will be reinvested automatically in
additional shares unless the Fund is notified that the shareholder elects to
receive distributions in cash.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Federal Taxes
Each Fund contemplates declaring as dividends each year all, or substantially
all, of its taxable income, including its net capital gain (the excess of long-
term capital gain over short-term capital loss). Distributions attributable to
the net capital gain of a Fund will be taxable to you as long-term capital
gain, regardless of how long you have held your Shares. Other Fund
distributions will generally be taxable as ordinary income. You will be subject
to income tax on these distributions regardless of whether they are paid in
cash or reinvested in additional Shares. You will be notified annually of the
tax status of distributions to you.
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In the case of any Fund other than a Money Market Fund, you should note that if
you purchase Shares just prior to a capital gain distribution, the purchase
price will reflect the amount of the upcoming distribution, but you will be
taxable on the entire amount of the distribution received, even though, as an
economic matter, the distribution simply constitutes a return of capital. This
is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the Shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held Shares.) Any loss
realized on Shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends that were received on
the Shares. Additionally, any loss realized on a sale or redemption of shares
of a Fund may be disallowed under "wash sale" rules to the extent the shares
disposed of are replaced with other shares of a Fund within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of,
such as pursuant to a dividend reinvestment in shares of a Fund. If disallowed,
the loss will be reflected in an adjustment to the basis of shares acquired.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, Shares held in an IRA (or other tax-
qualified plan) will not be currently taxable.
A Fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the Fund receives from U.S. domestic
corporations may be eligible, in the hands of the corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations.
The International Value Fund and International Growth Fund. It is expected that
the International Value Fund and International Growth Fund will be subject to
foreign withholding taxes with respect to dividends or interest received from
sources in foreign countries. The International Value Fund and International
Growth Fund may make an election to treat a proportionate amount of such taxes
as constituting a distribution to each Shareholder, which would allow each
Shareholder either: (1) to credit such proportionate amount of taxes against
U.S. federal income tax liability; or (2) to take such amount as an itemized
deduction.
The Tax-Exempt Money Market Fund, Ohio Tax-Exempt Money Market Fund, Tax-Exempt
Intermediate Bond Fund, Missouri Tax-Exempt Bond Fund and National Municipal
Bond Fund. It is expected that the Tax-Exempt Money Market Fund, Ohio Tax-
Exempt Money Market Fund, Tax-Exempt Intermediate Bond Fund, Missouri Tax-
Exempt Bond Fund and National Municipal Bond Fund will distribute dividends
derived from interest earned on Exempt Securities, and these "exempt interest
dividends" will be exempt income for Shareholders for federal income tax
purposes. However, distributions, if any, derived from net capital gains will
generally be taxable to you as capital gains. Particularly in the case of the
Missouri Tax-Exempt Bond Fund, some dividends will be taxable, such as
dividends that are attributable to gains on bonds that are acquired at a
"market discount," and distributions of short and long-term capital gains. It
is expected that the Tax-Exempt Intermediate Bond Fund may pay such capital
gains distributions from time to time. Dividends, if any, derived from taxable
interest income will be taxable to you as ordinary income.
Interest on indebtedness incurred by a Shareholder to purchase or carry shares
of the Tax-Exempt Funds generally will not be deductible for federal income tax
purposes.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Exempt Funds may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest
dividends will also be considered along with other adjusted gross income in
determining
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whether any Social Security or railroad retirement payments received by you are
subject to federal income taxes.
If you receive an exempt-interest dividend with respect to any Share and the
Share is held by you for six months or less, any loss on the sale or exchange
of the Share will be disallowed to the extent of such dividend amount.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different United States federal income tax
treatment. You should consult your tax adviser for further information
regarding federal, state, local and/or foreign tax consequences relevant to
your specific situation.
State and Local Taxes
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply, however, to the portions of each
Fund's distributions, if any, that are attributable to interest on Federal
securities or interest on securities of the particular state or localities
within the state. Shareholders should consult their tax advisers regarding the
tax status of distributions in their state and locality.
Management of the Funds
Advisory Services
FIRMCO, a Wisconsin Limited Liability Company and subsidiary of Firstar
Corporation, a bank holding company, serves as investment adviser to each Fund.
FIRMCO, with principal offices at Firstar Center, 777 East Wisconsin Avenue,
8th Floor, Milwaukee, Wisconsin 53202, has provided investment advisory
services since 1986. FIRMCO currently has $32.3 billion in assets under
management.
Firstar Corporation has agreed to permit the Company to use the name "Firstar
Funds" and expansions thereof on a non-exclusive and royalty-free basis in
connection with mutual fund management and distribution services within the
United States, its territories and possessions. This agreement may be
terminated by Firstar Corporation under specified circumstances, including if
no affiliate of Firstar Corporation is serving as investment adviser for any
portfolio offered by the Company.
Subject to the general supervision of the Board of Directors and in accordance
with the respective investment objective and policies of each Fund, the Adviser
manages each Fund's portfolio securities and maintains records relating to such
purchases and sales (except for the International Value and International
Growth Funds). Subject to the general supervision of the Board of Directors and
in accordance with the respective investment objectives and policies of the
International Value and International Growth Funds, the Adviser is responsible
for each Fund's investment program, general investment criteria and policies.
The Adviser has retained Hansberger Global Investors, Inc. ("HGI") as Sub-
Adviser for the International Value Fund. HGI, a Delaware corporation founded
in 1994, with its principal office at 515 East Las Olas Boulevard, Suite 1300,
Fort Lauderdale, Florida 33301, currently has $3.2 billion in assets under
management. HGI is a wholly-owned subsidiary of Hansberger Group, Inc. Subject
to the oversight and supervision of the Fund's Board of Directors and Adviser,
HGI formulates and implements a continuous investment program for the
International Value Fund.
The Adviser has retained Clay Finlay Inc. ("Clay Finlay") as Sub-Adviser for
the International Growth Fund. Clay Finlay is a New York corporation founded in
1982, with principal offices at 200 Park Avenue, 56th Floor, New York, NY
10166, and, as of June 30, 2000, had $5.7 billion in assets under management.
Clay Finlay is a wholly-owned subsidiary of Old Mutual plc, a South African
financial services company. Subject
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to the oversight and supervision of the Fund's Board of Directors and Adviser,
Clay Finlay formulates and implements a continuous investment program for the
International Growth Fund.
The Adviser (or Sub-Adviser for the International Value Fund and International
Growth Fund, respectively) is authorized to allocate purchase and sale orders
for portfolio securities to shareholder organizations, including, in the case
of agency transactions, shareholder organizations which are affiliated with the
Adviser (or Sub-Advisers), to take into account the sale of Fund shares if the
Adviser (or Sub-Adviser for the International Value Fund or International
Growth Fund, respectively) believes that the quality of the transaction and the
amount of the commission are comparable to what they would be with other
qualified brokerage firms.
FIRMCO is entitled to receive from the Funds contractual fees calculated daily
and payable monthly, at the annual rate (as a percentage of such Fund's average
daily net assets) as follows:
<TABLE>
----------------------------------------------------
<CAPTION>
Amount
Fund Before Waivers
----------------------------------------------------
<S> <C>
Institutional Money Market Fund 0.49%
Tax-Exempt Money Market Fund 0.50%
Ohio Tax-Exempt Money Market Fund 0.50%
U.S. Government Money Market Fund 0.50%
U.S. Treasury Money Market Fund 0.44%
Short-Term Bond Fund 0.60%
Intermediate Bond Fund 0.50%
U.S. Government Securities Fund 0.60%
Aggregate Bond Fund 0.50%
Bond IMMDEX(TM) Fund 0.30%
Strategic Income Fund 0.95%
Tax-Exempt Intermediate Bond Fund 0.50%
Missouri Tax-Exempt Bond Fund 0.45%
National Municipal Bond Fund 0.55%
Balanced Income Fund 0.75%
Balanced Growth Fund 0.75%
Growth & Income Fund 0.75%
Equity Income Fund 0.75%
Relative Value Fund 0.75%
Equity Index Fund 0.25%
Large Cap Core Equity Fund 0.75%
Large Cap Growth Fund 0.95%
International Value Fund 1.34%
Global Equity Fund 0.75%
International Growth Fund 1.00%
MidCap Index Fund 0.25%
MidCap Core Equity Fund 0.75%
Small Cap Index Fund 0.40%
Small Cap Core Equity Fund 0.75%
Science & Technology Fund 1.05%
MicroCap Fund 1.50%
</TABLE>
--------------------------------------------------------------------------------
HGI is entitled to a fee, payable by the Adviser, for its services and expenses
incurred with respect to the International Value Fund. The fee is computed
daily and paid monthly at the following annual rates (as a
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percentage of the Fund's average daily net assets): 0.75% on the Fund's first
$25 million, 0.50% of the next $75 million and 0.35% of the Fund's average
daily net assets in excess of $100 million.
Clay Finlay is entitled to a fee, payable by the Adviser, for its services and
expenses incurred with respect to the International Growth Fund. The fee is
computed daily and paid monthly at the following annual rates (as a percentage
of the Fund's average daily net assets): 0.75% of the first $50 million of the
Fund's average daily net assets; plus 0.50% of the next $50 million of average
daily net assets; plus 0.25% of average daily net assets in excess of $100
million.
For the fiscal year ended October 31, 1999, the Adviser received from each Fund
a fee, calculated daily and payable monthly, at the following annual rates (as
a percentage of the Fund's average daily net assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Fee Paid
----------------------------------------------
<S> <C>
Institutional Money Market Fund 0.28%
Tax Exempt Money Market Fund 0.49%
U.S. Government Money Market Fund 0.50%
Short-Term Bond Fund 0.32%
Intermediate Bond Fund 0.35%
Bond IMMDEX(TM) Fund 0.30%
Tax-Exempt Intermediate Bond Fund 0.32%
Balanced Income Fund 0.45%
Balanced Growth Fund 0.68%
Growth & Income Fund 0.75%
Equity Index Fund 0.18%
Large Cap Core Equity Fund 0.75%
International Value Fund 1.08%
MidCap Index Fund 0.01%
MidCap Core Equity Fund 0.73%
MicroCap Fund 1.50%
</TABLE>
--------------------------------------------------------------------------------
Prior to March 1, 2000, the Mercantile Government & Corporate Bond Portfolio,
Mercantile U.S. Government Securities Portfolio, Mercantile Missouri Tax-Exempt
Bond Portfolio, Mercantile National Municipal Bond Portfolio, Mercantile Small
Cap Equity Portfolio, Mercantile International Equity Portfolio, Mercantile
Equity Income Portfolio and Mercantile Small Cap Equity Index Portfolio were
managed by Mississippi Valley Advisors Inc. ("MVA"), a subsidiary of Firstar
Corporation.
For the fiscal year ended November 30, 1999, the Predecessor Mercantile Funds
paid their former investment adviser, MVA, the following fees:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Fee Paid
------------------------------------------------------------
<S> <C>
Mercantile Government & Corporate Bond Portfo-
lio 0.45%
Mercantile U.S. Government Securities Portfolio 0.45%
Mercantile Missouri Tax-Exempt Bond Portfolio 0.45%
Mercantile National Municipal Bond Portfolio 0.55%
Mercantile Small Cap Equity Portfolio 0.75%
Mercantile International Equity Portfolio 1.00%
Mercantile Equity Income Portfolio 0.75%
Mercantile Small Cap Equity Index Portfolio 0.32%
</TABLE>
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Prior to April 1, 2000, the Firstar Stellar Treasury Fund, Firstar Stellar Ohio
Tax-Free Money Market Fund, Firstar Stellar Strategic Income Fund, Firstar
Stellar Science & Technology Fund, Firstar Stellar Growth Equity Fund, Firstar
Stellar Relative Value Fund and Firstar Stellar International Equity Fund were
managed by the Capital Management Division of Firstar Bank, N.A., which is also
a subsidiary of Firstar Corporation.
For the fiscal year ended November 30, 1999, the Predecessor Stellar Funds paid
their former investment adviser, Firstar Bank, N.A., the following fees:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Fee Paid
-------------------------------------------------------------
<S> <C>
Firstar Stellar Treasury Fund 0.50%
Firstar Stellar Ohio Tax-Free Money Market Fund 0.35%
Firstar Stellar Strategic Income Fund 0.95%
Firstar Stellar Science & Technology Fund 0.90%/1/
Firstar Stellar Growth Equity Fund 0.75%
Firstar Stellar Relative Value Fund 0.75%
Firstar Stellar International Equity Fund 0.75%
</TABLE>
--------------------------------------------------------------------------------
1 Commenced operations August 9, 1999. The fee given is the contractual
advisory fee rate.
Fund Managers
Richard Burling and Bradley Peters co-manage the Short-Term Bond Fund. Mr.
Burling is FIRMCO's Director of Credit Research. He has been with FIRMCO and
its affiliates since 1980 and has 17 years of investment management experience.
Mr. Peters has been with FIRMCO and its affiliates since 1993 and has 18 years
of investment management experience. Mr. Peters is a Certified Public
Accountant, a Certified Financial Planner, and a Certified Management
Accountant. Mr. Burling and Mr. Peters have managed the Fund since February
2000.
David Bethke manages the Intermediate Bond Fund and the U.S. Government
Securities Fund. Mr. Bethke has 19 years of investment management experience
and has been with FIRMCO and its affiliates since 1987. Mr. Bethke has managed
the Intermediate Bond Fund since February 2000. He has managed the Predecessor
Mercantile U.S. Government Securities Portfolio since it commenced operations
in 1988.
George Schupp and David Bethke co-manage the Bond IMMDEX(TM) Fund and Aggregate
Bond Fund. Mr. Schupp serves as FIRMCO's Director of Fixed Income. He has 24
years of investment management experience and has been with Firstar and its
affiliates since 1983. Mr. Schupp and Mr. Bethke have managed the Bond
IMMDEX(TM) Fund since February 2000. Mr. Schupp has managed the Predecessor
Mercantile Government & Corporate Bond Portfolio since February 1988, and Mr.
Bethke has managed the Predecessor Mercantile Government & Corporate Bond
Portfolio since February 2000.
George Schupp and Karen Bowie co-manage the Strategic Income Fund. Ms. Bowie
has over 15 years of trust and investment management experience with five of
those years at FIRMCO and its affiliates. Mr. Schupp has managed the Fund since
December 2000 and Ms. Bowie since September 2000.
Peter Merzian manages the Tax-Exempt Intermediate Bond Fund, Missouri Tax-
Exempt Bond Fund and National Municipal Bond Fund. Mr. Merzian joined FIRMCO
and its affiliates in 1993 and has 12 years of investment management
experience. He has managed the Tax-Exempt Intermediate Bond Fund since February
2000. He has managed the Predecessor Mercantile Missouri Tax-Exempt Bond
Portfolio since 1993 and the Predecessor Mercantile National Municipal Bond
Portfolio since it commenced operations in 1996.
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Marian Zentmyer and David Bethke co-manage the Balanced Income Fund. Ms.
Zentmyer serves as FIRMCO's Chief Equity Investment Officer. She has been with
FIRMCO and its affiliates since 1982 and has 21 years of investment management
experience. Ms. Zentmyer is a Certified Financial Planner. Ms. Zentmyer has
managed the Fund since its inception in December 1997. Mr. Bethke has managed
the Fund since February 2000.
Walter Dewey and George Schupp co-manage the Balanced Growth Fund. Mr. Dewey
has been with FIRMCO and its affiliates since 1986 and has 16 years of
investment management experience. Mr. Dewey has managed the Fund since November
1999. Mr. Schupp has managed the Fund since February 2000.
Marian Zentmyer and Leon Dodge co-manage the Growth & Income Fund. Ms. Zentmyer
has managed the Fund since February 1993. Mr. Dodge has been with FIRMCO since
September, 2000. He has 23 years of investment management experience and has
been a portfolio manager of the Fund since September 2000.
Joseph P. Belew manages the Relative Value Fund and the Equity Income Fund. Mr.
Belew joined FIRMCO and its affiliates in 1979 and has 21 years of investment
management experience. He has managed the Predecessor Stellar Relative Value
Fund since its inception in June 1991 and the Predecessor Mercantile Equity
Income Portfolio since October 2000.
Walter Dewey and Jane Snorek co-manage the Large Cap Core Equity Fund. Mr.
Dewey has managed the Fund since July 7, 1997, and Ms. Snorek has managed the
Fund since September 2000. Ms. Snorek has been with FIRMCO and its affiliates
since 1999 and has nine years of investment management experience.
Donald L. Keller and Randy Hare co-manage the Large Cap Growth Fund. Mr. Keller
has been with FIRMCO and its affiliates since 1982 and has 18 years of
investment management experience. Mr. Keller has managed the Predecessor
Stellar Growth Equity Fund since its inception in October 1994. Mr. Hare has
been with FIRMCO and its affiliates since 1998 and has four years of investment
management experience. Mr. Hare has managed the Fund since November 2000.
A Portfolio Management Team lead by Thomas Hansberger, CIC manages the
International Value Fund for Hansberger Global Investors. Mr. Hansberger serves
as the Chief Executive Officer of Hansberger Global Investors and has over
thirty-five years of investment management experience. Before forming
Hansberger Global Investors, Mr. Hansberger served as Chairman, President and
Chief Executive Officer of Templeton Worldwide, Inc. the parent company of the
Templeton group of companies. The Portfolio Management Team has over 20 years
of industry experience.
Donald L. Keller manages the Global Equity Fund. Mr. Keller has managed the
Predecessor Stellar International Equity Fund since May 1999.
Clay Finlay's International Equity team is responsible for the management of
the International Growth Fund. Frances Dakers, Greg Jones, Virginie Maisonneuve
and Susan Kenneally serve as regional team leaders on the International Equity
team. Each of these individuals is a Principal and Director of the Firm, and
each has an average of more than seventeen years of investment experience. This
team has managed the Predecessor Mercantile International Equity Portfolio
since it began operations in 1994.
Todd Krieg and Matt D'Attilio co-manage the MidCap Core Equity Fund. Mr. Krieg
has been with FIRMCO and its affiliates since 1992 and has seven years of
investment management experience. Mr. Krieg has managed the Fund since
September 1994. Mr. D'Attilio has been with FIRMCO and its affiliates since
1993. He has six years of investment management experience and has managed the
Fund since December 1998.
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David Lettenberger and John Potter co-manage the Small Cap Core Equity Fund -
each since September 2000. Mr. Lettenberger has been with FIRMCO and its
affiliates since 1999 and has seven years of investment management experience.
Mr. Potter joined FIRMCO in September 2000 and has six years of investment
management experience.
Randy Hare and Donald L. Keller co-manage the Science & Technology Fund. Mr.
Hare has managed the Predecessor Stellar Science & Technology Fund since
October 2000 and Mr. Keller since its inception in August 1999.
Joe Frohna and Barry Randall co-manage the MicroCap Fund. Mr. Frohna has been
with FIRMCO and its affiliates since 1995. He has seven years of investment
management experience and has managed the Fund since September 1997. Mr.
Randall has been with FIRMCO and its affiliates since May 2000. He has seven
years of investment management experience and has managed the Fund since May
2000.
Administrative Services
FMFS, an affiliate of the Advisor, serves as the Funds' Administrator and
receives fees for those services.
Custodian, Transfer and Dividend Disbursing Agent, and Accounting Services
Agent
FMFS also provides transfer agency, dividend disbursing agency and accounting
services for the Funds and receive fees for these services. Inquiries to the
transfer agent may be sent to: Firstar Mutual Fund Services, LLC, P.O. Box
3011, Milwaukee, Wisconsin 53201-3011. Firstar Bank, N.A., an affiliate of the
Adviser, provides custodial services for the Funds and receives fees for those
services.
Net Asset Value and Days of Operation
The price of Institutional Shares is based on net asset value per share. This
amount is calculated for the Institutional class of Shares by dividing the
value of all securities and other assets attributable to the Institutional
class, less the liabilities attributable to the class, by the number of
outstanding shares of the class. The price at which a purchase or redemption is
effected is based on the next calculation of net asset value after the order is
accepted.
Money Market Funds
The net asset value of the Money Market Funds for purposes of pricing purchase
and redemption orders is determined as of 11:30 a.m. Central time (9:00 a.m.
Central time for the Ohio Tax-Exempt Money Market Fund and 1:00 p.m. Central
time for the Institutional Money Market Fund and U.S. Treasury Money Market
Fund) and as of the close of regular trading hours on the Exchange, normally,
3:00 p.m. Central time, on each day on which both the Exchange is open for
trading and the Federal Reserve Banks' Fedline System is open. Shares of the
Funds are not priced on days the Exchange is closed. For a complete list of
days the Exchange is closed, please see the Additional Statement. Net asset
value per share is calculated by dividing the value of all securities and other
assets owned by each Fund attributable to a particular class, less the
liabilities charged to the Fund attributable to a particular class, by the
number of the Fund's outstanding shares.
The Company intends to use its best efforts to maintain the net asset value of
each Money Market Fund at $1.00 per share, although there is no assurance that
it will be able to do so.
Net asset value is computed using the amortized cost method as permitted by SEC
rules.
............................................................................ 129
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Non-Money Market Funds
Net asset value for purposes of pricing purchase and redemption orders is
determined as of the close of regular trading hours on the Exchange, normally,
3:00 p.m. Central time, on each day the Exchange is open for trading. Shares of
the Funds are not priced on days the Exchange is closed. For a complete list of
days the Exchange is closed, please see the Additional Statement.
The Funds' investments are valued based on market quotations, except that
restricted securities and securities for which market quotations are not
readily available and other assets are valued at fair value by the Adviser
under the supervision of the Board of Directors. Short-term investments having
a maturity of 60 days or less are valued at amortized cost, unless the
amortized cost does not approximate market value.
Portfolio securities which are primarily traded on foreign securities exchanges
are generally valued at the preceding closing values of such securities on
their respective exchanges, except when an occurrence subsequent to the time a
value was so established is likely to have changed such value. In such an
event, the fair value of those securities will be determined through the
consideration of other factors by or under the direction of the Board of
Directors. A Fund's foreign securities may trade on weekends or other days when
the Fund does not price its shares. Accordingly, the net asset value per share
of a Fund may change on days when shareholders will not be able to purchase or
redeem the Fund's shares.
Each Fund's securities may be valued based on valuations provided by an
independent pricing service. The Adviser reviews these valuations. If the
Adviser believes that a valuation received from the service does not represent
a fair value, it values the security by a method that the Board of Directors
believes will determine a fair value. Any pricing service used may employ
electronic data processing techniques, including a "matrix" system, to
determine valuations.
Quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents using the foreign exchange quotation in effect at the time
net asset value is computed. Foreign securities held by the International Value
Fund and the International Growth Fund may trade in their local markets on days
the Funds are closed, and the Funds' net asset value may, therefore, change on
days when investors may not purchase or redeem Fund shares.
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Appendix
Financial Highlights
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the table represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). The financial highlights tables set forth
on the following pages for the Ohio Tax-Exempt Money Market Fund, U.S. Treasury
Money Market Fund, U.S. Government Securities Fund, Aggregate Bond Fund,
Strategic Income Fund, Missouri Tax-Exempt Bond Fund, National Municipal Bond
Fund, Equity Income Fund, Relative Value Fund, Large Cap Growth Fund,
International Growth Fund, Small Cap Index Fund, Small Cap Core Equity Fund,
Global Equity Fund and Science & Technology Fund are based on the financial
history of the predecessor Stellar Ohio Tax-Free Money Market Fund, predecessor
Stellar Treasury Fund, predecessor Mercantile U.S. Government Securities
Portfolio, predecessor Mercantile Government & Corporate Bond Portfolio,
predecessor Stellar Strategic Income Fund, predecessor Mercantile Missouri Tax-
Exempt Bond Portfolio, predecessor Mercantile National Municipal Bond
Portfolio, predecessor Mercantile Equity Income Portfolio, predecessor Stellar
Relative Value Fund, predecessor Stellar Growth Equity Fund, predecessor
Mercantile International Equity Portfolio, predecessor Mercantile Small Cap
Equity Index Portfolio, predecessor Mercantile Small Cap Equity Portfolio,
predecessor Stellar International Equity Fund and predecessor Stellar Science &
Technology Fund, respectively.
With respect to the Institutional Money Market, Tax-Exempt Money Market, U.S.
Government Money Market, Short-Term Bond, Intermediate Bond, Bond IMMDEX, Tax-
Exempt Intermediate Bond, Balanced Income, Balanced Growth, Growth & Income,
Equity Index, Large Cap Core Equity, International Value, MidCap Index, MidCap
Core Equity and MicroCap Funds, this information for the period ended October
31, 1999 has been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are included in the Annual Report, and
incorporated by reference into the Additional Statement, both of which are
available upon request. The financial statements for the six-month period ended
April 30, 2000 are unaudited and are contained in the Funds' Semi-Annual
Report. Those unaudited financial statements are also incorporated by reference
into the Additional Statement.
With respect to the Predecessor Stellar Funds, this information for the periods
ended November 30, 1999 and prior has been audited by Arthur Andersen LLP,
independent public accountants for the Predecessor Stellar Funds, whose
reports, along with each Fund's financial statements, are included in the
Predecessor Stellar Funds' Annual Report, and incorporated by reference into
the Statement of Additional Information (the "Additional Statement"), all of
which are available upon request. The financial statements for the six-month
period ended May 31, 2000 are unaudited and are contained in the Predecessor
Stellar Funds' Semi-Annual Report. Those unaudited financial statements are
also incorporated by reference into the Additional Statement.
With respect to the Predecessor Mercantile Portfolios, this information for the
periods ended November 30, 1999 and prior has been audited by KPMG LLP,
independent auditors for the Predecessor Mercantile Portfolios, whose reports,
along with each Fund's financial statements, are included in the Predecessor
Mercantile Portfolios' Annual Report, and incorporated by reference into the
Statement of Additional Information (the "Additional Statement"), all of which
are available upon request. The financial statements for the six-month period
ended May 31, 2000 are unaudited and are contained in the Predecessor
Mercantile Portfolios' Semi-Annual Report. Those unaudited financial statements
are also incorporated by reference into the Additional Statement.
Contact FMFS for a free copy of the Annual and Semi-Annual Reports or
Additional Statement.
During the periods shown, the Tax-Exempt Money Market, Ohio Tax-Exempt Money
Market, U.S. Government Money Market, Strategic Income and Global Equity Funds
did not offer Institutional Shares. Accordingly, there are no financial
highlights for Institutional Shares of these portfolios. The financial
highlights shown for the Tax-Exempt Money Market, Ohio Tax-Exempt Money Market,
U.S. Government Money Market and Global Equity Funds are for Retail A Shares.
The financial highlights shown for the Strategic Income Fund are for Retail B
Shares.
............................................................................ 131
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Institutional Money Market Funds
<TABLE>
<CAPTION>
Net Dividends
Asset Value, Net from Net Net Asset
Beginning Investment Investment Value, End
of Period Income Income of Period
<S> <C> <C> <C> <C>
INSTITUTIONAL MONEY MARKET FUND
Year Ended October 31,
1995 $1.00 $0.06 $(0.06) $1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1996 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1997 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1998 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1999 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 1.00 0.03 (0.03) 1.00
TAX-EXEMPT MONEY MARKET FUND/6/
Year Ended October 31,
1995 1.00 0.03 (0.03) 1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1996 1.00 0.03 (0.03) 1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1997 1.00 0.03 (0.03) 1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1998 1.00 0.03 (0.03) 1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1999 1.00 0.03 (0.03) 1.00
-------------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 1.00 0.03 (0.03) 1.00
OHIO TAX-EXEMPT MONEY MARKET FUND/6/,/7/
Period Ended November 30,
1998 1.00 0.03 (0.03) 1.00
-------------------------------------------------------------------------------------------
Year Ended November 30,
1999 1.00 0.03 (0.03) 1.00
-------------------------------------------------------------------------------------------
Period Ended May 31, 2000 (unaudited) 1.00 0.02 (0.02) 1.00
U.S. GOVERNMENT MONEY MARKET FUND
Year Ended October 31,
1995 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1996 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1997 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1998 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------------------
Year Ended October 31,
1999 1.00 0.04 (0.04) 1.00
-------------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 1.00 0.02 (0.02) 1.00
U.S. TREASURY MONEY MARKET FUND/10/
March 25, 1997 to November 30, 1997 1.00 0.03 (0.03) 1.00
-------------------------------------------------------------------------------------------
Year Ended November 30,
1998 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------------------
Year Ended November 30,
1999 1.00 0.04 (0.04) 1.00
-------------------------------------------------------------------------------------------
Period Ended May 31, 2000 (unaudited) 1.00 0.02 (0.02) 1.00
-------------------------------------------------------------------------------------------
</TABLE>
1 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
31, 1999, 1998, 1997,1996, 1995 would have been 0.63%, 0.62%,
0.64%, 0.66%, 0.64%, 0.69%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 5.30%, 4.52%, 5.01%, 4.92%, 4.90%,
5.29%, respectively.
2 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
31, 1999, 1998, 1997, 1996, 1995, 1994 would have been 0.72%,
0.73%, 0.75%, 0.75%, 0.78%, 0.84%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 3.01%, 2.49%, 2.87%, 2.91%, 2.91%,
3.12%, respectively.
3 Without fees waived, ratios of net expenses to average net assets
for the fiscal periods ended May 31, 2000, November 30, 1999 and
November 30, 1998 would have been 1.06%, 1.09%, and 1.29%
respectively; and ratios of net investment income to average net
assets would have been 2.67%, 2.13% and 2.21% respectively.
4 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
31, 1999, 1998, 1997, 1996, 1995, 1994 would have been 0.79%,
0.69%, 0.71%, 0.70%, 0.71%, 0.75%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 4.70%, 4.29%, 4.79%, 4.73%, 4.73%,
5.09% respectively.
5 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended May 31, 2000 and November 30,
1999, 1998, 1997, would have been 1.08%, 0.93%, 0.93%, 0.92%,
respectively; and ratios of net investment income to average net
assets for the fiscal years (periods) ended May 31, 2000 and
November 30, 1999, 1998, 1997, would have been 4.57%, 3.97%,
4.53%, 4.67%, respectively.
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<TABLE>
<CAPTION>
Supplemental Data and Ratios
----------------------------------------------------------------------------------------
Ratio of Net
Net Assets, Ratio of Net Investment
End of Expenses Income
Period to Average to Average Total
(000s) Net Assets Net Assets Return
<S> <C> <C> <C>
$ 716,566 0.35%/1/ 5.63%/1/ 5.77%
---------------------------------------------------------------------------------------------
750,051 0.35%/1/ 5.19%/1/ 5.32%
---------------------------------------------------------------------------------------------
1,201,341 0.35%/1/ 5.23%/1/ 5.38%
---------------------------------------------------------------------------------------------
1,623,970 0.35%/1/ 5.30%/1/ 5.41%
---------------------------------------------------------------------------------------------
2,356,251 0.38%/1/ 4.76%/1/ 4.85%
---------------------------------------------------------------------------------------------
2,185,399 0.39%/1/,/9/ 5.54%/1/,/9/ 2.79%/8/
---------------------------------------------------------------------------------------------
84,084 0.60%/2/ 3.36%/2/ 3.42%
---------------------------------------------------------------------------------------------
79,328 0.60%/2/ 3.09%/2/ 3.13%
---------------------------------------------------------------------------------------------
108,639 0.60%/2/ 3.06%/2/ 3.12%
---------------------------------------------------------------------------------------------
122,451 0.60%/2/ 3.02%/2/ 3.04%
---------------------------------------------------------------------------------------------
153,189 0.71%/2/ 2.51%/2/ 2.53%
---------------------------------------------------------------------------------------------
158,938 0.72%/2/,/9/ 3.01%/2/,/9/ 1.50%/8/
---------------------------------------------------------------------------------------------
57,614 0.69%/3/,/9/ 2.81%/3/,/9/ 2.85%/8/
---------------------------------------------------------------------------------------------
64,475 0.58%/3/ 2.64%/3/ 2.67%
---------------------------------------------------------------------------------------------
48,448 0.73%/3/,/9/ 3.10%/3/,/9/ 1.60%/8/
---------------------------------------------------------------------------------------------
163,068 0.60%/4/ 5.24%/4/ 5.37%
---------------------------------------------------------------------------------------------
198,334 0.60%/4/ 4.84%/4/ 4.96%
---------------------------------------------------------------------------------------------
198,592 0.60%/4/ 4.83%/4/ 4.99%
---------------------------------------------------------------------------------------------
233,176 0.60%/4/ 4.90%/4/ 4.97%
---------------------------------------------------------------------------------------------
209,015 0.68%/4/ 4.30%/4/ 4.37%
---------------------------------------------------------------------------------------------
61,186 0.72%/4/,/9/ 4.77%/4/,/9/ 2.46%/8/
---------------------------------------------------------------------------------------------
659,296 0.72%/5/,/9/ 4.87%/5/,/9/ 3.37%/8/
---------------------------------------------------------------------------------------------
1,123,144 0.73%/5/ 4.73%/5/ 4.84%
---------------------------------------------------------------------------------------------
1,766,246 0.77%/5/ 4.13%/5/ 4.18%
---------------------------------------------------------------------------------------------
1,867,979 0.82%/5/,/9/ 4.83%/5/,/9/ 2.44%/8/
---------------------------------------------------------------------------------------------
</TABLE>
6 For the Tax-Exempt Money Market Fund and the Ohio Tax-Free Money Market
Fund, substantially all the investment income is exempt from federal
income tax.
7 The Ohio Tax-Exempt Money Market Fund has been operating since December
2, 1997.
8 Not Annualized.
9 Annualized.
10 The Institutional Shares of the U.S. Treasury Money Market Fund have
been operating since March 25, 1997.
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Institutional
Bond Funds
<TABLE>
<CAPTION>
Income from Investment Operations
---------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning of Investment or Losses on Investment
Period Income/1/ Securities Operations
<S> <C> <C> <C> <C>
SHORT-TERM BOND
Year Ended October 31,
1995/5/ $10.03 $ 0.63 $ 0.24 $ 0.87
----------------------------------------------------------------------------------------------
Year Ended October 31,
1996 10.28 0.61/6/ (0.03) 0.58
----------------------------------------------------------------------------------------------
Year Ended October 31,
1997 10.25 0.62 0.02 0.64
----------------------------------------------------------------------------------------------
Year Ended October 31,
1998 10.27 0.61 0.07 0.68
----------------------------------------------------------------------------------------------
Year Ended October 31,
1999 10.34 0.56 (0.22) 0.34
----------------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 10.12 0.29 (0.09) 0.20
INTERMEDIATE BOND
Year Ended October 31,
1995/5/ 9.67 0.62 0.53 1.15
----------------------------------------------------------------------------------------------
Year Ended October 31,
1996 10.21 0.59/6/ (0.02) 0.57
----------------------------------------------------------------------------------------------
Year Ended October 31,
1997 10.19 0.60 0.12 0.72
----------------------------------------------------------------------------------------------
Year Ended October 31,
1998 10.31 0.59 0.19 0.78
----------------------------------------------------------------------------------------------
Year Ended October 31,
1999 10.50 0.59 (0.39) 0.20
----------------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 10.10 0.31 (0.18) 0.13
U.S. GOVERNMENT SECURITIES
Year Ended November 30,
1995 10.05 0.67 0.80 1.47
----------------------------------------------------------------------------------------------
Year Ended November 30,
1996 10.85 0.66 (0.15) 0.51
----------------------------------------------------------------------------------------------
Year Ended November 30,
1997 10.67 0.61 (0.05) 0.56
----------------------------------------------------------------------------------------------
Year Ended November 30,
1998 10.62 0.60 0.12 0.72
----------------------------------------------------------------------------------------------
Year Ended November 30,
1999 10.74 0.58 (0.41) 0.17
----------------------------------------------------------------------------------------------
Period Ended May 31, 2000 (unaudited) 10.34 0.31 (0.22) 0.09
AGGREGATE BOND
Year Ended November 30,
1995 9.64 0.64 0.89 1.53
----------------------------------------------------------------------------------------------
Year Ended November 30,
1996 10.53 0.67 (0.19) 0.48
----------------------------------------------------------------------------------------------
Year Ended November 30,
1997 10.34 0.59 0.03 0.62
----------------------------------------------------------------------------------------------
Year Ended November 30,
1998 10.37 0.60 0.37 0.97
----------------------------------------------------------------------------------------------
Year Ended November 30,
1999 10.74 0.60 (0.69) (0.09)
----------------------------------------------------------------------------------------------
Period Ended May 31, 2000 (unaudited) 9.86 0.30 (0.17) 0.13
----------------------------------------------------------------------------------------------
</TABLE>
1 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
3l, 1999, 1998, 1997, 1996, 1995 would have been 0.86%, 0.84%,
0.86%, 0.86%, 0.87%, 0.91%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 5.48%, 5.24%, 5.56%, 5.68%, 5.55%,
5.82%, respectively.
2 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
3l, 1999, 1998, 1997, 1996, 1995 would have been 0.69%, 0.70%,
0.71%, 0.73%, 0.74%, 0.79%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 6.19%, 5.57%, 5.54%, 5.73%, 5.60%,
5.97%, respectively.
3 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended May 31, 2000 and November
30, 1999, 1998, 1997, 1996, 1995 would have been 1.14%, 1.09%,
1.07%, 1.07%, 0.77%, 0.77%, respectively; and (unaudited) ratios
of net investment income to average net assets for the fiscal
years (periods) ended May 31, 2000 and November 30, 1999, 1998,
1997, 1996, 1995 would have been 5.28%, 5.04%, 5.24%, 5.44%,
6.00%, 6.26%, respectively.
4 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended May 31, 2000 and November
30, 1999, 1998, 1997, 1996, 1995 would have been 1.11%, 1.08%,
1.06%, 1.05%, 0.75%, 0.75%, respectively; and (unaudited) ratios
of net investment income to average net assets for the fiscal
years (periods) ended May 31, 2000 and November 30, 1999, 1998,
1997, 1996, 1995 would have been 5.68%, 5.43%, 5.31%, 5.45%,
6.26%, 6.22%, respectively.
5 On January 9, 1995, all previously existing series of shares of
each Fund were reclassified as Series A shares. Effective January
9, 1995, Institutional shareowners exchanged their Series A
shares for the Funds' Institutional series shares. For the year
ended October 31, 1995, the Financial Highlights ratios of net
expenses to average net assets, ratios of net investment income
to average net assets, total return and the per share income from
investment operations and distributions are presented on a basis
whereby the Funds' net investment income, net expenses, net
realized and unrealized gains (losses) and distributions for the
period November 1, 1994, through January 9, 1995, were allocated
to each class of shares based upon the relative net assets of
each class of shares as of the close of business on January 9,
1995, and the results thereof combined with the results of
operations and distributions for each applicable class for the
period January 10, 1995, through October 31, 1995.
6 Net investment income per share is calculated using ending
balances prior to consideration of adjustments for permanent book
and tax differences.
................................................................................
134
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
------------------------------------------ -------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Net Assets Rate/11/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ (0.62) $ - $(0.62) $ 10.28 8.95% $ 94,959 0.50%/1/ 6.23%/1/ 100.58%
---------------------------------------------------------------------------------------------------------------------
(0.61) - (0.61) 10.25 5.80% 147,466 0.50%/1/ 5.92%/1/ 59.62%
---------------------------------------------------------------------------------------------------------------------
(0.62) - (0.62) 10.27 6.47% 136,084 0.50%/1/ 6.04%/1/ 77.12%
---------------------------------------------------------------------------------------------------------------------
(0.61) - (0.61) 10.34 6.84% 120,693 0.50%/1/ 5.92%/1/ 78.20%
---------------------------------------------------------------------------------------------------------------------
(0.56) - (0.56) 10.12 3.42% 130,611 0.56%/1/ 5.52%/1/ 52.28%
---------------------------------------------------------------------------------------------------------------------
(0.29) - (0.29) 10.03 2.02%/9/ 123,128 0.57%/1/,/10/ 5.78%/1/,/10/ 33.23%/9/
(0.61) - (0.61) 10.21 12.25% 128,941 0.50%/2/ 6.26%/2/ 66.69%
---------------------------------------------------------------------------------------------------------------------
(0.59) - (0.59) 10.19 5.77% 173,468 0.50%/2/ 5.84%/2/ 59.29%
---------------------------------------------------------------------------------------------------------------------
(0.60) - (0.60) 10.31 7.36% 254,521 0.50%/2/ 5.96%/2/ 40.61%
---------------------------------------------------------------------------------------------------------------------
(0.59) - (0.59) 10.50 7.83% 291,289 0.50%/2/ 5.75%/2/ 27.29%
---------------------------------------------------------------------------------------------------------------------
(0.59) (0.01) (0.60) 10.10 1.91% 284,047 0.56%/2/ 5.71%/2/ 64.07%
---------------------------------------------------------------------------------------------------------------------
(0.31) - (0.31) 9.92 1.30%/9/ 368,098 0.57%/2/,/10/ 6.31%/2/,/10/ 46.03%/9/
(0.67) - (0.67) 10.85 15.00% 45,513 0.67%/3/ 6.36%/3/ 93.76%
---------------------------------------------------------------------------------------------------------------------
(0.66) (0.03)/7/ (0.69) 10.67 4.88% 60,079 0.67%/3/ 6.10%/3/ 53.76%
---------------------------------------------------------------------------------------------------------------------
(0.61) - (0.61) 10.62 5.51% 72,753 0.67%/3/ 5.84%/3/ 100.33%
---------------------------------------------------------------------------------------------------------------------
(0.60) - (0.60) 10.74 6.98% 93,683 0.67%/3/ 5.64%/3/ 54.57%
---------------------------------------------------------------------------------------------------------------------
(0.57) - (0.57) 10.34 1.67% 72,483 0.68%/3/ 5.45%/3/ 26.17%
---------------------------------------------------------------------------------------------------------------------
(0.29) - (0.29) 10.14 0.90%/9/ 51,696 0.73%/3/,/10/ 5.69%/3/,/10/ 4.38%/9/
(0.64) - (0.64) 10.53 16.31% 127,741 0.65%/4/ 6.32%/4/ 59.32%
---------------------------------------------------------------------------------------------------------------------
(0.67) - (0.67) 10.34 4.82% 141,440 0.65%/4/ 6.36%/4/ 149.20%
---------------------------------------------------------------------------------------------------------------------
(0.59) - (0.59) 10.37 6.32% 172,637 0.65%/4/ 5.85%/4/ 140.72%
---------------------------------------------------------------------------------------------------------------------
(0.60) - (0.60) 10.74 9.63% 178,868 0.66%/4/ 5.71%/4/ 91.14%
---------------------------------------------------------------------------------------------------------------------
(0.59) (0.20)/8/ (0.79) 9.86 (0.83)% 126,472 0.67%/4/ 5.84%/4/ 38.29%
---------------------------------------------------------------------------------------------------------------------
(0.28) - (0.28) 9.69 1.31%/9/ 112,682 0.70%/4/,/10/ 6.09%/4/,/10/ 17.60%/9/
---------------------------------------------------------------------------------------------------------------------
</TABLE>
7 Includes distributions in excess of net realized gains of $0.03 per
share.
8 Includes distributions in excess of net realized gains of $0.07 per
share.
9 Not Annualized.
10 Annualized.
11 Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
............................................................................ 135
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Institutional
Bond Funds
<TABLE>
<CAPTION>
Income from Investment Operations
--------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning of Investment or Losses on Investment
Period Income/2/ Securities Operations
<S> <C> <C> <C> <C>
BOND IMMDEX(TM)
Year Ended October 31,
1995/6/ 25.67 1.74 2.29 4.03
-----------------------------------------------------------------------------------------------
Year Ended October 31,
1996 27.82 1.70/7/ (0.27) 1.43
-----------------------------------------------------------------------------------------------
Year Ended October 31,
1997 27.55 1.75 0.61 2.36
-----------------------------------------------------------------------------------------------
Year Ended October 31,
1998 28.16 1.72 0.85 2.57
-----------------------------------------------------------------------------------------------
Year Ended October 31,
1999 29.02 1.70 (1.65) 0.05
-----------------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 27.37 0.89 (0.37) 0.52
STRATEGIC INCOME
December 12, 1994 to November 30, 1995/1/ 10.00 0.69 0.55 1.24
-----------------------------------------------------------------------------------------------
Year Ended November 30,
1996 10.53 0.73 (0.04) 0.69
-----------------------------------------------------------------------------------------------
Year Ended November 30,
1997 10.50 0.73 0.18 0.91
-----------------------------------------------------------------------------------------------
Year Ended November 30,
1998 10.67 0.72 (0.94) (0.22)
-----------------------------------------------------------------------------------------------
Year Ended November 30,
1999 9.62 0.64 (1.10) (0.46)
-----------------------------------------------------------------------------------------------
Period Ended May 31, 2000 (unaudited) 8.52 0.32 (0.18) 0.14
TAX-EXEMPT INTERMEDIATE BOND
Year Ended October 31,
1995/6/ 9.78 0.44 0.46 0.90
-----------------------------------------------------------------------------------------------
Year Ended October 31,
1996 10.24 0.43/7/ (0.03) 0.40
-----------------------------------------------------------------------------------------------
Year Ended October 31,
1997 10.21 0.44 0.15 0.59
-----------------------------------------------------------------------------------------------
Year Ended October 31,
1998 10.36 0.44 0.16 0.60
-----------------------------------------------------------------------------------------------
Year Ended October 31,
1999 10.52 0.44 (0.40) 0.04
-----------------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 10.12 0.22 (0.09) 0.13
-----------------------------------------------------------------------------------------------
</TABLE>
1 Period from commencement of operations.
2 For the Tax-Exempt Intermediate Bond Fund substantially all
investment income is exempt from federal income tax.
3 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
3l, 1999, 1998, 1997, 1996, 1995 would have been 0.48%, 0.48%,
0.49%, 0.49%, 0.50%, 0.51%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 6.55%, 6.04%, 5.95%, 6.26%, 6.16%,
6.44%, respectively.
4 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended May 31, 2000 and November 30,
1999, 1998, 1997, 1996, 1995 would have been 1.46%, 1.44%, 1.46%,
1.46%, 1.56%, 1.77%, respectively; and ratios of net investment
income to average net assets for the fiscal years (periods) ended
May 31, 2000 and November 30, 1999, 1998, 1997, 1996, 1995 would
have been 7.51%, 6.79%, 6.99%, 6.93%, 7.06%, 7.11%, respectively.
5 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
3l, 1999, 1998, 1997, 1996, 1995 would have been 0.86%, 0.82%,
0.81%, 0.88%, 0.97%, 1.00%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 4.20%, 3.98%, 3.94%, 3.98%, 3.77%,
3.96%, respectively.
................................................................................
136
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
----------------------------------------- ---------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Net Assets Rate/9/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1.84) (0.04) (1.88) 27.82 16.26% 290,274 0.44%/3/ 6.51%/3/ 41.67%
-----------------------------------------------------------------------------------------------------------------------
(1.70) - (1.70) 27.55 5.35% 370,556 0.43%/3/ 6.23%/3/ 33.38%
-----------------------------------------------------------------------------------------------------------------------
(1.75) - (1.75) 28.16 8.90% 408,018 0.42%/3/ 6.33%/3/ 35.12%
-----------------------------------------------------------------------------------------------------------------------
(1.71) - (1.71) 29.02 9.41% 471,425 0.42%/3/ 6.02%/3/ 20.07%
-----------------------------------------------------------------------------------------------------------------------
(1.70) - (1.70) 27.37 0.20% 421,897 0.47%/3/ 6.05%/3/ 57.04%
-----------------------------------------------------------------------------------------------------------------------
(0.88) - (0.88) 27.01 1.95%/10/ 426,813 0.48%/3/,/11/ 6.55%/3/,/11/ 33.11%/10/
(0.67) (0.04) (0.71) 10.53 12.71%/10/ 47,513 1.47%/4/,/11/ 7.41%/4/,/11/ 258.00%/10/
-----------------------------------------------------------------------------------------------------------------------
(0.72) - (0.72) 10.50 6.99% 110,775 1.36%/4/ 7.26%/4/ 201.00%
-----------------------------------------------------------------------------------------------------------------------
(0.74) - (0.74) 10.67 9.02% 179,413 1.26%/4/ 7.13%/4/ 142.00%
-----------------------------------------------------------------------------------------------------------------------
(0.73) (0.10) (0.83) 9.62 (2.16)% 202,354 1.26%/4/ 7.19%/4/ 146.00%
-----------------------------------------------------------------------------------------------------------------------
(0.64)/8/ - (0.64) 8.52 (4.99)% 160,605 1.28%/4/ 6.95%/4/ 73.00%
-----------------------------------------------------------------------------------------------------------------------
(0.34) - (0.34) 8.32 1.77%/10/ 138,250 1.35%/4/,/11/ 7.62%/4/,/11/ 29.00%/10/
(0.44) - (0.44) 10.24 9.38% 27,595 0.51%/5/ 4.45%/5/ 44.13%
-----------------------------------------------------------------------------------------------------------------------
(0.43) - (0.43) 10.21 4.02% 36,652 0.50%/5/ 4.24%/5/ 30.46%
-----------------------------------------------------------------------------------------------------------------------
(0.44) - (0.44) 10.36 5.96% 52,208 0.50%/5/ 4.36%/5/ 11.22%
-----------------------------------------------------------------------------------------------------------------------
(0.44) - (0.44) 10.52 5.88% 66,427 0.50%/5/ 4.25%/5/ 14.38%
-----------------------------------------------------------------------------------------------------------------------
(0.43) (0.01) (0.44) 10.12 0.39% 65,034 0.64%/5/ 4.16%/5/ 21.77%
-----------------------------------------------------------------------------------------------------------------------
(0.22) (0.04) (0.26) 9.99 1.26%/10/ 68,728 0.67%/5/,/11/ 4.39%/5/,/11/ 10.68%/10/
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
6 On January 9, 1995, all previously existing series of shares of each
Fund were reclassified as Series A shares. Effective January 9, 1995,
Institutional shareowners exchanged their Series A shares for the
Funds' Institutional series shares. For the year ended October 31,
1995, the Financial Highlights ratios of net expenses to average net
assets, ratios of net investment income to average net assets, total
return and the per share income from investment operations and
distributions are presented on a basis whereby the Funds' net
investment income, net expenses, net realized and unrealized gains
(losses) and distributions for the period November 1, 1994, through
January 9, 1995, were allocated to each class of shares based upon the
relative net assets of each class of shares as of the close of
business on January 9, 1995, and the results thereof combined with the
results of operations and distributions for each applicable class for
the period January 10, 1995, through October 31, 1995.
7 Net investment income per share is calculated using ending balances
prior to consideration of adjustments for permanent book and tax
differences.
8 Includes distributions in excess of net investment income of $0.01 per
share.
9 Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
10 Not Annualized.
11 Annualized.
............................................................................ 137
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Institutional
Bond Funds (cont'd.)
<TABLE>
<CAPTION>
Income from Investment Operations
--------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning of Investment or Losses on Investment
Period Income/3/ Securities Operations
<S> <C> <C> <C> <C>
MISSOURI TAX-EXEMPT BOND
Six Months Ended November 30, 1995/1/ 11.52 0.28 0.22 0.50
-----------------------------------------------------------------------------------------------
Year Ended November 30,
1996 11.74 0.57 (0.05) 0.52
-----------------------------------------------------------------------------------------------
Year Ended November 30,
1997 11.69 0.56 0.18 0.74
-----------------------------------------------------------------------------------------------
Year Ended November 30,
1998 11.87 0.55 0.21 0.76
-----------------------------------------------------------------------------------------------
Year Ended November 30,
1999 12.08 0.53 (0.74) (0.21)
-----------------------------------------------------------------------------------------------
Period Ended May 31, 2000 (unaudited) 11.32 0.27 (0.20) 0.07
NATIONAL MUNICIPAL BOND
November 18, 1996 to November 30, 1996/2/ 10.00 0.02 0.05 0.07
-----------------------------------------------------------------------------------------------
Year Ended November 30,
1997 10.05 0.54 0.23 0.77
-----------------------------------------------------------------------------------------------
Year Ended November 30,
1998 10.28 0.46 0.30 0.76
-----------------------------------------------------------------------------------------------
Year Ended November 30,
1999 10.23 0.43 (0.72) (0.29)
-----------------------------------------------------------------------------------------------
Period Ended May 31, 2000 (unaudited) 9.41 0.21 (0.18) 0.03
-----------------------------------------------------------------------------------------------
</TABLE>
1 Upon reorganizing as a Portfolio of the Arch Fund, Inc., the Missouri Tax-
Exempt Bond Portfolio changed its fiscal year end from May 31 to November 30.
2 Period from commencement of operations.
3 For the Missouri Tax-Exempt Bond Fund and the National Municipal
Bond Fund, substantially all investment income is exempt from
federal income tax.
4 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended May 31, 2000 and November 30,
1999, 1998, 1997, 1996, 1995 would have been 1.08%, 1.07%, 1.06%,
1.06%, 0.75%, 0.88%, respectively; and (unaudited) ratios of net
investment income to average net assets for the fiscal years
(periods) ended May 31, 2000 and November 30, 1999, 1998, 1997,
1996, 1995 would have been 4.50%, 4.10%, 4.17%, 4.36%, 4.85%,
4.73%, respectively.
5 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended May 31, 2000 and November 30,
1999, 1998, 1997, 1996 would have been 1.19%, 1.16%, 1.16%, 1.17%,
0.82%, respectively; and (unaudited) ratios of net investment
income to average net assets for the fiscal years (periods) ended
May 31, 2000 and November 30, 1999, 1998, 1997, 1996 would have
been 4.17%, 3.93%, 3.92%, 4.35%, 5.07%, respectively.
6 Includes distributions in excess of net income and net realized gains of
$0.01 and $0.01 per share respectively.
7 Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
8 Not Annualized.
9 Annualized.
................................................................................
138
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
----------------------------------------- -----------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Net Assets Rate/7/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.28) - (0.28) 11.74 4.41%/8/ 47,773 0.78%/4/,/9/ 4.83%/4/,/9/ 1.55%/8/
------------------------------------------------------------------------------------------------------------------
(0.57) - (0.57) 11.69 4.62% 55,905 0.65%/4/ 4.95%/4/ 3.66%
------------------------------------------------------------------------------------------------------------------
(0.56) - (0.56) 11.87 6.48% 75,431 0.66%/4/ 4.76%/4/ 3.50%
------------------------------------------------------------------------------------------------------------------
(0.55) - (0.55) 12.08 6.52% 94,402 0.66%/4/ 4.57%/4/ 6.14%
------------------------------------------------------------------------------------------------------------------
(0.53) (0.02) (0.55) 11.32 (1.81)% 111,842 0.66%/4/ 4.51%/4/ 0.76%
------------------------------------------------------------------------------------------------------------------
(0.27) - (0.27) 11.12 0.66%/8/ 116,179 0.67%/4/,/9/ 4.91%/4/,/9/ 2.26%/8/
(0.02) - (0.02) 10.05 0.74% 310,413 0.12%/5/,/9/ 5.77%/5/,/9/ -
------------------------------------------------------------------------------------------------------------------
(0.54) - (0.54) 10.28 7.97% 366,889 0.14%/5/ 5.38%/5/ 83.94%
------------------------------------------------------------------------------------------------------------------
(0.46) (0.35) (0.81) 10.23 7.76% 384,518 0.56%/5/ 4.52%/5/ 18.30%
------------------------------------------------------------------------------------------------------------------
(0.43)/6/ (0.10)/6/ (0.53) 9.41 (2.97)% 326,840 0.76%/5/ 4.33%/5/ -
------------------------------------------------------------------------------------------------------------------
(0.22) - (0.22) 9.22 0.31%/8/ 253,261 0.78%/5/,/9/ 4.58%/5/,/9/ -
------------------------------------------------------------------------------------------------------------------
</TABLE>
............................................................................ 139
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Institutional
Equity Funds
<TABLE>
<CAPTION>
Income from Investment Operations
-----------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains From
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
BALANCED INCOME
Dec. 1, 1997/1/
through Oct. 31, 1998 $10.00 $0.30/10/ $0.96 $1.26
----------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 11.01 0.31 0.38 0.69
----------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000 (unaudited) 10.96 0.15/10/ 0.21 0.36
BALANCED GROWTH
Year Ended October 31, 1995/9/ 22.10 0.53 3.78 4.31
----------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 25.90 0.55/11/ 2.62 3.17
----------------------------------------------------------------------------------------------------
Year Ended October 31, 1997 27.99 0.66 4.20 4.86
----------------------------------------------------------------------------------------------------
Year Ended October 31, 1998 30.51 0.62 1.86 2.48
----------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 29.85 0.58 1.19 1.77
----------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000 (unaudited) 30.11 0.30 4.21 4.51
GROWTH AND INCOME
Year Ended October 31, 19959 23.09 0.42 5.14 5.56
----------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 27.63 0.50/11/ 6.61 7.11
----------------------------------------------------------------------------------------------------
Year Ended October 31, 1997 33.08 0.46 8.94 9.40
----------------------------------------------------------------------------------------------------
Year Ended October 31, 1998 39.28 0.47 6.55 7.02
----------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 44.46 0.41 4.92 5.33
----------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 46.15 0.13 2.70 2.83
EQUITY INCOME
Feb. 27, 1997/1/ through
Nov. 30, 1997 10.00 0.20 1.55 1.75
----------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 11.56 0.19 0.98 1.17
----------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.24 0.16 (0.18) (0.02)
----------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 7.83 0.06 (0.13) (0.07)
RELATIVE VALUE
Aug. 18, 1997/1/ through
Nov. 30, 1997 22.67 0.08 0.81 0.89
----------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 23.49 0.18 3.65 3.83
----------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 26.27 0.23 2.96 3.19
----------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 29.12 0.16 (0.21) (0.05)
----------------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000, the fiscal year
ended October 31, 1999 and the period ended October 31, 1998
would have been 1.12%, 1.23%, 1.38%, respectively; and ratios
of net investment income to average net assets for the period
ended April 30, 2000, the fiscal year ended October 31, 1999
and the period ended October 31, 1998 would have been 2.63%,
2.54%, 2.44%, respectively.
5 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 1.02%, 1.00%, 0.99%, 1.00%, 1.03%, 1.06%, respectively;
and ratios of net investment income to average net assets for
the period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 1.82%,
1.77%, 1.92%, 2.05%, 1.77%, 1.93%, respectively.
6 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 0.94%, 0.93%, 0.94%, 0.94%, 0.98%, 1.01%, respectively;
and ratios of net investment income to average net assets for
the period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 0.58%,
0.98%, 1.04%, 1.27%, 1.59%, 1.59%, respectively.
7 Without fees waived, ratios of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, and the period ended
November 30, 1997 would have been 1.46%, 1.38%, 1.37%, 1.38%,
respectively; and (unaudited) ratios of net investment income
to average net assets for the period ended May 31, 2000 and for
the fiscal years ended November 30, 1999, 1998, and the period
ended November 30, 1997 would have been 1.49%, 1.50%, 1.28%,
1.28%, respectively.
................................................................................
140
<PAGE>
................................................................................
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
----------------------------------------- -------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Net Assets Rate/12/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ (0.25) $ - $ (0.25) $11.01 12.70%/2/ $ 34,036 0.75%/3/,/4/ 3.07%/3/,/4/ 58.33%/2/
----------------------------------------------------------------------------------------------------------------------------
(0.30) (0.44) (0.74) 10.96 6.34% 49,728 0.93%/4/ 2.84%/4/ 48.46%
----------------------------------------------------------------------------------------------------------------------------
(0.14) (0.20) (0.34) 10.98 3.33%/2/ 76,998 0.97%/3/,/4/ 2.78%/3/,/4/ 93.42%/2/
(0.51) - (0.51) 25.90 19.79% 104,552 0.75%/5/ 2.24%/5/ 61.87%
----------------------------------------------------------------------------------------------------------------------------
(0.53) (0.55) (1.08) 27.99 12.56% 129,415 0.75%/5/ 2.05%/5/ 63.91%
----------------------------------------------------------------------------------------------------------------------------
(0.66) (1.68) (2.34) 30.51 18.39% 164,382 0.75%/5/ 2.31%/5/ 69.90%
----------------------------------------------------------------------------------------------------------------------------
(0.64) (2.50) (3.14) 29.85 8.83% 188,123 0.75%/5/ 2.16%/5/ 56.44%
----------------------------------------------------------------------------------------------------------------------------
(0.56) (0.95) (1.51) 30.11 5.87% 180,737 0.93%/5/ 1.84%/5/ 69.42%
----------------------------------------------------------------------------------------------------------------------------
(0.30) (1.67) (1.97) 32.65 15.41%/2/ 174,574 0.97%/3/,/5/ 1.87%/3/,/5/ 81.13%/2/
(0.42) (0.60) (1.02) 27.63 25.00% 162,752 0.90%/6/ 1.70%/6/ 47.85%
----------------------------------------------------------------------------------------------------------------------------
(0.47) (1.19) (1.66) 33.08 26.90% 226,888 0.90%/6/ 1.67%/6/ 51.37%
----------------------------------------------------------------------------------------------------------------------------
(0.47) (2.73) (3.20) 39.28 30.83% 366,020 0.87%/6/ 1.34%/6/ 31.36%
----------------------------------------------------------------------------------------------------------------------------
(0.45) (1.39) (1.84) 44.46 18.35% 474,603 0.87%/6/ 1.11%/6/ 48.56%
----------------------------------------------------------------------------------------------------------------------------
(0.46) (3.21) (3.67) 46.12 12.04% 531,257 0.92%/6/ 0.99%/6/ 62.20%
----------------------------------------------------------------------------------------------------------------------------
(0.11) (3.90) (4.01) 44.97 6.62%/2/ 509,849 0.94%/3/,/6/ 0.58%/3/,/6/ 91.87%/2/
(0.19) - (0.19) 11.56 17.64%/2/ 131,919 0.15%/3/,/7/ 2.51%/3/,/7/ 48.33%/2/
----------------------------------------------------------------------------------------------------------------------------
(0.20) (2.29) (2.49) 10.24 12.00% 111,866 0.71%/7/ 1.94%/7/ 98.32%
----------------------------------------------------------------------------------------------------------------------------
(0.16) (2.23) (2.39) 7.83 0.23% 104,762 0.98%/7/ 1.90%/7/ 81.84%
----------------------------------------------------------------------------------------------------------------------------
(0.06) (1.11) (1.17) 6.59 (0.85)%/2/ 55,935 1.06%/3/,/7/ 1.89%/3/,/7/ 15.81%/2/
(0.07) - (0.07) 23.49 3.93%/2/ 312,056 1.00%/3/,/8/ 1.35%/3/,/8/ 18.00%/2/
----------------------------------------------------------------------------------------------------------------------------
(0.23) (0.82) (1.05) 26.27 16.95% 386,405 1.04%/8/ 0.95%/8/ 26.00%
----------------------------------------------------------------------------------------------------------------------------
(0.23) (0.11) (0.34) 29.12 12.20% 466,203 1.05%/8/ 0.77%/8/ 11.00%
----------------------------------------------------------------------------------------------------------------------------
(0.12) - (0.12) 28.95 (0.15)%/2/ 483,427 1.10%/3/,/8/ 1.13%/3/,/8/ 4.00%/2/
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
8 Without fees waived, ratios of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, and the period ended
November 30, 1997 would have been 1.21%, 1.21%, 1.24%,
1.20%, respectively; and ratios of net investment income to
average net assets for the period ended May 31, 2000 and
for the fiscal years ended November 30, 1999, 1998, and the
period ended November 30, 1997 would have been 1.02%,
0.61%, 0.75%, 1.15%, respectively.
9 On January 9, 1995, all previously existing series of
shares of each Fund were reclassified as Series A shares.
Effective January 9, 1995, Institutional shareholders
exchanged their Series A shares for the Funds'
Institutional series shares. For the year ended October 31,
1995, the Financial Highlights ratios of net expenses to
average net assets, ratios of net investment income to
average net assets, total return and the per share income
from investment operations and distributions are presented
on a basis whereby the Funds' net investment income, net
expenses, net realized and unrealized gains (losses) and
distributions for the period November 1, 1994 through
January 9, 1995, were allocated to each class of shares
based upon the relative net assets of each class of shares
as of the close of business on January 9, 1995, and the
results thereof combined with the results of operations and
distributions for each applicable class for the period
January 10, 1995 through October 31, 1995.
10 Net investment income (loss) per share represents net
investment income divided by the average shares outstanding
throughout the period.
11 Net investment income (loss) per share is calculated using
ending balances prior to consideration of adjustments for
permanent book and tax differences.
12 Portfolio turnover is calculated on the basis of the Fund
as a whole without distinguishing between the classes of
shares issued.
............................................................................ 141
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Institutional
Equity Funds (cont'd.)
<TABLE>
<CAPTION>
Income from Investment Operations
------------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains From
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
EQUITY INDEX
Year Ended October 31, 1995/8/ 33.41 0.76 7.71 8.47
----------------------------------------------------------------------------------------------
Year Ended October 31, 1996 41.08 0.91/10/ 8.68 9.59
----------------------------------------------------------------------------------------------
Year Ended October 31, 1997 49.43 0.95 14.33 15.28
----------------------------------------------------------------------------------------------
Year Ended October 31, 1998 63.16 1.02/11/ 12.59 13.61
----------------------------------------------------------------------------------------------
Year Ended October 31, 1999 74.66 1.04 17.75 18.79
----------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 91.95 0.52/11/ 5.74 6.27
LARGE CAP CORE EQUITY
Year Ended October 31, 1995/8/ 21.47 0.03 4.16 4.19
----------------------------------------------------------------------------------------------
Year Ended October 31, 1996 25.61 (0.01)/10/ 4.83 4.82
----------------------------------------------------------------------------------------------
Year Ended October 31, 1997 30.43 0.04/10/ 6.31 6.35
----------------------------------------------------------------------------------------------
Year Ended October 31, 1998 35.48 0.07/11/ 5.70 5.77
----------------------------------------------------------------------------------------------
Year Ended October 31, 1999 36.05 (0.02)/11/ 6.47 6.45
----------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 38.42 (0.01) 7.17 7.16
LARGE CAP GROWTH
Aug. 18, 1997/1/ through Nov. 30,
1997 16.46 0.03 0.73 0.76
----------------------------------------------------------------------------------------------
Year Ended November 30, 1998 17.18 0.06 3.30 3.36
----------------------------------------------------------------------------------------------
Year Ended November 30, 1999 19.51 0.07 4.83 4.90
----------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 23.90 0.01 1.85 1.86
INTERNATIONAL VALUE/9/
Year Ended October 31, 1995/8/ 19.99 0.12 (0.87) (0.75)
----------------------------------------------------------------------------------------------
Year Ended October 31, 1996 19.19 0.11/10/ 1.44 1.55
----------------------------------------------------------------------------------------------
Year Ended October 31, 1997 20.27 0.10/10/ (1.10) (1.00)
----------------------------------------------------------------------------------------------
Year Ended October 31, 1998 18.64 0.24/11/ (3.16) (2.92)
----------------------------------------------------------------------------------------------
Year Ended October 31, 1999 15.26 0.09 3.62 3.71
----------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 18.66 (0.03) (0.22) (0.25)
----------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 0.43%, 0.43%, 0.44%, 0.45%, 0.48%, 0.53%, respectively;
and ratios of net investment income to average net assets for
the period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 1.04%,
1.10%, 1.32%, 1.59%, 1.94%, 2.27%, respectively.
5 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 0.95%, 0.95%, 0.96%, 0.96%, 0.98%, 1.02%, respectively;
and ratios of net investment income to average net assets for
the period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been
(0.07)%, (0.07)%, (0.13)%, 0.01%, (0.12)%, 0.01%, respectively.
6 Without fees waived, ratios of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, and the period ended
November 30, 1997 would have been 1.22%, 1.27%, 1.29%, 1.26%,
respectively; and ratios of net investment income to average
net assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, and the period ended
November 30, 1997 would have been (0.03)%, 0.01%, 0.17%, 0.48%,
respectively.
7 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 1.79%, 1.85%, 1.92%, 2.25%, 2.36%, 2.65%, respectively;
and ratios of net investment income to average net assets for
the period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been
(0.50)%, 0.51%, 0.96%, (0.25)%, (0.24)%, (0.49)%, respectively.
................................................................................
142
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
-------------------------------------------- -----------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Net Assets Rate/12/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.74) (0.06) (0.80) 41.08 26.02% 138,106 0.46%/4/ 2.34%/4/ 4.61%
-----------------------------------------------------------------------------------------------------------------------------
(0.89) (0.35) (1.24) 49.43 23.68% 212,072 0.41%/4/ 2.01%/4/ 7.48%
-----------------------------------------------------------------------------------------------------------------------------
(0.94) (0.61) (1.55) 63.16 31.38% 315,759 0.38%/4/ 1.66%/4/ 9.81%
-----------------------------------------------------------------------------------------------------------------------------
(1.00) (1.11) (2.11) 74.66 21.93% 452,752 0.33%/4/ 1.43%/4/ 2.91%
-----------------------------------------------------------------------------------------------------------------------------
(1.03) (0.47) (1.50) 91.95 25.32% 568,161 0.36%/4/ 1.17%/4/ 13.95%
-----------------------------------------------------------------------------------------------------------------------------
(0.50) (2.08) (2.58) 95.63 6.79%/2/ 665,835 0.37%/3/,/4/ 1.10%/3/,/4/ 2.80%/2/
(0.05) - (0.05) 25.61 19.55% 134,428 0.90%/5/ 0.13%/5/ 49.84%
-----------------------------------------------------------------------------------------------------------------------------
- - - 30.43 18.82% 155,293 0.90%/5/ (0.04)%/5/ 56.75%
-----------------------------------------------------------------------------------------------------------------------------
- (1.30) (1.30) 35.48 21.56% 181,650 0.89%/5/ 0.09%/5/ 62.09%
-----------------------------------------------------------------------------------------------------------------------------
(0.03) (5.17) (5.20) 36.05 18.89% 197,798 0.89%/5/ 0.20%/5/ 51.82%
-----------------------------------------------------------------------------------------------------------------------------
(0.04) (4.04) (4.08) 38.42 18.18% 306,832 0.94%/5/ (0.06)%/5/ 59.35%
-----------------------------------------------------------------------------------------------------------------------------
- (2.03) (2.03) 43.55 19.01%/2/ 321,879 0.94%/3/,/5/ (0.06)%/3/,/5/ 65.02%/2/
(0.04) - (0.04) 17.18 4.59%/2/ 109,087 1.06%/3/,/6/ 0.68%/3/,/6/ 60.00%/2/
-----------------------------------------------------------------------------------------------------------------------------
(0.07) (0.96) (1.03) 19.51 20.91% 121,475 1.09%/6/ 0.37%/6/ 48.00%
-----------------------------------------------------------------------------------------------------------------------------
(0.06)/13/ (0.45) (0.51) 23.90 25.61% 186,177 1.11%/6/ 0.17%/6/ 28.00%
-----------------------------------------------------------------------------------------------------------------------------
- - - 25.76 7.78%/2/ 221,978 1.11%/3/,/6/ 0.08%/3/,/6/ 9.00%/2/
(0.04) (0.01) (0.05) 19.19 (3.75)% 31,187 1.50%/7/ 0.66%/7/ 15.12%
-----------------------------------------------------------------------------------------------------------------------------
(0.10) (0.37) (0.47) 20.27 8.21% 43,182 1.50%/7/ 0.62%/7/ 31.57%
-----------------------------------------------------------------------------------------------------------------------------
(0.17) (0.46) (0.63) 18.64 (5.10)% 57,206 1.50%/7/ 0.50%/7/ 97.09%
-----------------------------------------------------------------------------------------------------------------------------
(0.09) (0.37) (0.46) 15.26 (15.97)% 44,670 1.50%/7/ 1.37%/7/ 43.96%
-----------------------------------------------------------------------------------------------------------------------------
(0.31) - (0.31) 18.66 24.74% 54,423 1.56%/7/ 0.80%/7/ 45.50%
-----------------------------------------------------------------------------------------------------------------------------
(0.06) - (0.06) 18.35 (1.37)%/2/ 54,391 1.57%/3/,/7/ (0.28)%/7/ 51.16%/2/
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
8 On January 9, 1995, all previously existing series of shares of each
Fund were reclassified as Series A shares. Effective January 9, 1995,
Institutional shareholders exchanged their Series A shares for the
Funds' Institutional series shares. For the year ended October 31,
1995, the Financial Highlights ratios of net expenses to average net
assets, ratios of net investment income to average net assets, total
return and the per share income from investment operations and
distributions are presented on a basis whereby the Funds' net
investment income, net expenses, net realized and unrealized gains
(losses) and distributions for the period November 1, 1994 through
January 9, 1995, were allocated to each class of shares based upon
the relative net assets of each class of shares as of the close of
business on January 9, 1995, and the results thereof combined with
the results of operations and distributions for each applicable class
for the period January 10, 1995 through October 31, 1995.
9 Effective September 2, 1997, Hansberger Global Investors assumed the
investment sub-advisory responsibilities of State Street Global
Advisors.
10 Net investment income (loss) per share is calculated using ending
balances prior to consideration of adjustments for permanent book and
tax differences.
11 Net investment income (loss) per share represents net investment
income divided by the average shares outstanding throughout the
period.
12 Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
13 Includes distribution in excess of not investment income of $0.01 per
share.
............................................................................ 143
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Institutional
Equity Funds (cont'd.)
<TABLE>
<CAPTION>
Income from Investment Operations
------------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains From
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
GLOBAL EQUITY
Dec. 3, 1997/1/ through Nov. 30,
1998 10.00 0.05 0.34 0.39
----------------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.35 0.09 2.78 2.87
----------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 12.94 0.01 0.47 0.48
INTERNATIONAL GROWTH
Year Ended November 30, 1995 9.92 0.03 0.86 0.89
----------------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.79 0.06 1.27 1.33
----------------------------------------------------------------------------------------------
Year Ended November 30, 1997 12.12 0.01 0.33 0.34
----------------------------------------------------------------------------------------------
Year Ended November 30, 1998 12.09 0.04 1.80 1.84
----------------------------------------------------------------------------------------------
Year Ended November 30, 1999 13.40 0.06 4.58 4.64
----------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 17.22 0.01 1.01 1.02
MIDCAP INDEX
Nov. 4, 1999/1/ through April 30,
2000 (unaudited) 10.00 0.05 1.65 1.70
MIDCAP CORE EQUITY
Year Ended October 31, 1995/10/ 33.19 0.00 8.49 8.49
----------------------------------------------------------------------------------------------
Year Ended October 31, 1996 41.47 (0.04)/11/ 4.74 4.70
----------------------------------------------------------------------------------------------
Year Ended October 31, 1997 41.58 (0.11)/11/ 8.49 8.38
----------------------------------------------------------------------------------------------
Year Ended October 31, 1998 44.70 (0.14)/12/ (2.09) (2.23)
----------------------------------------------------------------------------------------------
Year Ended October 31, 1999 38.01 0.02/11/ 0.60 0.62
----------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 38.32 (0.04) 11.66 11.62
SMALL CAP INDEX
December 30, 1998/1/ through
November 30, 1999 10.00 0.01 0.19 0.20
----------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 10.19 0.01 0.95 0.96
SMALL CAP CORE EQUITY
Year Ended November 30, 1995 12.01 0.03 2.36 2.39
----------------------------------------------------------------------------------------------
Year Ended November 30, 1996 13.49 0.02 1.05 1.07
----------------------------------------------------------------------------------------------
Year Ended November 30, 1997 13.49 0.01 2.50 2.51
----------------------------------------------------------------------------------------------
Year Ended November 30, 1998 15.17 (0.02) (1.91) (1.93)
----------------------------------------------------------------------------------------------
Year Ended November 30, 1999 12.02 (0.03)/12/ 2.13 2.10
----------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 14.07 0.02 3.01 3.03
----------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 Without fees waived, ratios of net expenses to average net
assets for the periods ended May 31, 2000 and fiscal year ended
November 30, 1999 and the period ended November 30, 1998 would
have been 1.26%, 1.29%, 1.51%, respectively; and ratios of net
investment income to average net assets for the periods ended
May 31, 2000 and fiscal year ended November 30, 1999 and the
period ended November 30, 1998 would have been 0.10%, 0.11%,
0.17%, respectively.
5 Without fees waived, ratios of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, 1997, 1996, 1995 would
have been 1.64%, 1.75%, 1.75%, 1.75%, 1.45%, 1.46%,
respectively; and (unaudited) ratios of net investment income
to average net assets for the period ended May 31, 2000 and for
the fiscal years ended November 30, 1999, 1998, 1997, 1996,
1995 would have been (0.34)%, (0.21)%, (0.13)%, (0.37)%, 0.20%,
0.09%, respectively.
6 Without fees waived, the ratio of net expenses to average net
assets for the period ended April 30, 2000 would have been
0.69%; and the ratio of net investment income to average net
assets for the period ended April 30, 2000 would have been
0.91%.
7 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 0.97%, 0.96%, 0.95%, 0.95%, 0.95%, 0.98% respectively; and
ratios of net investment income to average net assets for the
period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been
(0.29)%, 0.02%, (0.39)%, (0.32)%, (0.17)%, (0.08)%,
respectively.
................................................................................
144
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
-------------------------------------------- ------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Net Assets Rate/13/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.04) - (0.04) 10.35 3.95%/2/ 48,459 1.31%/3/,/4/ 0.37%/3/,/4/ 3.00%/2/
-----------------------------------------------------------------------------------------------------------------------------
(0.10) (0.18) (0.28) 12.94 28.44% 59,496 1.13%/4/ 0.27%/4/ 34.00%
-----------------------------------------------------------------------------------------------------------------------------
- (0.14) (0.14) 13.28 3.70%/2/ 72,196 1.15%/3/,/4/ 0.21%/3/,/4/ 7.00%/2/
- (0.02)/14/ (0.02) 10.79 8.97% 36,096 1.16%/5/ 0.39%/5/ 62.78%
-----------------------------------------------------------------------------------------------------------------------------
- - - 12.12 12.33% 52,181 1.14%/5/ 0.51%/5/ 77.63%
-----------------------------------------------------------------------------------------------------------------------------
(0.06)/14/ (0.31) (0.37) 12.09 2.91% 55,038 1.29%/5/ 0.09%/5/ 75.18%
-----------------------------------------------------------------------------------------------------------------------------
(0.10)/14/ (0.43) (0.53) 13.40 15.73% 60,647 1.28%/5/ 0.34%/5/ 88.95%
-----------------------------------------------------------------------------------------------------------------------------
(0.07)/14/ (0.75) (0.82) 17.22 36.98% 92,778 1.26%/5/ 0.28%/5/ 93.73%
-----------------------------------------------------------------------------------------------------------------------------
(0.12) (1.52) (1.64) 16.60 6.02%/2/ 110,702 1.18%/3/,/5/ 0.12%/3/,/5/ 44.99%
(0.05) - (0.05) 11.65 16.97%/2/ 102,815 0.50%/3/,/6/ 1.10%/3/,/6/ 23.17%/2/
- (0.21) (0.21) 41.47 25.79% 434,228 0.90%/7/ 0.00%/7/ 79.25%
-----------------------------------------------------------------------------------------------------------------------------
- (4.59) (4.59) 41.58 12.58% 482,857 0.88%/7/ (0.10)%/7/ 103.34%
-----------------------------------------------------------------------------------------------------------------------------
- (5.26) (5.26) 44.70 22.44% 569,028 0.87%/7/ (0.25)%/7/ 97.40%
-----------------------------------------------------------------------------------------------------------------------------
- (4.46) (4.46) 38.01 (5.66)% 464,858 0.88%/7/ (0.32)%/7/ 77.39%
-----------------------------------------------------------------------------------------------------------------------------
- (0.31) (0.31) 38.32 1.56% 359,947 0.94%/7/ 0.04%/7/ 139.91%
-----------------------------------------------------------------------------------------------------------------------------
- (0.79) (0.79) 49.15 30.63%/2/ 395,603 0.95%/3/,/7/ (0.27)%/3/,/7/ 177.11%/2/
(0.01) - (0.01) 10.19 2.01%/2/ 45,331 0.68%/3/,/8/ 0.18%/3/,/8/ 35.27%
-----------------------------------------------------------------------------------------------------------------------------
- (0.14) (0.14) 11.01 9.54%/2/ 53,205 0.67%/3/,/8/ 0.10%/3/,/8/ 19.13%
- (0.91) (0.91) 13.49 21.70% 139,681 0.96%/9/ 0.18%/9/ 83.13%
-----------------------------------------------------------------------------------------------------------------------------
(0.02) (1.05) (1.07) 13.49 8.72% 171,295 0.96%/9/ 0.17%/9/ 65.85%
-----------------------------------------------------------------------------------------------------------------------------
(0.01) (0.82) (0.83) 15.17 19.77% 211,643 0.95%/9/ 0.01%/9/ 80.23%
-----------------------------------------------------------------------------------------------------------------------------
- (1.22)/15/ (1.22) 12.02 (13.90)% 129,591 0.95%/9/ (0.16)%/9/ 69.72%
-----------------------------------------------------------------------------------------------------------------------------
- (0.05) (0.05) 14.07 17.57% 111,643 0.96%/9/ (0.26)%/9/ 72.08%
-----------------------------------------------------------------------------------------------------------------------------
- (0.26) (0.26) 16.84 21.94%/2/ 131,418 0.98%/3/,/9/ 0.24%/3/,/9/ 40.05%
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
8 Without fees waived, ratios of net expenses to average net assets for
the periods ended May 31, 2000 and November 30, 1999 would have been
1.07%, 1.13%, respectively; and (unaudited) ratios of net investment
income to average net assets for the periods ended May 31, 2000 and
November 30, 1999 would have been (0.30)%, (0.27)%.
9 Without fees waived, ratios of net expenses to average net assets for
the periods ended May 31, 2000 and for the fiscal years ended
November 30, 1999, 1998, 1997, 1996, 1995 would have been 1.39%,
1.36%, 1.35%, 1.35%, 1.06%, 1.06%, respectively; and (unaudited)
ratios of net investment income to average net assets for the period
ended May 31, 2000 and for the fiscal years ended November 30, 1999,
1998, 1997, 1996, 1995 would have been (0.17)%, (0.66)%, (0.24)%,
(0.39)%, 0.07%, 0.08%, respectively.
10 On January 9, 1995, all previously existing series of shares of each
Fund were reclassified as Series A shares. Effective January 9, 1995,
Institutional shareholders exchanged their Series A shares for the
Funds' Institutional series shares. For the year ended October 31,
1995, the Financial Highlights ratios of net expenses to average net
assets, ratios of net investment income to average net assets, total
return and the per share income from investment operations and
distributions are presented on a basis whereby the Funds' net
investment income, net expenses, net realized and unrealized gains
(losses) and distributions for the period November 1, 1994 through
January 9, 1995, were allocated to each class of shares based upon
the relative net assets of each class of shares as of the close of
business on January 9, 1995, and the results thereof combined with
the results of operations and distributions for each applicable class
for the period January 10, 1995 through October 31, 1995.
11 Net investment income (loss) per share is calculated using ending
balances prior to consideration of adjustments for permanent book and
tax differences.
12 Net investment income (loss) per share represents net investment
income divided by the average shares outstanding throughout the
period.
13 Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
14 Includes distribution in excess of net investment income for the
periods ended November 30, 1999, 1998, 1997, of $0.02, $0.07, $0.02
per share, respectively. Includes return of capital distribution of
$0.01 per share for the period ended November 30, 1995.
............................................................................ 145
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Institutional
Equity Funds (cont'd.)
<TABLE>
<CAPTION>
Income from Investment Operations
-----------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains From
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
SCIENCE & TECHNOLOGY
Aug. 9, 1999/1/ through Nov. 30,
1999 10.00 - 4.56 4.56
---------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 14.56 (0.06) 2.94 2.88
MICROCAP
Aug. 1, 1995/1/ through June 30,
1996 10.00 (0.02) 6.14 6.12
---------------------------------------------------------------------------------------------
July 1, 1996 through Oct. 31, 1996 15.45 (0.07) 0.82 0.75
---------------------------------------------------------------------------------------------
Year Ended October 31, 1997 16.20 (0.15) 4.27 4.12
---------------------------------------------------------------------------------------------
Year Ended October 31, 1998 17.57 (0.22) (3.19) (3.41)
---------------------------------------------------------------------------------------------
Year Ended October 31, 1999 12.49 (0.19)/6/ 9.79 9.60
---------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 22.06 (0.19) 15.06 14.87
---------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 Without fees waived, ratios of net expenses to average net
assets for the periods ended May 31, 2000 and November 30, 1999
would have been 1.41% and 1.84; and ratios of net investment
income to average net assets for the periods ended May 31, 2000
and November 30, 1999 would have been (0.86)% and (1.09)%.
................................................................................
146
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
----------------------------------------- -----------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Net Assets Rate/7/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - - 14.56 45.60%/2/ 40,936 1.69%/3/,/4/ (0.94)%/3/,/4/ 16.00%/2/
----------------------------------------------------------------------------------------------------------------------------
- - - 17.44 19.78%/2/ 89,842 1.30%/3/,/4/ (0.75)%/3/,/4/ 31.00%/2/
(0.05) (0.62) (0.67) 15.45 63.93%/2/ 63,595 1.74%/3/,/5/ (0.16)%/3/,/5/ 283.67%/2/
----------------------------------------------------------------------------------------------------------------------------
- - - 16.20 4.85%/2/ 66,368 1.72%/3/,/5/ (1.44)%/3/,/5/ 64.44%/2/
----------------------------------------------------------------------------------------------------------------------------
- (2.75) (2.75) 17.57 30.12% 103,840 1.70%/5/ (1.20)%/5/ 158.39%
----------------------------------------------------------------------------------------------------------------------------
- (1.67) (1.67) 12.49 (21.51)% 72,696 1.74%/5/ (1.38)%/5/ 135.61%
----------------------------------------------------------------------------------------------------------------------------
- (0.03) (0.03) 22.06 77.06% 150,898 1.76%/5/ (1.18)%/5/ 200.09%
----------------------------------------------------------------------------------------------------------------------------
- (6.13) (6.13) 30.80 81.81%/2/ 282,900 1.69%/3/,/5/ (1.25)%/3/,/5/ 231.39%/2/
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
5 Without fees waived, the ratio of net expenses to average
net assets for the period ended April 30, 2000 and for the
fiscal years ended October 31, 1999, 1998, 1997, 1996 and
for the period ended June 30, 1996 would have been 1.69%,
1.77%, 1.81%, 1.78%, 1.79%, 1.97%, respectively; and the
ratio of net investment income (loss) to average net assets
for the period ended April 30, 2000 and for the fiscal years
ended October 31, 1999, 1998, 1997 and 1996 and the period
ended June 30, 1996 would have been (1.25%), (1.19)%,
(1.45%), (1.28%), (1.51%), (0.39%), respectively.
6 Net investment income (loss) per share is calculated using
ending balances prior to consideration of adjustments for
permanent book and tax differences.
7 Portfolio turnover is calculated on the basis of the Fund as
a whole without distinguishing between the classes of shares
issued.
............................................................................ 147
<PAGE>
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[LOGO OF FIRSTAR]
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No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Funds' Additional
Statement incorporated herein by reference, in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Funds
or their Distributor. This Prospectus does not constitute an offering by the
Funds or by their Distributor in any jurisdiction in which such offering may
not lawfully be made.
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500", "500",
"S&P MidCap 400 Index", "Standard & Poor's MidCap 400 Index, "S&P Small Cap
600" and "Standard & Poor's Small Cap 600" are trademarks of The McGraw Hill
Companies, Inc. and have been licensed for use by Firstar Funds. The Equity
Index Fund, MidCap Index Fund and Small Cap Index Fund are not sponsored,
endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no
representation regarding the advisability of investing in the Equity Index
Fund, MidCap Index Fund or Small Cap Index Fund.
The Lehman Brothers 1-3 Year Government/Credit Bond Index, the Lehman Brothers
Intermediate Government/Credit Bond Index and the Lehman Brothers
Government/Credit Bond Index are trademarks of Lehman Brothers. The Fund, its
Adviser and the Administrator are not affiliated in any way with Lehman
Brothers. Inclusion of a security in the bond index in no way implies an
opinion by Lehman Brothers as to its attractiveness or appropriateness as an
investment. Lehman Brothers' publication of the bond index is not made in
connection with any sale or offer for sale of securities or any solicitations
of orders for the purchase of securities.
................................................................................
148
<PAGE>
For More Information
Annual/Semiannual Reports
Additional information about the Funds' performance and investments is
available in the Funds' annual and semi-annual reports to shareholders. In the
Funds' annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the Funds' performance during
its last fiscal year.
Statement of Additional Information
Additional information about the Funds and their policies is also available in
the Funds' Statement of Additional Information ("Additional Statement"). The
Additional Statement is incorporated by reference into this Prospectus (and is
legally considered part of this Prospectus).
The Funds' annual and semi-annual reports and the Additional Statement are
available free upon request by calling Firstar Funds at 1-800-677-FUND.
To obtain other information and for shareholder inquiries:
By telephone - call 1-800-677-FUND.
By mail - Firstar Funds
615 East Michigan Street
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
By e-mail - [email protected]
On the Internet - Text only version of the Funds' documents are located online
and may be downloaded from: SEC - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's Public
Reference Room in Washington, D.C. You may also obtain copies of Fund documents
by paying a duplicating fee and sending an electronic request at the following
e-mail address at: [email protected]., or by sending your request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C. 20549-
0102. Information on the operation of the public reference room may be obtained
by calling the SEC at 1-202-942-8090.
The Fund's Investment Company Act File Number is 811-5380.
www.firstarfunds.com
[LOGO OF FIRSTAR]
<PAGE>
Prospectus
December 11, 2000
Y Shares
Short-Term Bond Fund
Intermediate Bond Fund
U.S. Government Securities Fund
Aggregate Bond Fund
Bond IMMDEXTM Fund
Strategic Income Fund
Tax-Exempt Intermediate Bond Fund
Missouri Tax-Exempt Bond Fund
National Municipal Bond Fund
Balanced Income Fund
Balanced Growth Fund
Growth & Income Fund
Equity Income Fund
Relative Value Fund
Equity Index Fund
Large Cap Core Equity Fund
Large Cap Growth Fund
International Value Fund
Global Equity Fund
International Growth Fund
MidCap Index Fund
MidCap Core Equity Fund
Small Cap Index Fund
Small Cap Core Equity Fund
Science & Technology Fund
MicroCap Fund
Institutional Shares
Institutional Money Market Fund
Tax-Exempt Money Market Fund
Ohio Tax-Exempt Money Market Fund
U.S. Government Money Market Fund
U.S. Treasury Money Market Fund
As with all mutual funds, the Securities and Exchange
Commission has not approved or disapproved any shares
of these funds or determined if this prospectus is
truthful or complete. Anyone who tells you otherwise is
committing a criminal offense.
[LOGO OF FIRSTAR] Bigger & Brighter
<PAGE>
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[LOGO OF FIRSTAR]
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Table of Contents
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Institutional Money Market Fund 1
--------------------------------------------------------------------------
Tax-Exempt Money Market Fund 3
--------------------------------------------------------------------------
Ohio Tax-Exempt Money Market Fund 7
--------------------------------------------------------------------------
U.S. Government Money Market Fund 11
--------------------------------------------------------------------------
U.S. Treasury Money Market Fund 14
--------------------------------------------------------------------------
Short-Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund 17
--------------------------------------------------------------------------
U.S. Government Securities Fund 22
--------------------------------------------------------------------------
Aggregate Bond Fund 25
--------------------------------------------------------------------------
Strategic Income Fund 29
--------------------------------------------------------------------------
Tax-Exempt Intermediate Bond Fund 34
--------------------------------------------------------------------------
Missouri Tax-Exempt Bond Fund 37
--------------------------------------------------------------------------
National Municipal Bond Fund 41
--------------------------------------------------------------------------
Balanced Income Fund 45
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Balanced Growth Fund 49
--------------------------------------------------------------------------
Growth & Income Fund 53
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Equity Income Fund 57
--------------------------------------------------------------------------
Relative Value Fund 60
--------------------------------------------------------------------------
Equity Index Fund 63
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Large Cap Core Equity Fund 67
--------------------------------------------------------------------------
Large Cap Growth Fund 70
--------------------------------------------------------------------------
International Value Fund 75
--------------------------------------------------------------------------
Global Equity Fund 79
--------------------------------------------------------------------------
International Growth Fund 84
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MidCap Index Fund 87
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MidCap Core Equity Fund 90
--------------------------------------------------------------------------
Small Cap Index Fund 93
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Small Cap Core Equity Fund 97
--------------------------------------------------------------------------
Science & Technology Fund 100
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MicroCap Fund 104
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Types of Investment Risk 108
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Investing With Firstar Funds 117
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Share Classes Available 117
--------------------------------------------------------------------------
Shareholder Organizations 117
--------------------------------------------------------------------------
Purchasing Shares 118
--------------------------------------------------------------------------
Redeeming Shares 122
--------------------------------------------------------------------------
Exchanging Shares 124
--------------------------------------------------------------------------
Additional Shareholder Services 124
--------------------------------------------------------------------------
Additional Information 125
--------------------------------------------------------------------------
Dividends, Capital Gains Distributions and Taxes 125
--------------------------------------------------------------------------
Management of the Funds 127
--------------------------------------------------------------------------
Net Asset Value and Days of Operation 132
--------------------------------------------------------------------------
Appendix 134
--------------------------------------------------------------------------
Financial Highlights 134
--------------------------------------------------------------------------
</TABLE>
An investment in the Funds is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Although each money market fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Funds.
Learn about each
Fund's Objective, Principal Investment Strategies, Principal risks, Performance
and Expenses
................................................................................
<PAGE>
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Institutional Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Institutional Money Market Fund is to provide a
high level of taxable current income consistent with liquidity, the
preservation of capital and a stable net asset value. This investment objective
may be changed by the Board of Directors without approval of Shareholders,
although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in short-term, high quality, dollar-denominated
money market debt obligations generally maturing in 397 days or less. These
obligations may be issued by entities including domestic and foreign
corporations, banks and other financial institutions and other types of
entities or by investment companies, or they may be issued or guaranteed by a
U.S. or foreign government, agency, instrumentality or political subdivision.
The Fund will acquire only securities which are rated in the highest short-term
rating category by at least two rating agencies (or by the only rating agency
providing a rating), or are issued or guaranteed by, or otherwise provide the
right to demand payment from, entities with those ratings. If the securities
are unrated, they must be of comparable quality, as determined at the time of
acquisition.
The Fund maintains an average maturity of 90 days or less.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed-income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed-income
securities will decline in value.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although each Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
shares from year to year and the average annual return of the Fund's shares.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If fee waivers were not in place,
the Fund's performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%)
1990
1991
1992 3.58%
1993 2.90%
1994 4.08%
1995 5.81%
1996 5.26%
1997 5.39%
1998 5.38%
1999 4.94%
.............................................................................. 1
<PAGE>
................................................................................
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--------------------------------------------------------------------------------
The Institutional Money Market Fund's total return for the nine-month period
ended September 30, 2000 was 4.52%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '95 1.46%
Worst Quarter: Q 2 '93 0.70%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (April 26, 1991)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Money Market Fund 4.94% 5.35% -- 4.72%
-------------------------------------------------------------------------
</TABLE>
The 7-day yield for the period ended on 12/31/99 for the Institutional Money
Market Fund was 5.54% and without giving effect to fee waivers was 5.29%.
Figures reflect past performance. Yields will vary. You may call 1-800-677-FUND
to obtain the current 7-day yield of the Institutional Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Shares of the Institutional Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Management Fees (before waivers)/2/ 0.49%
Distribution and Service (12b-1) Fees None
Other Expenses (before waivers)/3/ 0.36%
-------
Total Annual Fund Operating Expenses (before
waivers) 0.85%
Fee Waiver and Expense Reimbursements/4/ (0.46)%
-------
Net Annual Fund Operating Expenses/4/ 0.39%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Institutional
Money Market Fund is 0.28% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Institutional Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the Institutional Money Market Fund
currently are 0.11% of the Fund's average daily net assets.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Shares of the Institutional Money Market Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.39% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
................................................................................
2
<PAGE>
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[LOGO OF FIRSTAR]
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in the Fund for the time periods indicated, reinvest
all of your dividends and distributions, and then redeem all of your shares at
the end of those periods. The example also assumes that your investment has a
5% return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Money Market Fund $40 $2,301 $435 $1,028
----------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
Tax-Exempt Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Tax-Exempt Money Market Fund is to provide a
high level of current income exempt from federal income taxes consistent with
liquidity, the preservation of capital and a stable net asset value. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in a diversified portfolio of dollar-denominated
debt obligations ("municipal obligations") issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their authorities, agencies, instrumentalities and political subdivisions. The
Fund will acquire only securities which are rated in the highest short-term
rating category by at least two rating agencies (or by the only rating agency
providing a rating), or are issued or guaranteed by, or otherwise provide the
right to demand payment from, entities with those ratings. If the security is
unrated, it must be of comparable quality to securities with those ratings, as
determined at the time of acquisition. During normal market conditions, the
Fund will invest at least 80% of its net assets in municipal obligations which
are exempt from federal income taxes with remaining maturities of 13 months or
less. (Securities which are subject to demand features and certain U.S.
government obligations may have longer maturities). The Fund maintains an
average portfolio maturity of 90 days or less.
The two principal classifications of municipal obligations which the Tax-Exempt
Money Market Fund invests in are:
General Obligation Revenue Securities
Securities Revenue securities are payable only from the
General obligation revenues derived from a particular facility or
securities are secured class of facilities or, in some cases, from the
by the issuer's pledge proceeds of a special excise tax or other
of its full faith, specific revenue source such as the issuer of the
credit and taxing power facility being financed.
for the payment of
principal and interest.
Municipal obligations purchased by the Fund may include variable and floating
rate instruments which are instruments with interest rates that are adjusted
either on a schedule or when an index or benchmark changes. While there may be
no active secondary market with respect to a particular variable or floating
rate demand instrument, the Fund may demand payment in full of the principal
and interest.
.............................................................................. 3
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Long-term fixed income securities will
normally have more price volatility because of this risk than short-term
securities.
Municipal obligations which the Fund purchases may be backed by letters of
credit issued by banks and other financial institutions. Adverse developments
affecting banks could have a negative effect on the Fund's portfolio
securities.
The Fund may invest more than 25% of its total assets in municipal obligations
issued by entities located in the same state and the interest on which is paid
solely from revenues of similar projects. As a result, changes in economic,
business or political conditions relating to a particular state or types of
projects may have a disproportionate impact on the Fund's share price.
The Fund may acquire municipal lease obligations which are issued by a state or
local government or authority to acquire land and a wide variety of equipment
and facilities. 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.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
Institutional Shares of the Tax-Exempt Money Market Fund are new and have no
performance history. For this reason, the performance information shown below
is for another class of shares (Retail A Shares) that is not offered in this
prospectus but would have substantially similar annual returns because both
classes of shares will be invested in the same portfolio of securities. Annual
returns will differ only to the extent that the classes do not have the same
expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A shares from year to year and the average annual returns of the Fund's
Retail A shares. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
................................................................................
4
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990 5.48%
1991 4.24%
1992 2.64%
1993 2.06%
1994 2.49%
1995 3.44%
1996 3.06%
1997 3.13%
1998 2.97%
1999 2.58%
The Tax-Exempt Money Market Fund's total return for Retail A Shares for the
nine-month period ended September 30, 2000 was 2.52%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 2 '89 1.58%
Worst Quarter: Q 1 '94 0.50%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
-------------------------------------------------------
<S> <C> <C> <C>
Tax-Exempt Money Market Fund -
Retail A Shares 2.58% 3.03% 3.20%
</TABLE>
--------------------------------------------------------------------------------
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
Tax-Exempt Money Market Fund was 3.66% and without giving effect to fee waivers
was 3.66%. Figures reflect past performance. Yields will vary. You may call 1-
800-677-FUND to obtain the current 7-day yield of Retail A Shares of the Tax-
Exempt Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the Tax-Exempt Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
.............................................................................. 5
<PAGE>
................................................................................
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees 0.50%
Distribution and Service (12b-1) Fees None
Other Expenses (before waivers)/2/ 0.43%
------
Total Annual Fund Operating Expenses
(before waivers) 0.93%
Fee Waivers and Expense Reimbursements/3/ (0.14)%
------
Net Annual Fund Operating Expenses/3/ 0.79%
======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Institutional Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the Tax-Exempt Money Market Fund
currently are 0.29% of the Fund's average daily net assets.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Tax-Exempt Money Market
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than 0.79% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money Market Fund -
Institutional Shares $81 $336 $611 $1,397
</TABLE>
--------------------------------------------------------------------------------
................................................................................
6
<PAGE>
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[LOGO OF FIRSTAR]
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Ohio Tax-Exempt Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Ohio Tax-Exempt Money Market Fund is to provide
current income exempt from federal income tax and the personal income taxes
imposed by the state of Ohio and Ohio municipalities consistent with stability
of principal. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPHIC]
Examples of Ohio Municipal Securities
.tax and revenue anticipation notes issued to finance working capital needs in
anticipation of receiving taxes or other revenues
.bond anticipation notes that are intended to be refinanced through a later
issuance of longer term bonds
.municipal commercial paper and other short-term notes
.variable rate demand notes
.municipal bonds and leases
.participation interests in any of the above
The Fund intends to achieve its investment goal by investing its assets so that
at least 80% of its annual interest income is exempt from federal income tax and
not subject to the alternative minimum tax and the personal income taxes imposed
by the state of Ohio and Ohio municipalities. In addition, the Fund will invest
its assets so that under normal circumstances, at least 65% of the value of its
total assets will be invested in Ohio municipal securities exempt from federal
regular income tax and Ohio State income tax. The Fund's portfolio consists of
municipal securities maturing in 397 days or less. The average maturity,
however, of all the securities in the Fund's portfolio will be 90 days or less
on a dollar-weighted basis. The Fund may invest more than 25% of its total
assets in securities credit-enhanced by banks. Credit-enhanced securities are
investments backed by a guaranty, a letter of credit or insurance.
The municipal securities in which the Fund invests are primarily debt
obligations issued by or on behalf of Ohio and its political subdivisions and
financing authorities and obligations of other states, territories and
possessions of the United States and any political subdivision or financing
authority of any of these. The income from such obligations must be exempt from
federal income tax (including alternative minimum tax) and the personal income
taxes imposed by the state of Ohio and its political subdivisions.
Participation Interests
The Fund may purchase interests in municipal securities from financial
institutions such as commercial and investment banks, savings associations and
insurance companies. Financial institutions provide guarantees, letters of
credit or insurance to the Fund on the underlying municipal securities.
Municipal Leases
The Fund may also invest in municipal leases, which are obligations issued by
state and local governments to finance the acquisition of equipment and
facilities. Municipal leases may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation interest.
Municipal leases may be considered illiquid.
Variable Rate Demand Notes
The Fund may invest in variable rate demand notes, which are obligations with
variable or floating interest rates. The notes provide the Fund with the right
to tender the security for repurchase at its stated principal amount plus
accrued interest. These securities usually bear interest at a rate that allows
the securities to trade at par. Most variable rate demand notes allow the fund
to demand the repurchase of the security on not more than 7 days' notice. Other
notes only permit the Fund to tender the security at the time of each interest
rate adjustment or at other fixed intervals. The Fund treats variable rate
demand notes as maturing on the later of the date of the next interest
adjustment or the date on which the Fund may next tender the security for
repurchase.
.............................................................................. 7
<PAGE>
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[LOGO OF FIRSTAR]
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Temporary Investments
From time to time, the Fund may invest in tax-exempt or taxable short-term
temporary investments when the Fund's Adviser determines that market conditions
call for a temporary defensive posture. During such times, it is possible for
the Fund not to reach its investment objective. Although the Fund is permitted
to make taxable temporary investments, the Adviser currently has no intention
to generate income subject to federal regular income tax.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk and tax risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal;
to the extent the Fund invests in credit enhanced securities, it is especially
susceptible to credit risk. The ability of a state or local government issuer
to make payments can be affected by many factors, including economic
conditions, the flow of tax revenues and changes in the level of federal, state
or local aid. Some municipal securities are payable only from limited revenue
sources or by private entities. Interest rate risk is the risk that, when
interest rates increase, fixed income securities, including municipal
securities, will decline in value. Tax risk is the risk that the Fund may be
more adversely impacted by changes in tax rates and policies than other funds.
Municipal obligations which the Fund purchases may be backed by letters of
credit issued by banks and other financial institutions. Adverse developments
affecting banks could have a negative effect on the Fund's portfolio
securities.
The Fund is also subject to Ohio state-specific risks, as it may invest at
least 65% of its total assets in municipal obligations issued by the State or
entities located in the state of Ohio. Ohio's economy is largely composed of
manufacturing, which is concentrated in the automobile sector and other durable
goods. The exposure to these industries, particularly the auto sector, leaves
Ohio vulnerable to an economic slowdown associated with business cycles.
Furthermore, population growth, as in many states around the Great Lakes, has
been stagnant.
The Fund's concentration in securities issued by Ohio and its political
subdivisions provides a greater level of risk than a fund whose assets are
diversified across numerous states and municipal issuers. The ability of Ohio
or its local issuers to meet their obligations will depend on, among other
factors:
1. the availability of tax and other revenues;
2. economic, political and demographic conditions within the state or region of
the state; and
3. the underlying fiscal condition of the state, its counties, municipalities
and school districts.
See the Additional Statement for additional information regarding Ohio state-
specific risks.
Investing in the Fund has added risks because the Fund is a non-diversified
fund under the Investment Company Act of 1940, as amended (the "1940 Act"),
subjecting the Fund to non-diversification risks. Compared with other mutual
funds, this Fund may invest a greater percentage of its assets in a more
limited number of issues concentrated in one state which, as a result, can
increase the Fund's volatility. The value of the Fund's securities can be
impacted by economic or political developments affecting certain securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
................................................................................
8
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A Shares from year to year and the average annual returns of the Fund's
Retail A Shares. The Fund began operations on December 2, 1997 as the Firstar
Stellar Ohio Tax-Free Money Market Fund, a separate portfolio (a "Predecessor
Stellar Fund") of Firstar Stellar Funds. On December 11, 2000, the Predecessor
Stellar Fund was reorganized as a new portfolio of Firstar Funds, Inc. The
Predecessor Stellar Fund did not offer Institutional shares. The performance
set forth below is based on the performance of a different class of the
Predecessor Stellar Fund (Retail A Shares). The performance of the other class
shown would be substantially similar to that of the Institutional Class because
both classes will be invested in the same portfolio of securities. Annual
returns will differ only to the extent that the classes do not have the same
expenses.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991
1992
1993
1994
1995
1996
1997
1998 2.85%
1999 2.69%
The Ohio Tax-Exempt Money Market Fund's total return for Retail A Shares for
the nine-month period ended September 30, 2000 was 2.49%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 2 '98 0.78%
Worst Quarter: Q 2 '99 0.62%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (December 2, 1997)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ohio Tax-Exempt Money Market Fund -
Retail A Shares 2.69% -- -- 2.77%
-----------------------------------------------------------------------
</TABLE>
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
Ohio Tax-Exempt Money Market Fund was 3.52%, and without giving effect to fee
waivers was 3.20%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-FUND to obtain the current 7-day yield of the Retail A Shares of
the Ohio Tax-Exempt Money Market Fund.
.............................................................................. 9
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the Ohio Tax-Exempt Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.50%
Distribution and Service (12b-1) Fees None
Other Expenses (before waivers)/3/ 0.63%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.13%
Fee Waivers and Expense Reimbursements/4/ (0.34)%
-------
Net Annual Fund Operating Expenses/4/ 0.79%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Ohio Tax-Exempt
Money Market Fund is 0.34% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Institutional Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the Ohio Tax-Exempt Money Market
Fund currently are 0.45% of the Fund's average daily net assets.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the Ohio Tax-Exempt Money
Market Fund until October 31, 2001, so that Net Annual Fund Operating
Expenses will be no more than 0.79% of the Fund's average daily net assets
for the current fiscal year. These fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ohio Tax-Exempt Money Market Fund -
Institutional Shares $81 $379 $699 $1,606
</TABLE>
--------------------------------------------------------------------------------
................................................................................
10
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
U.S. Government Money Market Fund
Objective
[GRAPHIC]
The investment objective of the U.S. Government Money Market Fund is to provide
a high level of taxable current income consistent with liquidity, the
preservation of capital and a stable net asset value (irrespective of state
income tax considerations). This investment objective may be changed by the
Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The U.S. Government Money Market Fund invests in short term dollar denominated
debt obligations generally maturing in 397 days or less, issued or guaranteed
as to principal and interest by the U.S. government, its agencies or
instrumentalities. Under normal market conditions, the Fund intends to invest
at least 65% of its total assets in these obligations. The Fund also invests in
variable and floating rate instruments and repurchase agreements.
The Fund maintains an average maturity of 90 days or less.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
Even though the U.S. Government Money Market Fund purchases mostly U.S.
government obligations, shares of the Fund are not themselves issued or
guaranteed by any government agency.
The rate of income on Fund shares will vary from day to day so that the
dividends on your investment will vary. The Fund is subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value.
There can be no assurance that the U.S. government will provide financial
support to U.S. government-sponsored agencies or instrumentalities where it is
not obligated to do so by law.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
Institutional Shares of the U.S. Government Money Market Fund are new and have
no performance history. For this reason, the performance information shown
below is for another class of shares (Retail A Shares) that is not offered in
this prospectus but would have substantially similar annual returns because
both classes of shares will be invested in the same portfolio of securities.
Annual returns will differ only to the extent that the classes do not have the
same expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A shares from year to year and the average annual return of the Fund's
Retail A Shares. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
............................................................................. 11
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990 7.71%
1991 5.56%
1992 3.30%
1993 2.61%
1994 3.76%
1995 5.39%
1996 4.92%
1997 4.97%
1998 4.95%
1999 4.41%
The U.S. Government Money Market Fund's total return for Retail A Shares for
the nine-month period ended September 30, 2000 was 4.12%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '89 2.24%
Worst Quarter: Q 2 '93 0.63%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
--------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Money Market Fund --
Retail A Shares 4.41% 4.92% 4.75%
--------------------------------------------------------------
</TABLE>
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
U.S. Government Money Market Fund was 4.66% and without giving effect to fee
waivers was 4.66%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-FUND to obtain the current 7-day yield of Retail A Shares of the
U.S. Government Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold
Institutional Shares of the U.S. Government Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
---------------------------------------------------------
</TABLE>
................................................................................
12
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.50%
Distribution and Service (12b-1) fees None
Other Expenses (before waivers)/3/ 0.66%
-------
Total Annual Fund Operating Expenses
(before waivers) 1.16%
Fee Waivers and Expense Reimbursements/4/ (0.37)%
-------
Net Annual Fund Operating Expenses/4/ 0.79%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the U.S. Government
Money Market Fund is 0.31% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds--
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Institutional Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the U.S. Government Money Market
Fund currently are 0.48% of the Fund's average daily net assets.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the U.S. Government Money
Market Fund until October 31, 2001, so that Net Annual Fund Operating
Expenses will be no more than 0.79% of the Fund's average daily net assets
for the current fiscal year. These fee waivers and expense reimbursements may
be terminated at any time after October 31, 2001 at the discretion of the
service providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Money Market Fund -
Institutional Shares $81 $385 $712 $1,637
--------------------------------------------------------------------
</TABLE>
............................................................................. 13
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
U.S. Treasury Money Market Fund
Objective
[GRAPHIC]
The investment objective of the U.S. Treasury Money Market Fund is to seek
stability of principal and current income consistent with stability of
principal. This investment objective may be changed by the Board of Directors
without approval of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The U.S. Treasury Money Market Fund invests exclusively in short-term U.S.
Treasury obligations that have a maturity of 397 days or less from the date of
purchase. The Fund may purchase repurchase agreements collateralized by U.S.
Treasury obligations. The Fund intends to invest in the agreements that provide
for repurchase within 397 days from the date of acquisition. The average
maturity of these securities is 120 days or less. The average maturity,
however, of all the securities in the Fund's portfolio will be 90 days or less
on a dollar-weighted basis. Securities subject to repurchase agreements are
marked to market on a daily basis. U.S. Treasury obligations are issued by the
U.S. government and are fully guaranteed as to principal and interest by the
United States government. The Fund may also retain assets in cash and may
purchase U.S. Treasury obligations on a when-issued or delayed delivery basis.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
Even though the U.S. Treasury Money Market Fund purchases mostly U.S.
government obligations, shares of the Fund are not themselves issued or
guaranteed by any government agency.
The rate of income on Fund shares will vary from day to day so that the
dividends on your investment will vary. The Fund is subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value.
The Fund is subject to when-issued and delayed delivery transaction risks.
When-issued and delayed delivery transactions involve securities with payment
and delivery scheduled for a future time. One of the risks of investing in
when-issued or delayed delivery transactions is if the seller chooses not to
complete the transaction, the Fund could miss an advantageous price or yield.
The Fund may enter into transactions to sell its purchase commitments to third
parties at current market rates and simultaneously acquire other commitments to
purchase similar securities at later dates. The Fund may realize short-term
profits or losses on the sale of these kinds of commitments.
The Fund is also subject to repurchase agreement risk. Repurchase agreements
are arrangements in which banks, broker/dealers and other financial
institutions sell securities to the Fund and agree to repurchase them at a
certain time and price within one year. Repurchase agreement risk is the risk
that the seller may not repurchase the securities from the Fund, which may
result in the Fund selling the security for less than the agreed upon price.
Another risk of repurchase agreements is that the seller may default or file
for bankruptcy. That could mean the Fund might have to wait through lengthy
court actions before selling the securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Institutional Shares from year to year and the average annual returns of the
Fund's Institutional Shares.
On November 27, 2000, the Mercantile Treasury Money Market Portfolio, a
portfolio of Mercantile Mutual Funds, Inc., and the Firstar Stellar Treasury
Fund, a portfolio of Firstar Stellar Funds, reorganized into the
................................................................................
14
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Firstar U.S. Treasury Money Market Fund. At that time, the Firstar U.S.
Treasury Money Market Fund adopted an investment objective and certain non-
fundamental investment policies and restrictions that are substantially the
same as those of the Firstar Stellar Treasury Fund (a "Predecessor Stellar
Fund"). The performance set forth below for the U.S. Treasury Money Market Fund
is based on the performance of a corresponding class of the Firstar Stellar
Treasury Fund.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991
1992
1993
1994
1995
1996
1997
1998 4.77%
1999 4.22%
The U.S. Treasury Money Market Fund's total return for Institutional Shares for
the nine-month period ending September 30, 2000 was 3.93%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q4 '97 1.24%
Worst Quarter: Q2 '99 0.98%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Institutional Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (March 25, 1997)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Money Market Fund -
Institutional Shares 4.22% -- -- 4.62%
</TABLE>
--------------------------------------------------------------------------------
The 7-day yield for the period ended on 12/31/99 for Institutional Shares of
the U.S. Treasury Money Market Fund was 4.13%, and without giving effect to fee
waivers was 4.13%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-Fund to obtain the current 7-day yield of Institutional Shares
of the Fund.
............................................................................. 15
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Shares of the U.S. Treasury Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional Shares
----------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional Shares
---------------------------------------------------------------------------
<S> <C>
Management Fees 0.44%
Distribution and Service (12b-1)
Fees None
Other Expenses (before waivers)/2/ 0.39%
-------
Total Annual Fund Operating Expenses (before waivers) 0.83%
Fee Waivers and Expense
Reimbursements/3/ (0.04)%
-------
Net Annual Fund Operating
Expenses/3/ 0.79%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Institutional Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the U.S. Treasury Money Market Fund
currently are 0.35% of the Fund's average daily net assets.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Institutional Shares of the U.S. Treasury Money Market
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than 0.79% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
Example
The following example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated, reinvest all of your dividends and
distributions, and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Money Market Fund -
Institutional Shares $81 $261 $456 $1,021
</TABLE>
--------------------------------------------------------------------------------
................................................................................
16
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Short-Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund
Objectives
[GRAPHIC]
The investment objective of the Short-Term Bond Fund (formerly Short-Term Bond
Market Fund) is to provide an annual rate of total return, before Fund
expenses, comparable to the annual rate of total return of the Lehman Brothers
1-3 Year Government/Credit Bond Index (the "Lehman 1-3 Index").
The investment objective of the Intermediate Bond Fund (formerly Intermediate
Bond Market Fund) is to provide an annual rate of total return, before Fund
expenses, comparable to the annual rate of total return of the Lehman Brothers
Intermediate Government/Credit Bond Index (the "Lehman Intermediate Index").
The investment objective of the Bond IMMDEX(TM) Fund is to provide an annual
rate of total return, before Fund expenses, comparable to the annual rate of
total return of the Lehman Brothers Government/Credit Bond Index (the "Lehman
Index").
Each of these investment objectives may be changed by the Board of Directors
without approval of Shareholders, although no change is currently anticipated.
Duration Defined:
"Duration" is the average time it takes to receive expected cash flows
(discounted to their present value) on a particular fixed-income instrument or a
portfolio of instruments. Duration usually defines the effect of interest rate
changes on bond prices. However, for large interest rate changes (generally
changes of 1% or more) this measure does not completely explain the interest
rate sensitivity of a bond.
For Example
The duration of a 5-year zero coupon bond which pays no interest or principal
until the maturity of the bond is 5 years. This is because a zero coupon bond
produces no cash flow until the maturity date.
On the other hand, a coupon bond that pays interest semiannually and matures in
5 years will have a duration of less than 5 years reflecting the semiannual cash
flows resulting from coupon payments.
Principal Investment Strategies
[GRAPHIC]
The Adviser attempts to make each Fund's duration and return comparable to those
of its respective bond index, and to maintain an overall interest rate
sensitivity for each Fund equivalent to its respective bond index.
The Adviser generally will sell a security when it, on a relative basis and in
the Adviser's opinion, will no longer help a Fund to maintain overall interest
sensitivity and return objectives.
The effective dollar-weighted average portfolio maturity of each Fund will be
more than one year but less than three years for the Short-Term Bond Fund; more
than three years but less than ten for the Intermediate Bond Fund; and more than
five years for the Bond IMMDEX(TM) Fund during normal market conditions.
Each Fund typically holds less than 200 securities.
The Adviser will attempt to keep each Fund fully invested. Each Fund's policy is
to invest at least 65% of total assets in the following types of debt
securities:
.U.S. government .U.S. government
.Stripped U.S. agencies
government .Corporate
.Collateralized .Medium-term
mortgage notes
obligations .Eurobonds
.Asset-backed
and mortgage-
backed
obligations
............................................................................. 17
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Investment Grade Securities are:
securities rated in the highest 4 categories by S&P, Moody's or another
nationally recognized rating agency.
Debt obligations acquired by each Fund will be "investment grade," as rated by
at least one rating agency. The Adviser may purchase unrated obligations that
are determined by the Adviser to be comparable in quality to the rated
obligations. Average quality for each Fund is expected to be at least the second
highest rating category of S&P or Moody's. After purchase, a security may cease
to be rated or may have its rating reduced below the minimum rating required by
the Fund for purchase. The Adviser will consider whether to continue to hold the
security. If over 5% of the Fund's net assets consist of obligations which have
fallen below the minimum rating, the Adviser will immediately sell the
securities.
Although these Funds attempt to achieve returns comparable to those of their
respective benchmark indices by maintaining a comparable duration (see
"Strategies" for definition), these Funds are NOT index funds. Each Fund may
invest more than 50% of their assets in securities not included in the index.
Description of Bond Indices
The bond indices measure the price changes of securities and the income
provided by the securities. The bond indices are intended to measure
performance of fixed-rate debt markets over given time intervals. The
difference between the indices is the maturity range of the securities
included. Each index is comprised of:
.U.S. Treasury securities
.U.S. government agency securities
.U.S. dollar denominated debt of certain foreign sovereign or supranational
entities
.investment-grade corporate debt obligations
The indices require that investment-grade corporate debt obligations must:
.be fixed-rate debt (as opposed to variable-rate debt);
.have at least one year until maturity;
.have a minimum outstanding par value of $100 million
.have a minimum quality rating of Baa by Moody's, BBB by S&P, or BBB by Fitch
IBCA.
The indices also require the following maturities for each debt obligation:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Index Length of Maturity
--------------------------------------------------------------------------
<S> <C>
Lehman 1-3 Index From one to three years remaining until maturity
Lehman Intermediate
Index From one to 10 years remaining until maturity
Lehman Index From one to 30 years or more remaining until maturity
</TABLE>
--------------------------------------------------------------------------------
The following chart depicts the number of bond issues and their aggregate
dollar values as represented by the indices on October 31, 1999.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Bond Issues Dollar Value
----------------------------------------------------
<S> <C> <C>
Lehman 1-3 Index 1,059 $ 974 billion
Lehman Intermediate Index 3,406 $2.6 trillion
Lehman Index 4,829 $3.6 trillion
</TABLE>
--------------------------------------------------------------------------------
................................................................................
18
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Funds are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Funds are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Obligations rated in the lowest of the top
four rating categories are considered to have speculative characteristics and
are subject to greater credit and interest rate risk than higher rated
securities.
Because of the smaller number of issues held by a Fund than its respective bond
index, material events affecting a Fund's portfolio (for example, an issuer's
decline in credit quality) may influence the performance of the Fund to a
greater degree than such events will influence its respective bond index and
may prevent the Fund from attaining its investment objective for particular
periods.
While the Adviser believes purchasing securities which are not in each Fund's
respective index or not consistent with the "mix" of the index provides the
opportunity to achieve an enhanced gross return compared to the index, the
Adviser may err in its choices of securities or portfolio mixes. Further, the
Adviser calculates the Funds' duration and average maturity based on certain
estimates relating to the duration and maturity of the securities held by the
Fund. The estimates used may not always be accurate, so the Adviser's
calculations may be incorrect. Such errors could result in a negative return
and a loss to you. In the event the performance of a Fund is not comparable to
the performance of its respective index, the Board of Directors will examine
the reasons for the deviation and the availability of corrective measures.
An investment in the Funds is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
Y Shares of the Fund are new and have no performance history. For this reason,
the performance information shown below is for another class of shares (Retail
A Shares) that is not offered in this prospectus but would have substantially
similar annual returns because both classes of shares will be invested in the
same portfolio of securities. Annual returns will differ only to the extent
that the classes do not have the same expenses.
The following bar chart and table provide an indication of the risks of
investing in a Fund by showing: (a) changes in the performance of a Fund's
Retail A Shares from year to year; and (b) how the average annual returns of a
Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, each Fund offered to investors one series of shares
with neither a sales charge nor a service fee. For periods prior to January 10,
1995, performance does not reflect service organization fees. If service
organization fees were reflected, performance would be reduced. Performance
does not reflect the sales load applicable to Retail A shares. If the sales
load were reflected, performance would be reduced. Performance reflects fee
waivers in effect. If these fee waivers were not in place, a Fund's performance
would be reduced.
............................................................................. 19
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
[GRAPH]
Year-by year total return as of 12/31 each year (%) (Retail Shares)
Short-Term Bond Fund Intermediate Bond Bond IMMDEX
1990 7.62% 8.22%
1991 13.51% 16.58%
1992 6.86% 7.56%
1993 6.47% 10.96%
1994 0.93% (2.09)% (3.06)%
1995 10.47% 14.99% 19.28%
1996 4.73% 3.81% 2.79%
1997 6.13% 7.07% 9.16%
1998 6.31% 7.64% 8.94%
1999 3.11% 0.75% (1.64)%
The Short-Term Bond Fund's total return for Retail A Shares for the nine-month
period ended September 30, 2000 was 5.25%.
The Intermediate Bond Fund's total return for Retail A Shares for the nine-
month period ended September 30, 2000 was 6.04%.
The Bond IMMDEX(TM) Fund's total return for Retail A Shares for the nine-month
period ended September 30, 2000 was 7.01%.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short-Term Intermediate Bond Bond
Bond Market Fund Market Fund IMMDEX(TM) Fund
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Best Quarter: Q 4 '91 4.18% Q 2 '95 4.96% Q 2 '95 6.58%
Worst Quarter: Q 1 '94 -0.45% Q 1 '94 -2.04% Q 1 '94 -2.90%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (inception date)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Bond Fund -
Retail A Shares 3.11% 6.12% 6.56% --
Lehman Brothers 1-3 Year
Government/Credit Bond Index 3.15% 6.55% 6.64% --
Intermediate Bond Fund -
Retail A Shares 0.75% 6.75% -- 5.71%
(January 5, 1993)
Lehman Brothers Intermediate
Government/Credit Bond Index 0.39% 7.10% -- 5.94%
(January 5, 1993)
Bond IMMDEX(TM) Fund -
Retail A Shares -1.64% 7.48% 7.67% --
Lehman Brothers
Government/Credit Bond Index -2.15% 7.61% 7.65% --
</TABLE>
--------------------------------------------------------------------------------
................................................................................
20
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Each of the Lehman Brothers 1-3 Year Government/Credit Bond Index, Intermediate
Government/Credit Bond Index and Government/Credit Bond Index is a widely-
recognized unmanaged index of bond prices compiled by Lehman Brothers. The
Index figures do not reflect any fees or expenses. Investors cannot invest
directly in the Index.
Securities included in the Lehman Brothers 1-3 Year Government/Credit Bond
Index must meet the following criteria: not less than one year to maturity; not
more than three years remaining to maturity.
Securities included in the Lehman Brothers Intermediate Government/Credit Bond
Index must meet the following criteria: remaining maturity of one to ten years;
and rated investment grade or higher by Moody's, Standard & Poor's, or Fitch,
in that order.
Securities included in the Lehman Brothers Government/Credit Bond Index must
meet the following criteria: not less than one year to maturity; and rated
investment grade or higher by Moody's, Standard & Poor's, or Fitch, in that
order.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the Short-Term Bond Fund, Intermediate Bond Fund and Bond
IMMDEX(TM) Fund.
Shareholder Fee (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short-Term Intermediate Bond IMMDEX(TM)
Bond Fund Bond Fund Fund
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None None None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None None None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None None
Redemption Fees None/1/ None/1/ None/1/
Exchange Fees None None None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short-Term Intermediate Bond IMMDEX(TM)
Bond Fund Bond Fund Fund
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fees (before waivers) 0.60%/2/ 0.50%/2/ 0.30%
Distribution and Service (12b-1) Fees None None None
Other Expenses/3/ 0.52% 0.45% 0.43%
------- ------- -----
Total Annual Fund Operating Expenses
(before waivers) 1.12% 0.95% 0.73%
Fee Waivers and Expense
Reimbursements/4/ (0.27)% (0.10)% --
------- ------- -----
Net Annual Fund Operating Expenses/4/ 0.85% 0.85% 0.73%
======= ======= =====
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fees of the Short-Term
Bond Fund and Intermediate Bond Fund are 0.33% and 0.40% of the respective
Fund's average daily net assets.
............................................................................. 21
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Funds not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of each Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for the Y Shares of the Short-Term Bond Fund, Intermediate
Bond Fund and Bond IMMDEX(TM) Fund until October 31, 2001, so that Net Annual
Fund Operating Expenses will be no more than 0.85%, 0.85% and 0.73%,
respectively of each Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Funds with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that each Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Bond Fund - Y Shares $87 $329 $591 $1,336
Intermediate Bond Fund - Y Shares 87 293 515 1,156
Bond IMMDEX(TM) - Y Shares 75 233 406 906
</TABLE>
--------------------------------------------------------------------------------
---------------------------------------------------------------------
U.S. Government Securities
Fund
Objective
[GRAPHIC]
The investment objective of the U.S. Government Securities Fund is to seek a
high rate of current income that is consistent with relative stability of
principal. The investment objective may be changed by the Board of Directors
without approval of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund normally invests at least 65% of its total assets in debt obligations
issued or guaranteed by the U.S. Government and its agencies, including U.S.
Treasury bonds, notes and bills, as well as in repurchase agreements backed by
such obligations. The Fund also invests in mortgage-backed securities issued by
U.S. Government-sponsored entities such as Ginnie Maes, Fannie Maes, and
Freddie Macs. The remaining maturity (i.e., length of time until an obligation
must be repaid) of the obligations held by the Fund will vary from one to 30
years. Under normal conditions, however, the Adviser does not expect the Fund's
average weighted maturity to exceed 10 years when adjusted for the expected
average life of any mortgage-backed securities held by the Fund.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. Fixed-income securities in which the Fund invests
are subject to credit risk, interest rate risk and maturity risk. Credit risk
is the risk that an issuer of fixed-income securities may default on its
obligation to pay interest and repay principal. Interest rate risk is the risk
that, when interest rates increase, fixed-income securities will decline in
value. Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities. Maturity risk is
the risk that, generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate changes.
................................................................................
22
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Certain securities in which the Fund invests pose additional risks. The
Statement of Additional Statement (the "Additional Statement") describes risks
of collateralized mortgage obligations and mortgage- and asset-backed
securities, which are subject to extension risk and prepayment risk. Extension
risk is the risk that an issuer will exercise its right to pay principal on an
obligation held by the Fund (such as a mortgage- or asset-backed security)
later than expected. This may happen when there is a rise in interest rates.
Under such circumstances, the value of the obligation will decrease and a Fund
will also suffer from the inability to invest in higher yielding securities.
Prepayment risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Fund (such as a mortgage- or asset-backed
security) earlier than expected. This may happen when there is a decline in
interest rates. These events may make a Fund unable to recoup its initial
investment and may result in reduced yields.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations, the value of its debt securities will fall. Securities issued or
guaranteed by the U.S. Government and its agencies have historically involved
little risk of loss of principal if held to maturity. Certain U.S. government
securities, such as Ginnie Maes, are supported by the full faith and credit of
the U.S. Treasury. Others, such as Freddie Macs, are supported by the right of
the issuer to borrow from the U.S. Treasury. Other securities, such as Fannie
Maes, are supported by the discretionary authority of the U.S. Government to
purchase certain obligations of the issuers, and still others are supported by
the issuer's own credit.
Repurchase Agreements carry the risk that the other party may not fulfill its
obligations under the agreement.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Y Shares from year to year; and (b) how the average annual returns of the
Fund's Y Shares compare to those of a broad-based securities market index. The
Fund began investment operations on June 2, 1988 as the Mercantile U.S.
Government Securities Portfolio, a separate portfolio of Mercantile Mutual
Funds, Inc. (a "Predecessor Mercantile Portfolio"). On November 27, 2000, the
Predecessor Mercantile Portfolio was reorganized as a new portfolio of Firstar
Funds, Inc. upon the closing of reorganizations between Firstar Funds, Inc. and
each of Mercantile Funds, Inc. and Firstar Stellar Funds (together, the
"Firstar Reorganization"). The performance set forth below is based on the
performance of a corresponding class of the Predecessor Mercantile Portfolio.
The Predecessor Mercantile Portfolio was managed by a different investment
adviser for the periods shown below until March 1, 2000. See "Management of the
Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If the fee waivers were not in
place, the Fund's performance would be reduced.
............................................................................. 23
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991
1992
1993
1994
1995 14.87%
1996 3.09%
1997 6.27%
1998 6.44%
1999 0.77%
The U.S. Government Securities Fund's total return for Y Shares for the nine-
month period ended September 30, 2000 was 5.74%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 2 '95 5.39%
Worst Quarter: Q 1 '96 -0.93%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Y Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (Inception date)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund -
Y Shares 0.77% 6.18% -- 5.42%
(June 7, 1994)
Lehman Brothers Intermediate
Government Bond Index 0.49% 6.93% -- 6.31%
(May 31, 1994)
---------------------------------------------------------------------------
</TABLE>
The Lehman Brothers Intermediate Government Bond Index is an unmanaged index,
which tracks the performance of intermediate-term U.S. Government bonds. The
Index figures do not reflect any fees or expenses. Investors cannot invest
directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the U.S. Government Securities Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
-----------------------------------------------------------
</TABLE>
................................................................................
24
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.60%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.48%
-------
Total Annual Fund Operating Expenses (before
waivers) 1.08%
Fee Waivers and Expense Reimbursements/4/ (0.10%)
-------
Net Annual Fund Operating Expenses/4/ 0.98%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the U.S. Government
Securities Fund is 0.50% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the U.S. Government Securities Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 0.98% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund -
Y Shares $100 $333 $585 $1,307
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Aggregate Bond Fund
Objective
[GRAPHIC]
The investment objective of the Aggregate Bond Fund is to provide an annual
rate of total return, before fund expenses, comparable to the annual rate of
total return of the Lehman Brothers Aggregate Bond Index. The investment
objective may be changed by the Board of Directors without approval of
Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests substantially all of its assets in a broad range of debt
obligations, including corporate obligations and U.S. Government obligations.
Corporate obligations may include bonds, notes and debentures. U.S. Government
obligations may include U.S. Treasury obligations and obligations of certain
U.S. Government agencies. The Fund also invests in mortgage-backed securities,
including Ginnie Maes, Fannie Maes and Freddie Macs. Although the Fund invests
primarily in the debt obligations of U.S. issuers, it may from time to time
invest up to 10% of its total assets in U.S. dollar-denominated debt
obligations of foreign corporations and governments.
The Fund may only purchase investment grade debt obligations, which are those
rated in one of the four highest rating categories by one or more national
rating agencies, such as S&P's or Moody's. Under normal
............................................................................. 25
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
market conditions, however, the Fund intends to invest at least 65% of its
total assets in debt obligations rated in one of the three highest rating
categories. Unrated debt obligations will be purchased only if they are
determined by the Adviser to be at least comparable in quality at the time of
purchase to eligible rated securities. Occasionally, the rating of a security
held by the Fund may be downgraded to below investment grade. If that happens,
the Fund does not have to sell the security unless the Adviser determines that
under the circumstances the security is no longer an appropriate investment for
the Fund.
In making investment decisions, the Adviser considers a number of factors
including credit quality, the price of the security relative to that of other
securities in its sector, current yield, maturity, yield to maturity,
anticipated changes in interest rates and other economic factors, liquidity,
and the overall quality of the investment.
The remaining maturity (i.e., length of time until an obligation must be
repaid) of the obligations held by the Fund will vary from less than one year
to 30 years. The Fund's average weighted maturity will vary from time to time
depending on current market and economic conditions and the Adviser's
assessment of probable changes in interest rates.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. Fixed-income securities in which the Fund invests
are subject to credit risk, interest rate risk and maturity risk. Credit risk
is the risk that an issuer of fixed-income securities may default on its
obligation to pay interest and repay principal. Interest rate risk is the risk
that, when interest rates increase, fixed-income securities will decline in
value. Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities. Maturity risk is
the risk that, generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate changes.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to extension risk and
prepayment risk. Extension risk is the risk that an issuer will exercise its
right to pay principal on an obligation held by the Fund (such as a mortgage-
or asset-backed security) later than expected. This may happen when there is a
rise in interest rates. Under such circumstances, the value of the obligation
will decrease and a Fund will also suffer from the inability to invest in
higher yielding securities. Prepayment risk is the risk that an issuer will
exercise its right to pay principal on an obligation held by the Fund (such as
a mortgage- or asset-backed security) earlier than expected. This may happen
when there is a decline in interest rates. These events may make the Fund
unable to recoup its initial investment and may result in reduced yields.
The Fund's investments in foreign debt securities are subject to foreign risks.
Foreign debt securities involve special risks not typically associated with
U.S. securities. The foreign debt securities held by the Fund may underperform
other types of securities, and they may not increase or may decline in value.
Foreign investments may be riskier than U.S. investments because of factors
such as foreign government restrictions, changes in currency exchange rates,
incomplete financial information about the issuers of securities, and political
or economic instability. Foreign securities may be more volatile and less
liquid than U.S. stocks.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
................................................................................
26
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Y Shares from year to year; and (b) how the average annual returns of the
Fund's Y Shares compare to those of a broad-based securities market index. The
Fund began investment operations on June 15, 1988 as the Mercantile Government
& Corporate Bond Portfolio, a separate portfolio of Mercantile Mutual Funds,
Inc. (a "Predecessor Mercantile Portfolio"). On November 27, 2000, the
Predecessor Mercantile Portfolio was reorganized as a new portfolio of Firstar
Funds, Inc. upon the closing of reorganizations between Firstar Funds, Inc. and
each of Mercantile Mutual Funds, Inc. and Firstar Stellar Funds (together, the
"Firstar Reorganization"). The performance set forth below is based on the
performance of a corresponding class of the Predecessor Mercantile Portfolio.
The Predecessor Mercantile Portfolio was managed by a different investment
adviser for the periods shown below until March 1, 2000. See "Management of the
Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If those fee waivers were not in
place, the Fund's performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1995 16.61%
1996 1.83%
1997 8.24%
1998 8.67%
1999 (2.06)%
The Aggregate Bond Fund's total return for Y Shares for the nine-month period
ended September 30, 2000 was 6.77%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '95 5.60%
Worst Quarter: Q 1 '96 -2.79%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Y Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (Inception date)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Bond Fund -
Y Shares -2.06% 6.47% -- 4.86%
(January 3, 1994)
Lehman Brothers Aggregate Bond
Index -0.82% 7.73% -- 5.88%
(December 31, 1993)
</TABLE>
--------------------------------------------------------------------------------
The Lehman Brothers Aggregate Bond Index is a widely-recognized unmanaged index
made up of Lehman Brothers' Government/Credit Bond Index, its Mortgage Backed
Securities Index and its Asset Backed Securities Index. The Index figures do
not reflect any fees or expenses. Investors cannot invest directly in an Index.
............................................................................. 27
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Fees and Expenses of the Fund
{GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the Aggregate Bond Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.50%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.49%
-------
Total Annual Fund Operating Expenses (before
waivers) 0.99%
Fee Waivers and Expense Reimbursements/4/ (0.06)%
-------
Net Annual Fund Operating Expenses/4/ 0.93%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Aggregate Bond
Fund is 0.44% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Aggregate Bond Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Fund until October 31, 2001, so that
Net Annual Fund Operating Expenses will be no more than 0.93% of the Fund's
average daily net assets for the current fiscal year. These fee waivers and
expense reimbursements may be terminated at any time after October 31, 2001
at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Bond Fund - Y Shares $95 $309 $541 $1,207
</TABLE>
--------------------------------------------------------------------------------
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Strategic Income Fund
Objective
[GRAPHIC]
The investment objective of the Strategic Income Fund is to generate high
current income. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund's investment categories:
1.U.S. government & corporate fixed-income securities
2.International securities
3.Real estate investment trusts
4.Domestic equity securities
5.Money market securities
6.Mortgage and asset-backed securities
The Fund attempts to achieve its investment goal by investing its assets in a
core group of securities as shown in the box to the right. The Adviser's
strategy is to spread the investment portfolio over several securities
categories to reduce the impact of any drastic market movements affecting one
category. With that in mind, the Fund invests approximately 40% of its assets in
short to long-term, investment grade U.S. government and corporate fixed-income
securities (category 1). The Fund invests between 0% to 20% of its assets in
each of the other categories (categories 2 through 6). Overall, the Fund will
have at least 65% of its assets invested in securities that produce income.
To aid in selecting securities, the Adviser will use the following techniques:
.fundamental and quantitative analysis to select equity securities, which
includes examining price/earnings ratios, historical and projected earnings
growth rates, historical sales growth rates, historical return on equity,
market capitalization, and average daily trading volume;
.use of ratings assigned by nationally recognized statistical rating
organizations (when needed);
.credit research;
.review of issuers' historical performance;
.examination of issuers' dividend growth record;
.consideration of market trends; and
.hedging through the use of options and futures.
Domestic Fixed-Income Securities
As noted above, the Fund will invest in domestic corporate debt obligations,
obligations of the United States, and notes, bonds and discount notes of U.S.
government agencies or instrumentalities. The Adviser selects bonds based on
their potential interest rates and yield in relation to other bonds of similar
quality and maturity. The Fund will only invest in bonds which are rated Baa or
higher by Moody's or rated BBB or higher by S&P or Fitch. If the securities are
unrated, the Adviser must consider them to be of similar quality to the rated
securities before the Fund may invest in them.
U.S. Government Securities
The Fund may invest in securities issued and/or guaranteed as to the payment of
principal and interest by the U.S. government or its agencies or
instrumentalities. U.S. government securities include direct obligations of the
U.S. Treasury (such as U.S. Treasury bills, notes and bonds) and obligations
issued or guaranteed by U.S. government agencies or instrumentalities.
International Securities
The Fund may invest in international securities (including other investment
companies that invest primarily in international securities). The international
securities include equity securities of non-U.S. companies and corporate and
government fixed-income securities denominated in currencies other than U.S.
dollars. These securities may be traded domestically or abroad through various
stock exchanges, American Depository Receipts or International Depository
Receipts (ADRs or IDRs). The international fixed-income and corporate
securities include ADRs, IDRs, and government securities of other nations and
must be rated Baa or better by Moody's or BBB or better by S&P. If the
securities are unrated, the Adviser must determine that they are of similar
quality to the rated securities before the Fund may invest in them.
............................................................................. 29
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Real Estate Investment Trusts
A REIT (real estate investment trust) is a managed portfolio of real estate
investments.
The Fund may invest in equity or mortgage REITs that produce income. REITs will
be diversified by geographic location and by sector (such as shopping malls,
apartment building complexes and health care facilities). An equity REIT holds
equity positions in real estate and provides its shareholders with income from
the leasing of its properties and capital gains from any sales of properties. A
mortgage REIT specializes in lending money to developers of properties and
passes interest income to its shareholders.
Domestic Equity Securities
The Fund's domestic equity securities consist of high dividend paying common
and preferred stocks of U.S. companies listed on the New York or American Stock
Exchanges or traded in the over-the-counter market. The companies must have a
history of stable earnings and/or growing dividends. The Fund may also invest
in warrants and securities convertible into common stocks of these U.S.
companies.
Money Market Instruments
The Fund may invest in U.S. and foreign short-term money market instruments,
including commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's or F-1 or F-2 by Fitch, bank instruments, obligations of the U.S.
government, its agencies or instrumentalities, repurchase agreements, and other
unrated short-term instruments that the Adviser believes to be of comparable
quality to the other obligations in which the Fund may invest.
Mortgage and Asset-Backed Securities
The Fund may invest in mortgage-backed securities, adjustable rate mortgage
securities, collateralized mortgage obligations and asset-backed securities.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to market risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. The Fund is also subject to liquidity risk. Liquidity risk
is the risk that certain securities may be difficult or impossible to sell.
Fixed income securities in which the Fund invests are subject to credit risk
and interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Obligations rated in the lowest of the top
four rating categories are considered to have speculative characteristics and
are subject to greater credit and interest rate risk than higher rated
securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise react in tandem with
interest rate changes or market moves and may be leveraged. Extension risk is
the risk that an issuer will exercise its right to pay principal on an
obligation held by the Fund (such as a mortgage- or asset-backed security)
later than expected. This may happen when there is a rise in interest rates.
Under such circumstances, the value of the obligation will decrease and the
Fund will also suffer from the inability to invest in higher yielding
securities. Prepayment risk is the risk that an issuer will exercise its right
to pay principal on an obligation held by the Fund (such as a mortgage- or
asset-backed security) earlier than expected. This may happen when there is a
decline in
................................................................................
30
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interest rates. These events may make the Fund unable to recoup its initial
investment and may result in reduced yields.
The Fund's investments in foreign securities are subject to foreign risks.
Foreign stocks involve special risks not typically associated with U.S. stocks.
The stocks held by the Fund may underperform other types of stocks, and they
may not increase or may decline in value. Foreign investments may be riskier
than U.S. investments because of factors such as foreign government
restrictions, changes in currency exchange rates, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
The Fund is subject to futures and options on futures risks, as the Fund may
use futures and options on futures for hedging purposes only. The hedging
strategy may not be successful if the Adviser is unable to accurately predict
movements in the prices of individual securities held by the Fund or if the
strategy does not correlate well with the Fund's investments. The use of
futures and options on futures may produce a loss for the Fund, even when used
only for hedging purposes, and you could lose money because of the Fund's use
of options.
The Fund is also subject to portfolio turnover risk. The Fund purchases and
sells securities to capture dividends on particular securities. The Fund will
purchase a security close to its ex-dividend date, thereby entitling the Fund
to receive the anticipated dividend. The Fund will then sell the security after
the ex-dividend date. This practice could result in the Fund experiencing an
annual turnover rate of up to 250%. High portfolio turnover rates lead to
increased costs, could cause you to pay higher taxes and could negatively
affect the performance of the Fund.
To the extent the Fund invests in REITs, it is subject to real estate
investment trust risks. Some of the risks of equity and mortgage REITs are that
they depend on management skills and are not diversified. As a result, REITs
are subject to the risk of financing either single projects or any number of
projects. REITs depend on heavy cash flow and may be subject to defaults by
borrowers and self-liquidation. Additionally, equity REITs may be affected by
any changes in the value of the underlying property owned by the trusts.
Mortgage REITs may be affected by the quality of any credit extended. The
Adviser tries to minimize these risks by selecting REITs diversified by sector
(i.e., shopping malls, apartment building complexes, health care facilities)
and geographic location. The Fund will generally be subject to risks associated
with direct ownership of real estate, such as decreases in real estate values
or fluctuations in rental income caused by a variety of factors, including
increases in interest rates, increases in property taxes and other operating
costs, casualty or condemnation losses, possible environmental liabilities and
changes in supply and demand for properties.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail B Shares from year to year; and (b) how the average annual returns of
the Fund's Retail B Shares compare to those of a broad-based securities market
index. The Fund began operations on December 12, 1994 as the Stellar Strategic
Income Fund (the "Predecessor Stellar Fund") a separate portfolio of Firstar
Stellar Funds. On December 11, 2000, the Predecessor Stellar Fund was
reorganized as a new portfolio of Firstar Funds, Inc. upon the closing of
reorganizations between Firstar Funds, Inc., and each of Mercantile Mutual
Funds, Inc. and Firstar Stellar Funds (together, the "Firstar Reorganization").
The Predecessor Stellar Fund did not offer Y Shares. The performance set forth
below is based on the performance of a different class of the Predecessor
Stellar Fund (Retail B Shares). The
............................................................................. 31
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performance of the other class shown would be substantially similar to that of
the Y class because both classes will be invested in the same portfolio of
securities. Annual returns will differ only to the extent that the classes do
not have the same expenses. The Fund's Retail A Shares commenced operations on
March 31, 2000.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart and table. If these amounts were reflected, returns would be
less than those shown.
Year-by-year total return as of 12/31 each year (%) (Retail B Shares)
[GRAPH]
1990
1991
1992
1993
1994
1995 13.24%
1996 5.29%
1997 9.49%
1998 (3.19)%
1999 (5.80)%
The Strategic Income Fund's total return for Retail B Shares for the nine-month
period ended September 30, 2000 was 9.58%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '97 4.59%
Worst Quarter: Q 1 '99 -2.72%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (December 12, 1994)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic Income Fund -
Retail B Shares -5.80% 3.55% -- 3.78%
Lehman Brothers Government/ Credit
Bond Index -2.15% 7.61% -- 7.66%
</TABLE>
--------------------------------------------------------------------------------
The Lehman Brothers Government/Credit Bond Index is a widely-recognized
unmanaged index of bonds which have maturities of at least one year and are
rated investment grade or higher by Moody's, S&P or Fitch, in that order. The
Index figures do not reflect any fees or expenses. Investors cannot invest
directly in an Index.
................................................................................
32
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the Strategic Income Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.95%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.54%
-------
Total Annual Fund Operating Expenses (before
waivers) 1.49%
Fee Waivers and Expense Reimbursements/4/ (0.04)%
-------
Net Annual Fund Operating Expenses/4/ 1.45%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Strategic
Income Fund is 0.91% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Strategic Income Fund until October
31, 2001, so that Net Annual Fund Operating Expenses will be no more than
1.45% of the Fund's average daily net assets for the current fiscal year.
These fee waivers and expense reimbursements may be terminated at any time
after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic Income Fund - Y Shares $148 $467 $809 $1,776
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 33
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Tax-Exempt Intermediate Bond Fund
Objective
[GRAPHIC]
The investment objective of the Tax-Exempt Intermediate Bond Fund is to provide
current income that is substantially exempt from federal income tax and
emphasize total return with relatively low volatility of principal. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in investment-grade intermediate-term municipal
obligations issued by state and local governments exempt from federal income
tax. Except during temporary defensive periods, the Fund will invest at least
80% of its net assets in securities, the interest on which is exempt from
regular federal income and alternative minimum taxes and will invest at least
65% of its total assets in bonds and debentures. The Fund intends to maintain
an average weighted maturity between three and ten years. There is no limit on
the maturity of any individual security in the Fund, and the Fund may invest in
short-term municipal obligations and tax-exempt commercial paper.
The Adviser generally will sell a security when it, on a relative basis and in
the Adviser's opinion, will no longer help a Fund to maintain overall interest
rate sensitivity and return objectives.
In pursuing its investment objective, the Fund invests in a diversified
portfolio of municipal obligations (as defined above under "Tax-Exempt Money
Market Fund"). Municipal obligations purchased by the Fund will be:
.investment grade at the time of purchase (i.e., BBB by S&P or Fitch IBCA or
Baa by Moody's, or in the highest 4 categories by another nationally
recognized rating agency)
.unrated at the time of purchase but determined to be of comparable quality by
the Adviser
.municipal notes and other short-term obligations rated SP-1 by S&P or MIG-1 by
Moody's
.tax-exempt commercial paper rated A-1 or higher by S&P or VMIG-1 by Moody's
After purchase, a security may cease to be rated or may have its rating reduced
below the minimum rating required for purchase by the Fund. At that time, the
Adviser will consider whether to 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 if the securities exceed 5% of
the Fund's net assets.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk and tax risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Tax risk is the risk that the Fund may be
more adversely impacted by changes in tax rates and policies than other funds.
Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities.
The Fund may invest more than 25% of its total assets in municipal obligations
issued by persons located in the same state and the interest on which is paid
solely from revenues of similar projects. As a result, changes in economic,
business or political conditions relating to a particular state or types of
projects may have a disproportionate impact on the Fund's share price.
Municipal obligations which the Fund may acquire include municipal lease
obligations, which are issued by a state or local government or authority to
acquire land and a wide variety of equipment and facilities. 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.
................................................................................
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An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
Y Shares of the Fund are new and have no performance history. For this reason,
the performance information shown below is for another class of shares (Retail
A Shares) that is not offered in this prospectus but would have substantially
similar annual returns because both classes of shares will be invested in the
same portfolio of securities. Annual returns will differ only to the extent
that the classes do not have the same expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. For periods prior to January 10,
1995, performance does not reflect service organization fees. If service
organization fees were reflected, performance would be reduced. Performance
does not reflect the sales load applicable to Retail A shares. If the sales
load were reflected, performance would be reduced. Performance reflects fee
waivers in effect. If these fee waivers were not in place, the Fund's
performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991
1992
1993
1994 (1.73)%
1995 10.26%
1996 3.53%
1997 5.79%
1998 5.01%
1999 0.15%
The Tax-Exempt Intermediate Bond Fund's total return for Retail A Shares for
the nine-month period ended September 30, 2000 was 3.72%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 1 '95 3.88%
Worst Quarter: Q 1 '94 -2.75%
------------------------------
</TABLE>
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Since Inception
Year 5 Years 10 Years (February 8, 1993)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Intermediate Bond Fund -
Retail A Shares 0.15% 4.90% -- 4.22%
Lehman Brothers 5-Year General
Obligation Bond Index 0.71% 5.81% -- 5.03%
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 35
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The Lehman Brothers 5-year General Obligation Bond Index is a widely recognized
unmanaged index of bond prices compiled by Lehman Brothers. The Index figures
do not reflect any fees or expenses. Investors cannot invest directly in the
Index. To be included in this Index, a municipal bond must be a state or local
General Obligation bond; have a minimum credit rating of at least Baa; have
been issued as part of an offering of at least $50 million; have a minimum
amount outstanding of at least $3 million; have been issued within the last
five years; and have a maturity of four to six years.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold Y shares
of the Tax-Exempt Intermediate Bond Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
----------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.50%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.61%
------
Total Annual Operating Expenses (before waivers) 1.11%
Fee Waivers and Expense Reimbursements/4/ (0.11)%
------
Net Annual Fund Operating Expenses/4/ 1.00%
======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Tax-Exempt
Intermediate Bond Fund is 0.39% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Tax-Exempt Intermediate Bond Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be
no more than 1.00% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
................................................................................
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--------------------------------------------------------------------------------
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Intermediate Bond Fund -
Y Shares $102 $342 $601 $1,342
--------------------------------------------------------------------
</TABLE>
Missouri Tax-Exempt Bond Fund
Objective
[GRAPHIC]
The investment objective of the Missouri Tax-Exempt Bond Fund is to seek as
high a level of interest income exempt from federal income tax as is consistent
with conservation of capital. This investment objective may be changed by the
Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Principal Investment Strategies
[GRAPHIC]
What Are Municipal Securities? State and local governments issue municipal
securities to raise money to finance public works, to repay outstanding
obligations, to raise funds for general operating expenses and to make loans to
other public institutions. Some municipal securities, known as private activity
bonds, are backed by private entities and are used to finance various non-
public projects. Municipal securities, which can be issued as bonds, notes or
commercial paper, usually have fixed interest rates, although some have
interest rates that change from time to time.
Average Weighted Maturity gives you the average time until all debt
obligations, including municipal securities, in the Fund come due or mature. It
is calculated by averaging the time to maturity of all debt obligations held by
the Fund with each maturity "weighted" according to the percentage of assets
which it represents.
The Fund normally invests at least 80% of its total assets in municipal
securities that pay interest that is exempt from federal income tax, and at
least 65% of its total assets in Missouri municipal securities, which are
securities issued by the State of Missouri and other government issuers and that
pay interest which is exempt from both federal income tax and Missouri state
income tax.
Municipal securities purchased by the Fund may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes of
the 80% requirement stated above. Under normal market conditions, the Fund's
investments in private activity bonds, together with any investments in taxable
obligations, will not exceed 20% of its total assets.
In selecting municipal securities for the Fund, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity.
............................................................................. 37
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[LOGO OF FIRSTAR]
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The Fund will invest only in investment grade municipal securities. These are
securities which have one of the four highest ratings assigned by a national
rating agency, such as Standard & Poor's or Moody's, or are unrated securities
determined by the Adviser to be of comparable quality. Short-term municipal
securities purchased by the Fund, such as municipal notes and tax-exempt
commercial paper, will have one of the two highest ratings assigned by a
national rating agency or will be unrated securities that the Adviser has
determined to be of comparable quality. Occasionally, the rating of a security
held by the Fund may be downgraded below the minimum required rating. If that
happens, the Fund does not have to sell the security unless the Adviser
determines that under the circumstances the security is no longer an
appropriate investment for the Fund.
The remaining maturity (i.e., length of time until an obligation must be
repaid) of the obligations held by the Fund will vary from one to 30 years. The
Fund's average weighted maturity will vary from time to time depending on
current economic and market conditions and the Adviser's assessment of probable
changes in interest rates.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk, prepayment risk and tax risk. Credit risk is the risk that an issuer of
fixed income securities may default on its obligation to pay interest and repay
principal. Interest rate risk is the risk that, when interest rates increase,
fixed income securities, including municipal securities, will decline in value.
The ability of a state or local government issuer to make payments can be
affected by many factors, including economic conditions, the flow of tax
revenues and changes in the level of federal, state or local aid. Some
municipal securities are payable only from limited revenue sources or by
private entities. Prepayment risk is the risk that an issuer will exercise its
right to pay principal on an obligation paid by the Fund earlier than expected.
This may happen when there is a decline in interest rates. These events may
make the Fund unable to recoup its initial investment and may result in reduced
yields. Tax risk is the risk that the Fund may be more adversely impacted by
changes in tax rates and policies than other funds. Obligations rated in the
lowest of the top four rating categories are considered to have speculative
characteristics and are subject to greater credit and interest rate risk than
higher rated securities.
Municipal obligations which the Fund purchases may be backed by letters of
credit issued by banks and other financial institutions. Adverse developments
affecting banks could have a negative effect on the Fund's portfolio
securities.
The Fund is also subject to Missouri state-specific risks, as it may invest at
least 65% of its total assets in municipal obligations issued by entities
located in the state of Missouri and the interest on which is paid solely from
revenues of similar projects. Missouri's economy is largely comprised of
services, manufacturing (primarily defense, transportation and other durable
goods), wholesale and retail trade, and state and local government. The
exposure to these industries leaves Missouri vulnerable to an economic slowdown
associated with the business cycles of such industries. Because defense-related
business plays an important role in Missouri's economy, declining defense
appropriations, military base closings in Missouri and federal downsizing also
may continue to have an adverse impact on the State. From time to time,
Missouri's political subdivisions have encountered financial difficulties.
Investing in the Fund has added risks because the Fund is a non-diversified
fund under the 1940 Act, subjecting the Fund to non-diversification risks.
Compared with other mutual funds, this Fund may invest a greater percentage of
its assets in a more limited number of issues concentrated in one state which,
as a result, can increase the Fund's volatility. The value of the Fund's
securities can be impacted by economic or political developments affecting
certain securities.
................................................................................
38
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. An investment in a Fund involves risk, including the risk of losing
money.
Bar Chart and Performance Table
[CHART]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The Fund began operations on July 15, 1988 as the Mercantile Missouri
Tax-Exempt Bond Portfolio, a separate portfolio of Mercantile Mutual Funds,
Inc. (the "Predecessor Mercantile Portfolio"). On December 11, 2000, the
Predecessor Mercantile Portfolio was reorganized as a new portfolio of Firstar
Funds, Inc. upon the closing of reorganizations between Firstar Funds, Inc. and
each of Mercantile Mutual Funds, Inc. and Firstar Stellar Funds (together, the
"Firstar Reorganization"). The performance set forth below is based on the
performance of a different class of the Predecessor Mercantile Portfolio. The
Predecessor Mercantile Portfolio did not offer Y Shares. The performance of the
other class would be substantially similar to that of the Y class because both
classes will be invested in the same portfolio of securities. Annual returns
will differ merely to the extent that the classes do not have the same
expenses.
The Predecessor Mercantile Portfolio commenced operations on July 15, 1988 as a
separate investment portfolio (the "Predecessor ARCH Portfolio") of The ARCH
Tax-Exempt Trust. On October 2, 1995, the Predecessor ARCH Portfolio was
reorganized as a new portfolio of Mercantile Mutual Funds, Inc. Prior to that
reorganization, the Predecessor ARCH Portfolio offered and sold shares that
were similar to the Fund's Institutional Shares. Total returns for periods
prior to October 2, 1995 reflect the performance of Institutional Shares of the
Predecessor ARCH Portfolio.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart and table. If these amounts were reflected, returns would be
less than those shown.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1991 11.52%
1992 8.75%
1993 11.63%
1994 (5.78)%
1995 16.89%
1996 2.90%
1997 8.08%
1998 5.11%
1999 3.08%
The Missouri Tax-Exempt Bond Fund's total return for Retail A Shares for the
nine-month period ended September 30, 2000 was 6.17%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 1 '95 7.53%
Worst Quarter: Q 1 '94 -5.61%
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 39
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Missouri Tax-Exempt Bond Fund -
Retail A Shares -3.08% 5.78% -- 6.24%
(September 28, 1990)
Lehman Brothers Municipal Bond
Index -2.06% 6.91% -- 5.91%
(September 30, 1990)
</TABLE>
--------------------------------------------------------------------------------
The Lehman Brothers Municipal Bond Index is a widely-recognized unmanaged index
that tracks the performance of municipal bonds. The Index figures do not
reflect any fees or expenses. Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the Missouri Tax-Exempt Bond Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
-----------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-------------------------------------------------
<S> <C>
Management Fees 0.45%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.52%
-----
Total Annual Fund Operating Expenses/3/ 0.97%
=====
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y shares of the Missouri Tax-Exempt Bond Fund until
October 31, 2001 so that Net Annual Fund Operating Expenses will be no more
than 0.97% of the Fund's average daily net assets for the current fiscal
year. These fee waiver and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
................................................................................
40
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Example
The following example is intended to help you compare the cost of investing in
Y shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Missouri Tax-Exempt Bond Fund -
Y Shares $99 $309 $536 $1,190
-----------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
National Municipal Bond Fund
Objective
[GRAPHIC]
The investment objective of the National Municipal Bond Fund is to seek as high
a level of current income exempt from regular federal income tax as is
consistent with conservation of capital. The investment objective may be
changed by the Board of Directors without approval of Shareholders, although no
change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund normally invests at least 80% of its total assets in municipal
securities that pay interest which is exempt from federal income tax. Municipal
securities purchased by the Fund may include general obligation securities,
revenue securities and private activity bonds. General obligation securities
are secured by the issuer's full faith, credit and taxing power. Revenue
securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under normal market conditions, the Fund's
investments in private activity bonds and taxable obligations will not exceed
20% of its total assets.
In selecting municipal securities for the Fund, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity. The Adviser also attempts to maintain a
broad geographic diversification for the Fund, with emphasis on no particular
state.
The Fund will invest only in investment grade municipal securities. These are
securities which have one of the four highest ratings assigned by a national
rating agency, such as S&P's or Moody's or are unrated securities determined by
the Adviser to be of comparable quality. Short-term municipal securities
purchased by the Fund, such as municipal notes and tax-exempt commercial paper,
will have one of the two highest ratings assigned by a national rating agency
or will be unrated securities that the Adviser has determined to be of
comparable quality. Occasionally, the rating of a security held by the Fund may
be downgraded to below the minimum required rating. If that happens, the Fund
does not have to sell the security unless the Adviser determines that under the
circumstances the security is no longer an appropriate investment for the Fund.
The Fund's average weighted maturity will vary from time to time depending on
current economic and market conditions and the Adviser's assessment of probable
changes in interest rates. The Fund's average weighted maturity generally will
be 10 years or less.
............................................................................. 41
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk and tax risk. Credit risk is the risk that an issuer of fixed-income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed-income
securities will decline in value. Tax risk is the risk that the Fund may be
more adversely impacted by changes in tax rates and policies than other funds.
Obligations rated in the lowest of the top four rating categories are
considered to have speculative characteristics and are subject to greater
credit and interest rate risk than higher rated securities.
The Fund is also subject to extension risk and prepayment risk. Extension risk
is the risk that an issuer will exercise its right to pay principal on an
obligation held by the Fund later than expected. This may happen when there is
a rise in interest rates. Under such circumstances, the value of the obligation
will decrease and the Fund will also suffer from the inability to invest in
higher yielding securities. Prepayment risk is the risk that an issuer will
exercise its rights to pay principal on an obligation held by the Fund earlier
than expected. This may happen when there is a decline in interest rates. These
events may make the Fund unable to recoup its initial investment and may result
in reduced yields.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. The ability of a state or local government issuer to make
payments can be affected by many factors, including economic conditions, the
flow of tax revenues and changes in the level of federal, state or local aid.
Some municipal securities are payable only from limited revenue sources or by
private entities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The Fund began investment operations on November 18, 1996 as the
Mercantile National Municipal Bond Portfolio, a separate portfolio of
Mercantile Mutual Funds, Inc. (a "Predecessor Mercantile Portfolio"). On
November 27, 2000, the Predecessor Mercantile Portfolio was reorganized as a
new portfolio of Firstar Mutual Funds, Inc. upon the closing of reorganizations
between Firstar Funds, Inc. and each of Mercantile Mutual Funds, Inc. and
Firstar Stellar Funds (together, the "Firstar Reorganization"). The performance
set forth below is based on the performance of a different class of the
Predecessor Mercantile Portfolio. The Predecessor Mercantile Portfolio did not
offer a share class corresponding to Y Shares. The performance of the other
Class shown would be substantially similar to that of the Y class because both
classes will be invested in the same portfolio of securities. Annual returns
will differ only to the extent that the classes do not have the same expenses.
The Predecessor Mercantile Portfolio was managed by a different investment
adviser for the periods shown below until March 1, 2000. See "Management of the
Funds" for more information.
................................................................................
42
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart and table. If these amounts were reflected, returns would be
less than those shown.
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
[GRAPH]
1990
1991
1992
1993
1994
1995
1996
1997 9.94%
1998 5.94%
1999 (4.33)%
The National Municipal Bond Fund's total return for Retail A Shares for the
nine-month period ended September 30, 2000 was 7.24%.
<TABLE>
------------------------------
<S> <C> <C> <C>
Best Quarter: Q3 '97 3.72%
Worst Quarter: Q2 '99 -2.76%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (Inception date)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National Municipal Bond Fund -
Retail A Shares -4.33% -- -- 3.63%
(November 18, 1996)
Lehman Brothers Municipal
Bond Index-10 Year -1.25% -- -- 4.53%
(November 30, 1996)
</TABLE>
--------------------------------------------------------------------------------
The Lehman Brothers Municipal Bond Index-10 Year is a widely-recognized
unmanaged index that tracks the performance of municipal bonds with remaining
maturities of 10 years or less. The Index figures do not reflect any fees or
expenses. Investors cannot invest directly in an Index.
............................................................................. 43
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the National Municipal Bond Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-------------------------------------------------
<S> <C>
Management Fees 0.55%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.46%
-----
Total Annual Fund Operating Expenses/3/ 1.01%
=====
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the National Municipal Bond Fund until
October 31, 2001 so that Net Annual Fund Operating Expenses will be no more
than 1.01% of the Fund's average daily net assets for the current fiscal year.
These fee waivers and expense reimbursements may be terminated at any time
after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National Municipal Bond Fund - Y Shares $103 $322 $558 $1,236
</TABLE>
--------------------------------------------------------------------------------
................................................................................
44
<PAGE>
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[LOGO OF FIRSTAR]
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Balanced Income Fund
Objective
[GRAPHIC]
The investment objective of the Balanced Income Fund is to provide current
income and the preservation of capital by investing in a balanced portfolio of
dividend-paying equity and fixed-income securities. This investment objective
may be changed by the Board of Directors without approval of Shareholders,
although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund selects and purchases common stocks of domestic companies that have a
history of paying dividends. The Fund selects fixed-income securities, which
the Adviser believes will provide an annual rate of total return similar to
that of the Lehman Intermediate Index. That Index is described under "Short-
Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund-Description of
Bond Indices."
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
The Fund plans to use a 50/50 method to invest its total assets - that means
50% in equity securities and 50% in fixed-income securities.
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Equity
Securities 50% (no less than 20%, no more than 60%)
Fixed Income
Securities 50% (no less than 40%)
</TABLE>
--------------------------------------------------------------------------------
NOTE: The actual percentage of assets invested in fixed income and equity
securities will vary from time to time, depending on the judgment of the
Adviser as to the general market and economic conditions, trends and yields,
interest rates and fiscal and monetary developments.
Equity Securities
The Adviser looks for companies with attractive fundamental financial
characteristics such as:
1.low debt
2.high return on equity
3.consistent revenue and earnings per share growth over the prior three to five
years
The Fund primarily invests in common stock of domestic companies the Adviser
considers to be well managed and to have "attractive fundamental financial
characteristics." The Adviser also generally looks for companies with stock
market capitalizations over $750 million. Stock market capitalizations are
calculated by multiplying the total number of common shares outstanding by the
market price per share.
The Fund may also acquire bonds, notes, debentures and preferred stocks
convertible into common stocks if they provide a current interest or dividend
stream, and may invest up to 5% of its net assets in other types of domestic
securities having common stock characteristics, such as rights and warrants to
purchase equity securities.
............................................................................. 45
<PAGE>
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[LOGO OF FIRSTAR]
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Fixed Income
The Fund may purchase the following types of fixed-income securities. There are
no maturity limitations.
.Corporate .U.S. Treasury
.U.S. government agency .Stripped U.S. government
.Asset-backed and .Money market instruments
mortgage-backed
obligations
.U.S. government
Except for convertible securities, the Fund will purchase only debt obligations
rated investment grade by at least one rating agency or unrated obligations
deemed by the Adviser to be comparable in quality. See "Short-Term Bond Fund,
Intermediate Bond Fund and Bond IMMDEX(TM) Fund" for a description of
investment-grade securities. After purchase, a security may cease to be rated
or may have its rating reduced below the minimum rating required for purchase
by the Fund. The Adviser will consider whether to continue to hold the
security.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to market risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. Fixed-income securities in which the Fund invests are
subject to credit risk and interest rate risk. Credit risk is the risk that an
issuer of fixed income securities may default on its obligation to pay interest
and repay principal. Interest rate risk is the risk that, when interest rates
increase, fixed income securities will decline in value. In particular,
convertible securities frequently have speculative characteristics and may be
acquired without regard to minimum quality ratings. The Fund intends to invest
no more than 5% of net assets in securities rated non-investment grade by at
least one rating agency at the time of purchase or unrated securities of
comparable quality. Convertible securities and obligations rated in the lowest
of the top four rating categories are subject to greater credit and interest
rate risk than higher rated securities. Stripped securities are subject to
greater interest rate risk than other more typical fixed income securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Extension risk is the risk that an issuer
will exercise its right to pay principal on an obligation held by a Fund (such
as a mortgage- or asset-backed security) later than expected. This may happen
when there is a rise in interest rates. Under such circumstances, the value of
the obligation will decrease and a Fund will also suffer from the inability to
invest in higher yielding securities. Prepayment risk is the risk that an
issuer will exercise its right to pay principal on an obligation held by a Fund
(such as a mortgage- or asset-backed security) earlier than expected. This may
happen when there is a decline in interest rates. These events may make a Fund
unable to recoup its initial investment and may result in reduced yields.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
................................................................................
46
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Bar Chart and Performance Table
[GRAPHIC]
Y Shares of the Fund are new and have no performance history. For this reason,
the performance information shown below is for another class of shares (Retail
A Shares) that is not offered in this prospectus but would have substantially
similar annual returns because both classes of shares will be invested in the
same portfolio of securities. Annual returns will differ only to the extent
that the classes do not have the same expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. For periods prior to January 10,
1995, performance does not reflect service organization fees. If the service
organization fees were reflected, performance would be reduced. Performance
does not reflect the sales load applicable to Retail A shares. If the sales
load were reflected, performance would be reduced. Performance reflects fee
waivers in effect. If these fee waivers were not in place, the Fund's
performance would be reduced.
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
[GRAPH]
1990 4.54%
1991 31.92%
1992 8.74%
1993 8.60%
1994 -2.00%
1995 25.41%
1996 17.71%
1997 22.77%
1998 16.52%
1999 1.14%
The Balanced Income Fund's total return for Retail A Shares for the nine-month
period ended September 30, 2000 was 6.65%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 2 '97 10.34%
Worst Quarter: Q 3 '90 -5.49%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
---------------------------------------------------
<S> <C> <C> <C>
Balanced Income Fund -
Retail A Shares 1.14% 16.48% 13.09%
S&P 500 Index 21.04% 28.86% 18.21%
Lipper Balanced Fund Index 8.98% 16.33% 12.26%
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market
............................................................................. 47
<PAGE>
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--------------------------------------------------------------------------------
capitalizations and represents approximately two-thirds of the total market
value of all domestic common stocks. The Lipper Balanced Fund Index is composed
of the 30 largest mutual funds whose primary objective is to conserve principal
by maintaining a balanced portfolio of stocks and bonds. The S&P 500 Index
figures do not reflect any fees or expenses. Investors cannot invest directly
in the Index.
The performance of Firstar Balanced Income Fund for the period prior to
December 1, 1997 is the performance of a common trust fund managed by Firstar
Investment Research & Management Company, LLC ("FIRMCO"), which operated during
the periods prior to commencement of operations of the Firstar Balanced Income
Fund using materially equivalent investment objectives, policies, guidelines
and restrictions as Firstar Balanced Income Fund. The common trust fund
transferred its assets to the Balanced Income Fund at the commencement of
operations. At the time of the transfer, the Adviser did not manage any other
collective investment or common trust funds using materially equivalent
investment objectives, policies, guidelines and restrictions to those of the
Balanced Income Fund. The common trust fund was not registered under the
Investment Company Act of 1940 (the "1940 Act"), and was not subject to certain
restrictions that are imposed by the 1940 Act and the Internal Revenue Code. If
the common trust fund had been registered under the 1940 Act, performance may
have been adversely affected. The performance of the common trust fund has been
restated to reflect Firstar Balanced Income Fund's expenses for its first year
of operations.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold Y Shares
of the Balanced Income Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.58%
-------
Total Annual Fund Operating Expenses (before
waivers) 1.33%
Fee Waivers and Expense Reimbursements/4/ (0.11)%
-------
Net Annual Fund Operating Expenses/4/ 1.22%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Balanced Income
Fund is 0.64% of the Fund's average daily net assets.
3 Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
................................................................................
48
<PAGE>
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4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Balanced Income Fund until October 31,
2001, so that Net Annual Fund Operating Expenses will be no more than 1.22%
of the Fund's average daily net assets for the current fiscal year. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Income Fund - Y Shares $124 $411 $718 $1,592
----------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
Balanced Growth Fund
Objective
[GRAPHIC]
The investment objective of the Balanced Growth Fund is to achieve a balance of
capital appreciation and current income with relatively low volatility of
capital. This investment objective may be changed by the Board of Directors
without approval of Shareholders, although no change is anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in a diversified portfolio of fixed-income and
equity securities. Equity securities are selected on the basis of their
potential for capital appreciation. The Fund selects fixed-income securities
which the Adviser believes will provide an annual rate of total return similar
to that of the Lehman Brothers Government/Credit Bond Index. That Index is
described under "Short-Term Bond Fund, Intermediate Bond Fund and Bond
IMMDEX(TM) Fund - Description of Bond Indices."
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
The Fund's policy is to invest at least 25% of the value of its total assets in
fixed-income senior securities and at least 50% and no more than 65% in equity
securities at all times.
Investment Policy
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Fixed Income at least 25%
Equity Securities at least 50% (no more than 65%)
</TABLE>
--------------------------------------------------------------------------------
NOTE: The actual percentage of assets invested in
fixed-income and equity securities will vary from
time to time, depending on the judgment of the
Adviser as to the general market and economic
conditions, trends and yields, interest rates and
fiscal and monetary developments.
Equity Securities
The Fund primarily invests in common stock of domestic and foreign companies
that the Adviser considers to be well managed and to have attractive
fundamental financial characteristics (see box on page 45 for examples of these
characteristics). The Adviser also generally looks for companies with stock
market
............................................................................. 49
<PAGE>
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--------------------------------------------------------------------------------
capitalizations between $100 million and $100 billion. The Fund may also invest
from time to time a portion of its assets in companies with larger or smaller
market capitalizations.
The Fund may also acquire preferred stocks. In addition, the Fund may invest in
domestic securities convertible into common stock, such as certain bonds and
preferred stocks, and may invest up to 5% of its net assets in other types of
domestic securities having common stock characteristics, such as rights and
warrants to purchase equity securities.
Fixed Income
The Fund may purchase the following types of fixed income securities. There are
no maturity limitations.
.Corporate .U.S. Treasury
.U.S. government agency .Stripped U.S. government
.Asset-backed and .Money market instruments
mortgage-backed
obligations
.U.S. government
Except for convertible securities the Fund will only acquire debt obligations
that are rated "investment-grade" by at least one rating agency or unrated
obligations deemed by the Adviser to be comparable in quality. See "Short-Term
Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund" for a description
of investment grade securities. After purchase, a security may cease to be
rated or may have its rating reduced below the minimum rating required for
purchase by the Fund. The Adviser will consider whether to continue to hold the
security.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to market risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. Fixed income securities in which the Fund invests are
subject to credit risk and interest rate risk. Credit risk is the risk that an
issuer of fixed income securities may default on its obligation to pay interest
and repay principal. Interest rate risk is the risk that, when interest rates
increase, fixed income securities will decline in value. In particular,
convertible securities frequently have speculative characteristics and may be
acquired without regard to minimum quality ratings. The Fund intends to invest
no more than 5% of net assets in securities rated non-investment grade by at
least one rating agency at the time of purchase or unrated securities of
comparable quality. Convertible securities and obligations rated in the lowest
of the top four rating categories are subject to greater credit and interest
rate risk than higher rated securities. Stripped securities are subject to
greater interest rate risk than other more typical fixed income securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise react in tandem with
interest rate changes or market moves and may be leveraged. Extension risk is
the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage- or asset-backed security) later
than expected. This may happen when there is a rise in interest rates. Under
such circumstances, the value of the obligation will decrease and a Fund will
also suffer from the inability to invest in higher yielding securities.
Prepayment risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Fund (such as a mortgage- or asset-backed
security) earlier than expected. This may happen when there is a decline in
interest rates. These events may make a Fund unable to recoup its initial
investment and may result in reduced yields.
................................................................................
50
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
Y Shares of the Fund are new and have no performance history. For this reason,
the performance information shown below is for another class of shares (Retail
A Shares) that is not offered in this prospectus but would have substantially
similar annual returns because both classes of shares will be invested in the
same portfolio of securities. Annual returns will differ only to the extent
that the classes do not have the same expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. For periods prior to January 10,
1995, performance does not reflect service organization fees. If the service
organization fees were reflected, performance would be reduced. Performance
does not reflect the sales load applicable to Retail A shares. If the sales
load were reflected, performance would be reduced. Performance reflects fee
waivers in effect. If these fee waivers were not in place, the Fund's
performance would be reduced.
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
[GRAPH]
1990
1991
1992
1993 8.24%
1994 (4.27)%
1995 26.23%
1996 12.31%
1997 17.22%
1998 16.20%
1999 4.02%
The Balanced Growth Fund's total return for Retail A Shares for the nine-month
period ended September 30, 2000 was 11.88%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 14.02%
Worst Quarter: Q 3 '98 -8.04%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (March 30, 1992)
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Growth Fund -
Retail A Shares 4.02% 14.97% -- 11.33%
S&P 500 Index 21.04% 28.86% -- 20.78%
Lipper Balanced Fund Index 8.98% 16.33% -- 12.52%
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 51
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The Lipper Balanced Fund Index is composed of the 30 largest mutual
funds whose primary objective is to conserve principal by maintaining a
balanced portfolio of stocks and bonds. The S&P 500 Index figures do not
reflect any fees or expenses. Investors cannot invest directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold Y Shares
of the Balanced Growth Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.52%
-------
Total Annual Fund Operating Expenses (before
waivers) 1.27%
Fee Waivers and Expense Reimbursements/4/ (0.05%)
-------
Net Annual Fund Operating Expenses/4/ 1.22%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee for the Balanced
Growth Fund is 0.70% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Balanced Income Fund until October 31,
2001, so that Net Annual Fund Operating Expenses will be no more than 1.22%
of the Fund's average daily net assets for the current fiscal year. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2001 at the discretion of the service providers.
................................................................................
52
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
----------------------------------------------------------------
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Growth Fund - Y Shares $124 $398 $692 $1,529
----------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
Growth & Income Fund
Objective
[GRAPHIC]
The investment objective of the Growth & Income Fund is to seek both reasonable
income and long-term capital appreciation. This investment objective may be
changed by the Board of Directors without approval of Shareholders, although no
change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Common Stocks
The Fund selects common stocks primarily from a universe of domestic companies
that have established dividend-paying histories. During normal market
conditions, at least 50% of the Fund's net assets will be invested in equities.
The Fund will not purchase a non-dividend paying security if immediately after
giving effect to such purchase less than 80% of the net assets of the Fund will
be invested in dividend-paying securities.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
Medium- to Large-Sized Companies
The Fund generally invests in medium- to large-sized companies with stock
market capitalizations over $1 billion that the Adviser considers to be well
managed and to have attractive fundamental financial characteristics (see box
on page 45 for examples of these characteristics). The Fund may also invest a
portion of its assets in companies with smaller market capitalizations.
Other
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks, if they provide a current interest or dividend
payment.
To the extent consistent with its objective, the Fund may purchase non-
convertible debt and preferred stocks that in the opinion of the Adviser
present opportunities for capital appreciation. These obligations must be
investment grade at time of purchase or unrated but deemed comparable by the
Adviser. See "Short-Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM)
Fund" for a description of investment-grade securities. After purchase, a
security may cease to be rated or may have its rating reduced below the minimum
rating required by the Fund for purchase. The Adviser will consider whether to
continue to hold the security.
............................................................................. 53
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. The Fund intends to invest no more than 5% of net
assets in securities rated non-investment grade at the time of purchase or
unrated securities of comparable quality. Convertible securities and
obligations rated in the lowest of the top four rating categories have
speculative characteristics and are subject to greater credit and interest rate
risk than higher rated securities. The Fund's options and futures transactions
involve derivatives risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise not react in tandem
with interest rate changes or market moves and may be leveraged.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
Y Shares of the Fund are new and have no performance history. For this reason,
the performance information shown below is for another class of shares (Retail
A Shares) that is not offered in this prospectus but would have substantially
similar annual returns because both classes of shares will be invested in the
same portfolio of securities. Annual returns will differ only to the extent
that the classes do not have the same expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. For periods prior to January 10,
1995, performance does not reflect service organization fees. If the service
organization fees were reflected, performance would be reduced. Performance
does not reflect the sales load applicable to Retail A Shares. If the sales
load were reflected, performance would be reduced. Performance reflects fee
waivers in effect. If these fee waivers were not in place, the Fund's
performance would be reduced.
................................................................................
54
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
[GRAPH]
1990 (0.28)%
1991 22.22%
1992 5.48%
1993 6.64%
1994 0.14%
1995 34.53%
1996 24.70%
1997 33.23%
1998 22.44%
1999 2.75%
The Growth & Income Fund's total return for Retail A Shares for the nine-month
period ended September 30, 2000 was 8.53%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q4 '98 17.70%
Worst Quarter: Q3 '99 -9.30%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------------------------------------------------
<S> <C> <C> <C>
Growth & Income Fund -
Retail A Shares 2.75% 22.97% 14.46%
S&P 500 Index 21.04% 28.56% 18.21%
Custom Index 16.88% 25.75% 16.79%
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The Custom Index is comprised of 50% of returns of the S&P 500 index
and 50% of returns of the S&P BARRA Value Index. The S&P BARRA Value Index is
an unmanaged market capitalization weighted index consisting of approximately
50% of the stocks in the S&P 500 index with low price-to-book ratios. The Index
figures do not reflect any fees or expenses. Investors cannot invest directly
in the Index.
............................................................................. 55
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold Y Shares
of the Growth & Income Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.44%
-----
Total Annual Fund Operating Expenses/3/ 1.19%
=====
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Growth & Income Fund until October 31,
2001 so that Net Annual Fund Operating Expenses will be no more than 1.19% of
the Fund's average daily net assets for the current fiscal year. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth & Income Fund - Y Shares $121 $378 $654 $1,443
</TABLE>
--------------------------------------------------------------------------------
................................................................................
56
<PAGE>
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[LOGO OF FIRSTAR]
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Equity Income Fund
Objective
[GRAPHIC]
The investment objective of the Equity Income Fund is to seek to provide an
above-average level of income consistent with long-term capital appreciation.
This investment objective may be changed by the Board of Directors without
approval of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Market capitalization is a common measure of the size of a company. It is the
market price of a share of the company's stock multiplied by the number of
outstanding shares.
The Fund invests primarily in
the common stocks of value
companies with large market
capitalizations (generally,
$5 billion or higher). In
selecting these stocks, the
Adviser evaluates a number of
quantitative factors,
including dividend yield,
current and future earnings
potential compared to stock
prices and total return
potential. The
Adviser also examines other measures of valuation, including cash flow, asset
value and book value.
Value stocks are those that appear to be underpriced based on valuation
measures, such as lower price-to-earnings and price-to-book value ratios.
Under normal market
conditions, the Fund invests
at least 65% of its total
assets in income-producing
(dividend-paying) equity
securities, primarily common
stocks. These stocks
generally will be listed on a
national stock exchange or
will be unlisted stocks with
established over-the-counter
markets. Many such stocks may offer above-average dividend yields, with
corresponding above-average levels of income, in each case as compared to the
S&P 500 Index.
The Fund may emphasize, from time to time, particular companies or market
sectors, in attempting to achieve its investment objective.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk and value style investing risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. In addition, different types of equity securities tend to
shift in and out of favor depending on market and economic conditions. Value
style investing risk is the risk that the performance resulting from the Fund's
"value" investment style may sometimes be lower than that of other types of
equity funds, such as those focusing more exclusively on growth in earnings.
To the extent that the Fund emphasizes particular companies or market sectors,
such as technology, it will be especially susceptible to market sector risk.
Stocks of technology companies may be subject to greater price volatility than
stocks of companies in other sectors. Technology companies may produce or use
products or services that prove commercially unsuccessful, become obsolete or
become adversely impacted by government regulation. Technology stocks may
experience significant price movements caused by disproportionate investor
optimism or pessimism.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Y Shares from year to year; and (b) how the average annual returns of the
Fund's Y Shares compare to those of a broad-based securities market index. The
Fund began operations on February 27, 1997 as the Mercantile Equity Income
Portfolio, a separate portfolio of Mercantile Mutual Funds, Inc. (the
"Predecessor Mercantile Portfolio"). On December 11, 2000, the Predecessor
Mercantile Portfolio was reorganized as a new portfolio of Firstar Funds, Inc.
upon the closing of
............................................................................. 57
<PAGE>
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--------------------------------------------------------------------------------
reorganizations between Firstar Funds, Inc. and each of Mercantile Mutual
Funds, Inc. and Firstar Stellar Fund (together, the "Firstar Reorganization").
The performance set forth below is based on the performance of the
corresponding class of the Predecessor Mercantile Portfolio. The Predecessor
Mercantile Portfolio was managed by a different investment adviser for the
period as shown below until March 1, 2000. See "Management of the Funds" for
more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1991
1992
1993
1994
1995
1996
1997
1998 10.82%
1999 (2.85)%
The Equity Income Fund's total return for Y Shares for the nine-month period
ended September 30, 2000 was 5.00%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 1 '98 11.90%
Worst Quarter: Q 3 '98 -8.75%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Y Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Income Fund -
Y Shares -2.85% -- -- 9.99%
(February 27, 1997)
Russell 1000 Value Index 7.35% -- -- 17.41%
(February 28, 1997)
S&P BARRA Value Index 12.72% -- -- 17.87%
(February 28, 1997)
</TABLE>
--------------------------------------------------------------------------------
The Russell 1000 Value Index is a widely-recognized unmanaged index that
measures the performance of the stocks in the Russell 1000 Index with less than
average growth orientation. Companies in this Index generally have low price to
book and price/earnings ratios, higher dividend yields and lower forecasted
growth values. The Russell 1000 Index consists of the 1,000 largest U.S.
companies as ranked by total market capitalization. The comparative index for
the Equity Income Fund has been changed from the Russell 1000 Value Index to
the S&P BARRA Value Index. The S&P BARRA Value Index, an unmanaged
................................................................................
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--------------------------------------------------------------------------------
capitalization weighted index, is a more widely-recognized index which
represents the value components of the market capitalizations reflected in the
Fund. The Index figures do not reflect any fees or expenses. Investors cannot
invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the Equity Income Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
-----------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.53%
-------
Total Annual Fund Operating Expenses (before
waivers) 1.28%
Fee Waivers and Expense Reimbursements/4/ (0.03)%
-------
Net Annual Fund Operating Expenses/4/ 1.25%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Equity Income
Fund is 0.72% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Equity Income Fund until October 31,
2001, so that Net Annual Fund Operating Expenses will be no more than 1.25%
of the Fund's average daily net assets for the current fiscal year. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Income Fund - Y Shares $127 $403 $699 $1,543
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 59
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Relative Value Fund
Objective
[GRAPHIC]
The investment objective of the Relative Value Fund is to obtain the highest
total return from a combination of income and capital appreciation. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
To achieve its objective, the Fund invests primarily in common stocks. The
stocks in which the Fund may invest include stocks that the Adviser believes
represent the best values within each industry sector. In the Adviser's
opinion, stocks with the best values present characteristics consistent with
low volatility, above average yields, and are under valued relative to the
stocks comprising the Standard & Poor's 500 Composite Stock Price Index. Under
normal circumstances, the Fund will invest at least 70% of its assets in common
stocks, which to a limited extent may include stocks of foreign issuers. To
obtain income, the Fund may invest a significant portion of its assets in
investment grade fixed-income securities such as domestic issues of corporate
debt obligations with short and intermediate terms. In this manner, the Fund
will attempt to obtain the highest total return that it can within the
constraints of its investment policies and restrictions.
The Adviser uses traditional research techniques when choosing which stocks to
invest in. The Adviser selects securities and attempts to maintain an
acceptable level of risk largely through the use of automated quantitative
measurement techniques. The Adviser considers the following "value"
characteristics when using this research technique:
.price/earnings ratios,
.dividend yield,
.book value,
.assets to liabilities ratio,
.management ownership,
.average daily trading volume, and
.credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The Adviser uses the quantitative model together with economic forecasts and
assessment of the risk and volatility of the company's industry. The Adviser
assesses the earnings and dividend growth prospects of the various companies'
stock and then considers the risk and volatility of the company's industry. The
Adviser typically invests in common stocks of companies that are in the top 25%
of their industries with regard to revenues. The Adviser also considers other
factors such as product position or market share.
Temporary Investments
To respond to adverse market, economic, political or other conditions, the Fund
may invest up to 100% of its assets in short-term temporary investments. Some
of the short-term money market instruments include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements
To the extent that the Fund engages in this temporary, defensive strategy, the
Fund may not achieve its investment objective.
Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk and value style investing risk. Market risk
is the risk that the value of the securities in which a Fund invests may go up
or down in response to the prospects of individual companies and/or general
economic conditions. In addition, different types of equity securities tend to
shift in and out of favor depending on market and economic conditions. Value
style investing risk is the risk that the
................................................................................
60
<PAGE>
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--------------------------------------------------------------------------------
performance resulting from the Fund's "value" investment style may sometimes be
lower than that of other types of equity funds, such as those focusing more
exclusively on growth in earnings.
The Fund's investments in debt securities are subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. The Fund intends to invest no more than 5% of net
assets in securities rated non-investment grade at the time of purchase or
unrated securities of comparable quality. Convertible securities and
obligations rated in the lowest of the top four rating categories have
speculative characteristics and are subject to greater credit and interest rate
risk than higher rated securities. The Fund's options and futures transactions
involve derivatives risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise not react in tandem
with interest rate changes or market movements and may be leveraged.
The Fund's investments in foreign securities are subject to foreign risks.
Foreign stocks involve special risks not typically associated with U.S. stocks.
The stocks held by the Fund may underperform other types of stocks, and they
may not increase or may decline in value. Foreign investments may be riskier
than U.S. investments because of factors such as foreign government
restrictions, changes in currency exchange rates, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The Fund began operations on June 5, 1991 as the Firstar Stellar
Relative Value Fund (the "Predecessor Stellar Fund"), a separate portfolio of
Firstar Stellar Funds. On December 11, 2000, the Predecessor Stellar Fund was
reorganized as a new portfolio of Firstar Funds, Inc. upon the closing of
reorganizations between Firstar Funds, Inc. and each of Mercantile Mutual
Funds, Inc. and Firstar Stellar Funds (together, the "Firstar Reorganization").
The performance set forth below is based on the performance of a different
class of the Predecessor Stellar Fund. The Predecessor Stellar Fund did not
offer a share class corresponding to Y Shares. The performance of the other
class shown would be substantially similar to that of the Y Class because both
classes will be invested in the same portfolio of securities. Annual returns
will differ only to the extent that the classes do not have the same expenses.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart and table. If these amounts were reflected, returns would be
less than those shown.
............................................................................. 61
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
[GRAPH]
1990
1991
1992 11.19%
1993 13.73%
1994 (2.03)%
1995 35.69%
1996 26.45%
1997 32.20%
1998 18.25%
1999 6.96%
The Relative Value Fund's total return for Retail A Shares for the nine-month
period ended September 30, 2000 was -3.21%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q 4 '98 21.33%
Worst Quarter: Q 3 '98 -12.29%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Relative Value Fund -
Retail A Shares 6.96% 23.46% -- 16.11%
(June 5, 1991)
S&P 500 Index 21.04% 28.56% -- 19.44%
(June 5, 1991)
Lipper Growth & Income Average 11.23% 22.56% -- 16.09%
(June 5, 1991)
------------------------------------------------------------------------
</TABLE>
The S&P 500 Index is a widely-recognized unmanaged index of 500 domestic stocks
created by Standard & Poor's Corporation. The Index is heavily weighted toward
stocks with large market capitalization and represents approximately two-thirds
of the total market value of all domestic common stocks. The Lipper Growth &
Income Average is composed of the 30 largest mutual funds whose primary
objective combines growth-of-earnings and dividend income. The Index figures do
not reflect any fees or expenses. Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the Relative Value Fund.
................................................................................
62
<PAGE>
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--------------------------------------------------------------------------------
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.47%
-----
Total Annual Fund Operating Expenses/3/ 1.22%
=====
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Relative Value Fund until October 31,
2001 so that Net Annual Fund Operating Expenses will be no more than 1.22% of
the Fund's average daily net assets for the current fiscal year. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Relative Value Fund - Y Shares $124 $387 $670 $1,477
---------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
Equity Index Fund
Objective
[GRAPHIC]
The investment objective of the Equity Index Fund is to seek returns, before
Fund expenses, comparable to the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the S&P 500 Index. The
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
............................................................................. 63
<PAGE>
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Principal Investment Strategies
[GRAPHIC]
Under normal market conditions, the Fund intends to invest substantially all of
its total assets in securities included in the S&P 500 Index, and in any event
the Fund will invest at least 80% of its net assets in securities included in
that index. The Fund uses the S&P 500 Index as the standard performance
comparison because it represents approximately two-thirds of the total market
value of all domestic common stocks and is well known to investors.
The S&P 500 Index consists of 500 selected common stocks, most of which are
listed on the New York Stock Exchange. Standard & Poor's selects the stocks
included in the S&P 500 Index on a market capitalization basis, and the S&P 500
Index is heavily weighted toward stocks with large market capitalizations.
Rather than using traditional methods of investment management, index funds
such as the Equity Index Fund are managed with the aid of a computer program.
The Adviser purchases and sells securities for the Fund in an attempt to
produce investment results that substantially duplicate the performance of the
common stocks of the issuers represented in the S&P 500 Index.
In general, the Fund expects to hold all of the stocks included in the S&P 500
Index. The Adviser believes that it will be able to construct and maintain the
Fund's investment portfolio so that it reasonably tracks the performance of the
S&P 500 Index by using a capitalization weighting and sector balancing
technique.
The Adviser believes the quarterly performance of the Fund and the S&P 500
Index will be within (+/-)0.3% under normal market conditions. The Adviser
believes that through the application of a capitalization weighting and sector
balancing technique that it will be able to construct and maintain the Fund's
investment portfolio so that it reasonably tracks the performance of the S&P
500 Index. In the event the performance of the Fund is not comparable to the
performance of the S&P 500 Index, the Board of Directors will examine the
reasons for the deviation and the availability of corrective measures. These
measures would include additional fee waivers by the Adviser and Administrator
or adjustments to the Adviser's portfolio management practices. If substantial
deviation in the Fund's performance continued for extended periods, it is
expected the Board of Directors would consider possible changes to the Fund's
investment objective.
The Fund may invest in futures contracts. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell an asset in the
future at an agreed upon price. The Fund may invest in futures contracts and
options on futures contracts for hedging purposes, to have fuller exposure to
price movements in a stock or bond index, to increase total return or to
maintain liquidity to meet potential shareholder redemptions, invest cash
balances or dividends or minimize trading costs. In addition, the Fund may
purchase and sell futures and related options (based only on the S&P 500 Index)
to maintain cash reserves while simulating full investment in the stocks
underlying the S&P 500 Index, to keep substantially all of its assets exposed
to the market (as represented by the S&P 500 Index), and to reduce transaction
costs.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. Your
investment follows the large-cap portion of the U.S. stock market, as measured
by the S&P 500 Index, during upturns as well as downturns. Because of its
indexing strategy, the Fund cannot take steps to reduce market volatility or to
lessen the effects of a declining market. Whenever large-cap stocks perform
less than mid- or small-cap stocks, the Fund may under-perform funds that have
exposure to those segments. Further, the Fund will not necessarily dispose of a
security in response to adverse events affecting the issuer of a security (such
as adverse credit factors or failure to pay dividends).
................................................................................
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<PAGE>
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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 portfolio.
This could have an adverse effect on the accuracy with which the Fund matches
the performance of the S&P 500 Index.
The Adviser may be required to sell common stock if the issuer is eliminated
from the S&P 500 Index. Such sales may result in:
.lower prices, or
.losses, that may not have been incurred if the Adviser did not have to
purchase or sell the securities.
The Fund's futures transactions involve derivatives risk. Derivatives risk is
the risk of loss from transactions which may be more sensitive to or otherwise
not react in tandem with interest rate changes or market moves and may be
leveraged. Futures contracts could cause the Fund to track the Index less
closely if they don't perform as expected.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in a Fund involves risk, including the risk of
losing money.
Standard & Poor's makes no representation or warranty regarding the
advisability of investing in index funds or the ability of the S&P 500 Index to
track general stock market performance.
Bar Chart and Performance Table
[GRAPHIC]
Y Shares of the Fund are new and have no performance history. For this reason,
the performance information shown below is for another class of shares (Retail
A Shares) that is not offered in this prospectus but would have substantially
similar annual returns because both classes of shares will be invested in the
same portfolio of securities. Annual returns will differ only to the extent
that the classes do not have the same expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. For periods prior to January 10,
1995, performance does not reflect service organization fees. If the service
organization fees were reflected, performance would be reduced. Performance
does not reflect the sales load applicable to Retail A shares. If the sales
load were reflected, performance would be reduced. Performance reflects fee
waivers in effect. If these fee waivers were not in place, the Fund's
performance would be reduced.
............................................................................. 65
<PAGE>
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Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
[GRAPH]
1990 (3.29)%
1991 29.96%
1992 6.97%
1993 9.11%
1994 1.02%
1995 36.65%
1996 22.35%
1997 32.29%
1998 28.40%
1999 20.10%
The Equity Index Fund's total return for Retail A Shares for the nine-month
period ended September 30, 2000 was -1.71%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q4 '98 21.44%
Worst Quarter: Q3 '90 -13.60%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
--------------------------------------------
<S> <C> <C> <C>
Equity Index Fund -
Retail A Shares 20.10% 27.81% 17.59%
S&P 500 Index 21.04% 28.56% 18.21%
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. Index figures do not reflect any fees or expenses. Investors cannot
invest directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold Y Shares
of the Equity Index Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
-----------------------------------------------------------
</TABLE>
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.25%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.42%
-------
Total Annual Fund Operating Expenses (before
waivers) 0.67%
Fee Waiver and Expense Reimbursements/4/ (0.05)%
-------
Net Annual Fund Operating Expenses/4/ 0.62%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Equity Index
Fund is 0.20% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Equity Index Fund until October 31,
2001, so that Net Annual Fund Operating Expenses will be no more than 0.62%
of the Fund's average daily net assets for the current fiscal year. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Index Fund - Y Shares $63 $209 $368 $830
-------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
Large Cap Core Equity Fund
Objective
[GRAPHIC]
The Large Cap Core Equity Fund (formerly Growth Fund) seeks capital
appreciation through investment in securities of large-sized companies. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Equity Securities
During normal market conditions, the Fund invests at least 65% of total assets
in equity securities of large-sized companies. Most of these equity securities
are publicly traded common stocks of companies incorporated in the U.S.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
............................................................................. 67
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Large-Sized Companies
The Fund generally invests in large-sized companies with stock market
capitalizations over $3 billion that the Adviser considers to be well-managed
and to have attractive fundamental financial characteristics (see box on page
45 for examples of these characteristics). The Fund may also invest a portion
of its assets in companies with market capitalizations below $3 billion.
Other
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks, if, in the Adviser's opinion, they present
opportunities for capital appreciation.
To the extent consistent with its objective, the Fund may purchase non-
convertible debt and preferred stocks that, in the opinion of the Adviser,
present opportunities for capital appreciation. These obligations must be
investment grade at time of purchase or unrated but deemed comparable by the
Adviser. See "Short-Term Bond Fund, Intermediate Bond Fund and Bond IMMDEX(TM)
Fund" for a description of investment grade securities. After purchase, a
security may cease to be rated or may have its rating reduced below the minimum
rating required by the Fund for purchase. The Adviser will consider whether to
continue to hold the security.
Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. The Fund intends to invest no more than 5% of net
assets in securities rated non-investment grade at the time of purchase, or
unrated securities of comparable quality. Convertible securities and
obligations rated in the lowest of the top four rating categories have
speculative characteristics, and are subject to greater credit and interest
rate risk than higher rated securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
Y Shares of the Fund are new and have no performance history. For this reason,
the performance information shown below is for another class of shares (Retail
A Shares) that is not offered in this prospectus but would have substantially
similar annual returns because both classes of shares will be invested in the
same portfolio of securities. Annual returns will differ only to the extent
that the classes do not have the same expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. For periods prior to January 10,
1995, performance does not reflect service organization fees. If the service
organization fees were reflected,
................................................................................
68
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performance would be reduced. Performance does not reflect the sales load
applicable to Retail A shares. If the sales load were reflected, performance
would be reduced. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
[GRAPH]
1990
1991
1992
1993 9.98%
1994 (5.34)%
1995 29.72%
1996 17.85%
1997 22.63%
1998 30.16%
1999 14.03%
The Large Cap Core Equity Fund's total return for Retail A Shares for the nine-
month period ended September 30, 2000 was 9.69%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q4 '98 23.97%
Worst Quarter: Q3 '98 -11.18%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (Dec. 29, 1992)
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Core Equity Fund -
Retail A Shares 14.03% 22.71% -- 16.46%
S&P 500 Index 21.04% 28.56% -- 21.53%
</TABLE>
--------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The Index figures do not reflect any fees or expenses. Investors cannot
invest directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold Y Shares
of the Large Cap Core Equity Fund.
............................................................................. 69
<PAGE>
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Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.44%
-----
Total Annual Fund Operating Expenses/3/ 1.19%
=====
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Large Cap Core Equity Fund until
October 31, 2001 so that Net Annual Fund Operating Expenses will be no more
than 1.19% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Expense Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Core Equity Fund - Y Shares $121 $378 $654 $1,443
----------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
Large Cap Growth Fund
Objective
[GRAPHIC]
The investment objective of the Large Cap Growth Fund is to maximize capital
appreciation. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
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Principal Investment Strategies
[GRAPHIC]
The Fund attempts to achieve its investment goal by investing at least 65% of
the value of its total assets in growth-oriented large capitalization domestic
equity securities. "Growth-oriented large capitalization" securities are
securities of U.S. companies that have market capitalization of $1.5 billion
or more and, based on traditional research techniques, the Fund's Adviser
believes have earnings growth potential superior to the S&P 500. The Fund will
maximize the amount of capital appreciation that it can within the constraints
of its investment policies and restrictions.
The Adviser selects securities and attempts to maintain an acceptable level of
risk largely through proprietary fundamental research and "bottom-up" stock
selection. The Adviser considers the following factors when assessing a
particular security:
What are "growth-oriented" securities? Securities of U.S. companies with
market capitalization of $1.5 billion or greater that show superior growth in
earnings and revenues.
.price/earnings ratios,
.historical and projected earnings growth rates,
.historical sales growth rates,
.historical return on equity,
.market capitalization,
.average daily trading volume, and
.credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The Adviser uses fundamental research together with economic forecasts and
assessment of the risk and volatility of the company's industry.
The Fund's domestic equity securities usually consist of U.S. common and
preferred stocks and warrants of companies with market capitalization of $1.5
billion or greater. The stocks are listed on the New York or American Stock
Exchanges or traded in the over-the-counter market.
To a limited degree, the Fund may also invest in: bonds, notes, debentures and
preferred stocks convertible into common stocks, if, in the Adviser's opinion,
they present opportunities for capital appreciation.
Temporary Investments
To respond to adverse market, economic, political or other conditions, the
Fund may invest up to 100% of its assets in U.S. and foreign short-term money
market instruments. The Fund may invest up to 35% of its assets in these
securities to maintain liquidity. Some of the short-term money market
instruments include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements
To the extent the Fund engages in this temporary, defensive strategy, the Fund
may not achieve its investment objective.
The Fund may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment
objective.
Principal Risks
[GRAPHIC]
The principal investment risks below are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. Convertible securities and obligations rated in
the lowest of the
............................................................................ 71
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top four rating categories have speculative characteristics, and are subject to
greater credit and interest rate risk than higher rated securities.
Certain securities in which the Fund invests pose additional risks. The
Additional Statement describes risks of collateralized mortgage obligations and
mortgage- and asset-backed securities, which are subject to derivatives risk,
extension risk and prepayment risk. Derivatives risk is the risk of loss from
transactions which may be more sensitive to or otherwise react in tandem with
interest rate changes or market movements and may be leveraged. Extension risk
is the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage- or asset-backed security) later
than expected. This may happen when there is a rise in interest rates. Under
such circumstances, the value of the obligation will decrease and a Fund will
also suffer from the inability to invest in higher yielding securities.
Prepayment risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Fund (such as a mortgage- or asset-backed
security) earlier than expected. This may happen when there is a decline in
interest rates. These events may make a Fund unable to recoup its initial
investment and may result in reduced yields.
The Fund's investments in foreign securities are subject to foreign risks.
Foreign stocks involve special risks not typically associated with U.S. stocks.
The stocks held by the Fund may underperform other types of stocks, and they
may not increase or may decline in value. Foreign investments may be riskier
than U.S. investments because of factors such as foreign government
restrictions, changes in currency exchange rates, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
To the extent the Fund invests in REITs, it is subject to real estate
investment trust risks. Some of the risks of equity and mortgage REITs are that
they depend on management skills and are not diversified. As a result, REITs
are subject to the risk of financing either single projects or any number of
projects. REITs depend on heavy cash flow and may be subject to defaults by
borrowers and self-liquidation. Additionally, equity REITs may be affected by
any changes in the value of the underlying property owned by the trusts.
Mortgage REITs may be affected by the quality of any credit extended. The
Adviser tries to minimize these risks by selecting REITs diversified by sector
(i.e., shopping malls, apartment building complexes, health care facilities)
and geographic location. The Fund will generally be subject to risks associated
with direct ownership of real estate, such as decreases in real estate values
or fluctuations in rental income caused by a variety of factors, including
increases in interest rates, increases in property taxes and other operating
costs, casualty or condemnation losses, possible environmental liabilities and
changes in supply and demand for properties.
The Fund is subject to futures and options on futures risks, as the Fund may
use futures and options on futures for hedging purposes only. The hedging
strategy may not be successful if the Adviser is unable to accurately predict
movements in the prices of individual securities held by the Fund or if the
strategy does not correlate well with the Fund's investments. The use of
futures and options on futures may produce a loss for the Fund, even when used
only for hedging purposes and you could lose money because of the Fund's use of
options.
The Fund's holdings are subject to small and midcap stock risks. Small and
medium-size companies often have narrower markets and more limited managerial
and financial resources than larger, more established companies. As a result,
their performance can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund's portfolio.
To the extent that the Fund emphasizes particular companies or market sectors,
such as technology, it will be especially susceptible to the risks associated
with investments in those companies or market sectors.
................................................................................
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An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail B Shares from year to year; and (b) how the average annual returns of
the Fund's Retail B Shares compare to those of a broad-based securities market
index. The Fund began operations on December 12, 1994 as the Firstar Stellar
Growth Equity Fund, a separate portfolio of Firstar Stellar Funds (the
"Predecessor Stellar Fund"). On December 11, 2000, the Predecessor Stellar Fund
was reorganized as a new portfolio of Firstar Funds, Inc. upon the closing of
reorganizations between Firstar Funds, Inc. and each of Mercantile Mutual
Funds, Inc. and Firstar Stellar Funds (together, the "Firstar Reorganization").
The performance set forth below is based on the performance of a different
class of the Predecessor Stellar Fund. The Predecessor Stellar Fund did not
offer Y Shares. The performance of the other class shown would be substantially
similar to that of the Y class because both classes will be invested in the
same portfolio of securities. Annual returns will differ only to the extent
that the classes do not have the same expenses.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart and table. If these amounts were reflected, returns would be
less than those shown.
Year-by-year total return as of 12/31 each year (%) (Retail B Shares)
[GRAPH]
1990
1991
1992
1993
1994
1995 27.37%
1996 23.35%
1997 25.28%
1998 28.05%
1999 25.42%
The Large Cap Growth Fund's total return for Retail B Shares for the six-month
period ended September 30, 2000 was 4.46%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 4 '98 23.49%
Worst Quarter: Q 3 '98 -10.87%
</TABLE>
--------------------------------------------------------------------------------
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Average Annual Total Return as of 12/31/99 (Retail B Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5 Since inception
1 Year Years 10 Years (inception date)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Growth Fund -
Retail B Shares 25.42% 25.88% -- 26.41%
(December 12, 1994)
S&P 500 Index 21.04% 28.56% -- 28.58%
(December 12, 1994)
S&P BARRA Growth Index 28.25% 33.64% -- 33.44%
(November 30, 1994)
-------------------------------------------------------------------
</TABLE>
The S&P 500 Index is a widely-recognized unmanaged index of 500 domestic stocks
created by Standard & Poor's Corporation. The Index is heavily weighted toward
stocks with large market capitalizations and represents approximately two-
thirds of the total market value of all domestic common stocks. The S&P BARRA
Growth Index, an unmanaged market capitalization weighted index, is replacing
the S&P 500 as the Fund's performance benchmark. The S&P BARRA Growth Index is
composed of the stocks in the S&P 500 with the highest valuations and, in the
adviser's view, the greatest growth opportunities. This benchmark is more
closely aligned to the management of the Large Cap Growth Fund, which seeks
appreciation by investing primarily in fast growing large cap securities. The
Index figures do not reflect any fees or expenses. Investors cannot invest
directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the Large Cap Growth Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.95%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.48%
-------
Total Annual Fund Operating Expenses (before waivers) 1.43%
Fee Waivers and Expenses Reimbursements/4/ (0.04)%
-------
Net Annual Fund Operating Expenses/4/ 1.39%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Large Cap
Growth Fund is 0.91% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Large Cap Growth Fund until October
31, 2001, so that Net Annual Fund Operating Expenses will be no more than
1.39% of the Fund's average daily net assets for the current fiscal year.
These fee waivers and expense reimbursements may be terminated at any time
after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Growth Fund - Y Shares $141 $448 $778 $1,709
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
International Value Fund
Objective
[GRAPHIC]
The investment objective of the International Value Fund (formerly
International Equity Fund) is to seek capital appreciation through investing in
foreign securities which the Sub-Adviser believes are undervalued. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
The Fund's policy under normal market conditions is to invest at least 65% of
its total assets in foreign common stocks, convertible securities, rights to
purchase equity securities, and warrants. Under normal market conditions, at
least 80% of assets will be invested in three countries other than the U.S.
Principal Investment Strategies
[GRAPHIC]
Hansberger Global Investors, Inc. (the "Sub-Adviser" or "HGI") chooses
securities based on a long-term investment perspective. The Sub-Adviser seeks
opportunities to invest in many countries and believes that this international
search provides flexibility to shift portfolio investments not only from
company to company and industry to industry, but also country to country, in
search of undervalued securities.
The Sub-Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Sub-Adviser may sell for reasons relating
to valuation when for example a security's price has reached a target specified
by the Sub-Adviser, and the Sub-Adviser believes potential increases in price
are limited.
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The Fund generally invests in common stocks, but may also invest in preferred
stocks and certain rated or unrated debt securities when the Sub-Adviser
believes there's a potential for appreciation. The Fund may also invest in
warrants or rights to subscribe to or purchase such securities, and sponsored
or unsponsored:
.American Depository Receipts
.European Depository Receipts
.Global Depository Receipts, and
.other depository receipts
American Depository Receipts are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issues by a foreign
issuer. American Depository Receipts may be listed on a national securities
exchange or may trade in the over-the-counter market. American Depository
Receipts are denominated in U.S. dollars. The underlying securities may be
denominated in a foreign currency.
The Fund may also invest in:
.closed-end investment companies holding foreign securities
.options on securities and securities indices
.futures contracts and related options
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest for the
long-term and are not seeking to speculate on short-term stock market
movements. The Fund's value is expected to be volatile as a result of its
investment in foreign securities.
The Fund is subject to market risk. The Fund's investments in foreign
securities, ADRs, EDRs and GDRs are subject to foreign risks. In unsponsored
ADR programs, the issuer may not be directly involved in arranging its
securities to be traded in the form of depository receipts. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the depository receipts. 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.
The Fund's investments in convertible securities are subject to credit risk.
Convertible securities frequently have speculative characteristics and may be
acquired without regard to minimum quality ratings. The Fund intends to invest
no more than 5% of net assets in securities rated non-investment grade (or
equivalent rating by an agency recognized in the local market) at the time of
purchase (or unrated securities deemed to be of comparable quality).
Convertible securities and obligations rated in the lowest of the top four
rating categories are subject to greater credit and interest rate risk than
higher rated securities.
The emerging country securities in which the Fund may invest are subject to
significant risk and will not be required to meet any minimum rating standard.
The Fund's investments in options and futures involve derivatives risk. This is
the risk of loss from transactions which may be more sensitive to or otherwise
not react in tandem with interest rate changes or market moves and may be
leveraged.
................................................................................
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Secondary markets generally do not exist for forward foreign currency
contracts, and there is no assurance that the Fund will be able to close out a
forward currency contract or close it out at a favorable price.
Warrants are options to purchase equity securities at a specific price valid
for a specific period of time. The purchase of warrants involves the risk that
the Fund could lose the purchase value of the 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.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
Y Shares of the Fund are new and have no performance history. For this reason,
the performance information shown below is for another class of shares (Retail
A Shares) that is not offered in this prospectus but would have substantially
similar annual returns because both classes of shares will be invested in the
same portfolio of securities. Annual returns will differ only to the extent
that the classes do not have the same expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. For periods prior to January 10,
1995, performance does not reflect service organization fees. If these service
organization fees were reflected, performance would be reduced. Performance
does not reflect the sales load applicable to Retail A shares. If the sales
load were reflected, performance would be reduced. Performance reflects fee
waivers in effect. If fee waivers were not in place, the Fund's performance
would be reduced.
Effective September 2, 1997, Hansberger Global Investors, Inc. became
investment Sub-Adviser to the Fund.
Year-by-year total return as of 12/31 each year (%) (Retail B Shares)
[GRAPH]
1990
1991
1992
1993
1994
1995 4.27%
1996 4.70%
1997 (10.71)%
1998 (9.69)%
1999 29.72%
The International Value Fund's total return for Retail A Shares for the nine-
month period ended September 30, 2000 was -13.91%.
............................................................................. 77
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--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q2 '99 14.87%
Worst Quarter: Q3 '98 -21.10%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (April 28, 1994)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Value Fund -
Retail A Shares 29.72% 2.69% -- 1.58%
MSCI/EAFE Index 26.96% 12.83% -- 11.21%
</TABLE>
--------------------------------------------------------------------------------
The Morgan Stanley Capital International Europe, Australia and Far East Index
("MSCI/EAFE") is a widely recognized unmanaged index composed of 20 European
and Pacific Basin countries. The Index figures do not reflect any fees or
expenses. Investors cannot invest directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold Y Shares
of the International Value Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 1.34%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.67%
-------
Total Annual Fund Operating Expenses (before
waivers) 2.01%
Fee Waivers and Expense Reimbursements/4/ (0.19)%
-------
Net Annual Fund Operating Expenses/4/ 1.82%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the International
Value Fund is 1.15% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the International Value Fund until October
31, 2001, so that Net Annual Fund Operating Expenses will be no more than
1.82% of the Fund's average daily net assets for the current fiscal year.
These fees waivers and/or expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
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Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Value Fund - Y Shares $185 $611 $1,064 $2,318
--------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
Global Equity Fund
Objective
[GRAPHIC]
The investment objective of the Global Equity Fund is to achieve long-term
capital appreciation. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPHIC]
To achieve its investment goal, the Fund invests, under normal market
conditions, at least 65% of the value of its total assets in shares of other
mutual funds whose portfolios consist of equity securities of non-U.S., U.S.
and global issuers. As an operational policy, the Fund will likely invest
substantially all of its assets in global and international equity funds, but
may invest a small portion in individual foreign securities.
The Fund may purchase shares of both load and no-load funds, including those
with a contingent deferred sales charge. However, the Fund anticipates that it
will generally purchase no-load fund shares that do not charge a sales charge.
The 1940 Act restricts the Fund's ability to purchase securities of another
mutual fund, if as a result, the Fund (together with any affiliates) would own
more than 3% of the total outstanding securities of that mutual fund.
The Fund primarily invests in other global and international equity funds (i.e.,
funds that invest primarily in equity securities of companies located in 3 or
more countries outside the U.S.)
The Adviser identifies and selects a varied portfolio of international and
global equity funds which represent the greatest long-term capital growth
potential based on the Adviser's analysis of many factors. For instance, the
Adviser may look for international or global equity funds that invest primarily
in emerging markets or funds that focus their investments on geographic regions.
Investing in non-U.S. securities provides you with 3 potential opportunities:
1. The opportunity to invest in foreign issuers believed by the adviser to have
superior growth potential;
2. The opportunity to invest in foreign countries with economic policies or
business cycles different from the U.S.; and
3. The opportunity to reduce portfolio volatility to the extent that the
securities markets inside and outside the U.S. do not move in harmony.
Before investing in an international or global equity fund, the Adviser:
First: assesses the relative attractiveness of individual countries, geographic
regions and/or emerging markets by examining the opinions of various
foreign market analysts.
Second: considers the expected returns and risks of the fund relative to the
industries in which the fund invests. The Adviser considers whether the
fund and the companies in which it invests have solid management, new
product lines. The Adviser also performs a quantitative analysis by
considering a company's price/earnings ratios and projected earnings.
............................................................................. 79
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Third:
involves an initial peer group screening process that assesses fund
investment style, objectives, policies and management. The peer group
also considers independent rating services.
If, in the Adviser's view, the mutual fund meets these criteria, then the
Adviser will further evaluate the mutual fund's investment policies, historic
total return, size, volatility and operating expenses over various time
periods. The Adviser also considers the differences between the fund's and
another mutual fund's investment restrictions when making any investment
decisions.
Underlying Funds
The underlying international and global equity funds in which the Fund invests
may have similar policies as the Fund, although this is not required. The
underlying international equity funds may invest up to 100% of their total
assets in equity securities of foreign issuers, including international stocks.
The underlying global equity funds may invest a substantial portion of their
total assets in equity securities of U.S. issuers.
Although the Fund is a diversified investment portfolio, it may invest in non-
diversified mutual funds or in funds that invest a substantial portion of their
assets in a single country. This may result in greater fluctuation in the total
market value of the underlying fund's portfolio because of the higher
percentage of investments among fewer issuers or in a single country. The Fund
intends to reduce these risks by holding shares of multiple funds.
The underlying funds may also be authorized to invest up to 100% of their
respective assets in securities of foreign issuers and engage in foreign
currency transactions with respect to these investments. The underlying funds
may invest primarily in either the securities of emerging market countries or
in the securities of a single country. The funds may invest 35% or more of
their respective assets in high yield securities (junk bonds) or warrants. They
may engage in short selling and in leveraged borrowing and enter into interest
rate swaps, currency swaps and other types of swap agreements such as caps,
collars and floors.
The Fund will normally invest in open-end management investment companies, but
may also invest in closed-end management investment companies and/or unit
investment trusts. Unlike open-end funds that offer and sell their shares at
net asset value plus any applicable sales charge, the shares of closed-end
funds may trade at a market value that represents a premium, discount or spread
to net asset value.
Temporary Investments
To respond to adverse market, economic, political or other conditions, the Fund
may invest up to 100% of its total assets in money market mutual funds or in
short-term debt securities. The Fund may invest up to 35% of the total assets
in these securities to maintain liquidity. Short-term debt securities include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements
.other short-term instruments
To the extent the Fund engages in this temporary, defensive strategy, the Fund
may not achieve its investment objective.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to underlying funds risks. The Fund's performance directly
relates to the performance of the funds in which it invests. This investment
strategy also subjects the Fund to additional expenses and certain tax
consequences that would not exist if you invested in those funds directly. By
investing in the
................................................................................
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Fund, you bear not only the Fund's total operating expenses, but the operating
expenses of the underlying funds as well.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which the Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions.
Investments in foreign securities are subject to foreign risks. Investing in
foreign securities can carry higher returns than those associated with domestic
investments. However, foreign securities may be substantially riskier than
domestic investments. The economies of foreign countries may differ from the
U.S. economy in such respects as growth of gross domestic product, rate of
inflation, currency depreciation, capital reinvestment, resource self-
sufficiency, and balance of payments position. Furthermore, the economies of
developing countries generally are heavily dependent on international trade
and, accordingly, have been, and may continue to be, adversely affected by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protective measures imposed or negotiated by the countries
with which they trade. These economies also have been, and may continue to be,
adversely affected by economic conditions in the countries with which they
trade.
Funds may be required to obtain prior governmental approval for foreign
investments in some countries under certain circumstances. Governments may
require approval to invest in certain issuers or industries deemed sensitive to
national interests, and the extent of foreign investment in certain debt
securities and domestic companies may be subject to limitation. Individual
companies may also limit foreign ownership to prevent, among other things,
violation of foreign investment limitations.
Some foreign investments may risk being subject to repatriation controls that
could render such securities illiquid. Other countries might undergo
nationalization, expropriation, political changes, governmental regulation,
social instability or diplomatic developments (including war) that could
adversely affect the economies of such countries or the value of the
investments in those countries. For this reason, funds that invest primarily in
the securities of a single country will be greatly impacted by any political,
economic or regulatory developments affecting the value of the securities.
Additional risks include currency fluctuations, incomplete financial
information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
The Fund is subject to futures and options on futures risks, as the Fund may,
via underlying funds, use futures and options on futures for hedging purposes
only. The hedging strategy may not be successful if the Adviser is unable to
accurately predict movements in the prices of individual securities held by the
Fund or if the strategy does not correlate well with the Fund's investments.
The use of futures and options on futures may produce a loss for the Fund, even
when used only for hedging purposes and you could lose money because of the
Fund's use of options.
The Fund's investments in debt securities are subject to credit risk, interest
rate risk and high-yield bond risk. Credit risk is the risk that an issuer of
fixed income securities may default on its obligation to pay interest and repay
principal. Interest rate risk is the risk that, when interest rates increase,
fixed income securities will decline in value. In particular, convertible
securities frequently have speculative characteristics and may be acquired
without regard to minimum quality ratings. Obligations rated in the lowest of
the top four rating categories are subject to greater credit and interest rate
risk than higher rated securities. High-yield bond risk involves the Fund's
investment (via underlying funds) in high-yield bonds (generally referred to as
junk bonds). Junk bonds are considered predominantly speculative by traditional
investment standards. The market value of these low-rated securities tends to
be more sensitive to individual corporate developments and changes in interest
rates and economic conditions than higher-rated securities. In addition, they
generally present a higher degree of credit risk. Issuers of low-rated
securities are often highly leveraged, so their ability to repay their debt
during an economic downturn or periods of rising interest rates may be
impaired.
............................................................................. 81
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The Fund's holdings are subject to small and midcap stock risks. Small and
medium-size companies often have narrower markets and more limited managerial
and financial resources than larger, more established companies. As a result,
their performance can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund's portfolio.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Y Shares from year to year; and (b) how the average annual returns of the
Fund's Y Shares compare to those of a broad-based securities market index. The
Fund began operations on December 3, 1997 as the Firstar Stellar International
Equity Fund (the "Predecessor Stellar Fund"), a separate portfolio of Firstar
Stellar Funds. On December 11, 2000, the Predecessor Stellar Fund was
reorganized as a new portfolio of Firstar Funds, Inc. upon the closing of
reorganizations between Firstar Funds, Inc. and each of Mercantile Mutual
Funds, Inc. and Firstar Stellar Funds (together, the "Firstar Reorganization").
The Predecessor Stellar Fund did not offer a share class corresponding to Y
Shares. The performance set forth below is based on the performance of a
different class of the Predecessor Stellar Fund (Retail A Shares). The
performance of this other class shown would be substantially similar to that of
the Y Class because both classes will be invested in the same portfolio of
securities. Annual returns will differ only to the extent that the classes do
not have the same expenses.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced. Sales charges are not reflected
in the bar chart and table. If these amounts were reflected, returns would be
less than those shown.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991
1992
1993
1994
1995
1996
1997
1998 8.51%
1999 37.25%
The Global Equity Fund's total return for Y Shares for the nine-month period
ended September 30, 2000 was -8.54%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 4 '99 25.23%
Worst Quarter: Q 3 '98 15.65%
</TABLE>
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Y Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (December 3, 1997)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Equity Fund -
Y Shares 37.25% -- -- 21.13%
EAFE Index 25.26% -- -- 21.25%
</TABLE>
--------------------------------------------------------------------------------
The Morgan Stanley Europe, Australasia and Far East ("EAFE") Index is a widely-
recognized unmanaged index used to measure the performance of European,
Australian, New Zealand and Far Eastern stock markets. The Index is composed of
securities drawn from 21 countries in the above regions. The Index figures do
not reflect any fees or expenses. Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the Global Equity Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.58%
-------
Total Annual Fund Operating Expenses (before
waivers)/5/ 1.33%
Fee Waivers and Expense Reimbursements/4/ (0.06)%
-------
Net Annual Fund Operating Expenses/4/,/5/ 1.27%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Global Equity
Fund is 0.69% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Global Equity Fund until October 31,
2001, so that Net Annual Fund Operating Expenses will be no more than 1.27%
of the Fund's average daily net assets for the current fiscal year. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2001 at the discretion of the service providers.
5 Because the Fund invests in other investment companies your investment in the
Fund is also indirectly subject to the operating expenses of those investment
companies. Such expenses have typically ranged from 0.37% to 3.07%. The above
table does not reflect these indirect expenses.
............................................................................. 83
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Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Equity Fund - Y Shares $129 $415 $723 $1,595
--------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
International Growth Fund
Objective
[GRAPHIC]
The investment objective of the International Growth Fund (formerly Core
International Equity Fund) is to provide capital growth consistent with
reasonable investment risk. The investment objective may be changed by the
Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Sub-Adviser
FIRMCO has appointed Clay Finlay Inc. ("Clay Finlay" or the "Sub-Adviser") as
sub-adviser to assist in the day-to-day management of the Fund.
Principal Investment Strategies
[GRAPHIC]
The Fund invests primarily in foreign common stocks, most of which will be
denominated in foreign currencies. Under normal market conditions, the Fund
invests substantially all (at least 80%) of its total assets in the securities
of companies that derive more than 50% of their gross revenues outside the
United States or have more than 50% of their assets outside the United States.
Under normal market conditions, the Fund invests in equity securities from at
least three foreign countries. Generally, at least 50% of the Fund's total
assets will be invested in securities of companies located either in the
developed countries of Western Europe or in Japan. The Fund also may invest in
other developed countries in the Far East and in countries with emerging
markets or economies.
By investing in various foreign stocks, the Fund attempts to achieve broad
diversification and to take advantage of differences between economic trends
and the performance of securities markets in different countries, regions and
geographic areas. In selecting stocks, the Sub-Adviser determines which
companies represent the best values relative to their long-term growth
prospects and local markets through the use of a screening tool which focuses
on valuation ranges. The Sub-Adviser focuses on companies with steady,
sustainable earnings growth rates that sell at a multiple lower than the
average for that growth rate in the local market. The Sub-Adviser also uses
fundamental analysis by evaluating balance sheets, market share and strength of
management.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest for the
long-term and are not seeking to speculate on short-term stock movements. The
Fund's value is expected to be volatile as a result of its investment in
foreign securities.
The Fund is subject to market risk and management risk. Market risk is the risk
that the value of the securities in which the Fund invests may go up or down in
response to the prospects of individual companies and/or general economic
conditions. Management risk is the risk that the evaluation by the investment
adviser of the rewards and risks presented by all securities purchased by the
Fund and how they
................................................................................
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advance the Fund's investment objectives may prove to be inaccurate. The Fund's
investments in foreign securities are subject to foreign risk. Foreign stocks
involve special risks not typically associated with U.S. stocks. The stocks
held by the Fund may underperform other types of stocks, and they may not
increase or may decline in value. Foreign investments may be riskier than U.S.
investments because of factors such as foreign government restrictions, changes
in currency exchange rates, incomplete financial information about the issuers
of securities, and political or economic instability. Foreign stocks may be
more volatile and less liquid than U.S. stocks. Foreign risks will normally be
greatest when the Fund invests in issues located in emerging countries. The
governments and economies of emerging countries feature greater instability
than those of more developed countries. Such investments tend to fluctuate in
price more widely and to be less liquid than other foreign investments. The
Fund is also subject to currency risk which is the potential for price
fluctuations in the dollar value of the foreign securities which the Fund holds
because of changing currency exchange rates.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Y Shares from year to year; and (b) how the average annual returns of the
Fund's Y Shares compare to those of a broad-based securities market index.
On November 27, 2000, the Mercantile International Equity Portfolio (a
"Predecessor Mercantile Portfolio"), a portfolio of Mercantile Mutual Funds,
Inc., reorganized into the Firstar International Growth Fund (formerly Firstar
Core International Equity Fund). At that time, the Firstar International Growth
Fund adopted an investment objective and certain non-fundamental investment
policies and restrictions that are substantially the same as those of the
Predecessor Mercantile Portfolio. The Predecessor Mercantile Portfolio began
operations on April 4, 1994. The performance set forth below is based on the
performance of a corresponding class of the Predecessor Mercantile Portfolio.
The Predecessor Mercantile Portfolio was managed by a different investment
adviser for the periods shown below until March 1, 2000. See "Management of the
Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
Year-by-year total return as of 12/31 each year (%) (Y Shares)
[GRAPH]
1990
1991
1992
1993
1994
1995 9.20%
1996 10.00%
1997 4.70%
1998 17.45%
1999 50.47%
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The International Growth Fund's total return for Y Shares the nine-month period
ending September 30, 2000 was -10.30%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Best Quarter: Q4 '99 27.46%
Worst Quarter: Q3 '98 -17.15%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Y Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Growth Fund -
Y Shares 50.47% 17.32% -- 15.21%
(April 24, 1994)
EAFE Index 26.96% 12.83% -- 11.21%
(April 30, 1994)
</TABLE>
--------------------------------------------------------------------------------
The Morgan Stanley Capital International Europe, Australia and Far East Index,
or EAFE Index, is an unmanaged index consisting of companies in Australia, New
Zealand, Europe and the Far East. The Index figures do not reflect any fees or
expenses. Investors cannot invest directly in an Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the International Growth Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 1.00%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.57%
-------
Total Annual Fund Operating Expenses (before
waivers) 1.57%
Fee Waivers and Expense Reimbursements/4/ (0.06)%
-------
Net Annual Fund Operating Expenses/4/ 1.51%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the International
Growth Fund is 0.94% of the Fund's average daily net assets.
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3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds--
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the International Growth Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.51% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of Fund with the cost of investing in other mutual funds. The example
assumes that you invest $10,000 in Y Shares of the Fund for the time periods
indicated, reinvest all of your dividends and distributions, and then redeem
all of your shares at the end of those periods. The example also assumes that
your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Growth Fund - Y Shares $154 $490 $849 $1,861
---------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
MidCap Index Fund
Objective
[GRAPHIC]
The investment objective of the MidCap Index Fund is to seek returns, before
Fund expenses, comparable to the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the S&P MidCap 400 Index. The
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Under normal market conditions, the Fund intends to invest substantially all of
its total assets in securities included in the S&P MidCap 400 Index, and in any
event the Fund will invest at least 80% of its net assets in securities
included in that index. The Fund uses the S&P MidCap 400 Index as the standard
performance comparison because it is composed of 400 selected common stocks of
medium-size domestic companies with market capitalizations between
approximately $148 million and $13 billion.
The S&P MidCap 400 Index is an unmanaged, capitalization-weighted index of
common stocks representing all major industries in the mid-range of the U.S.
stock market.
Rather than using traditional methods of investment management, index funds
such as the Firstar MidCap Index Fund are managed with the aid of a computer
program. The Adviser purchases and sells securities for the Fund in an attempt
to produce investment results that substantially duplicate the performance of
the common stocks of the issuers represented in the S&P MidCap 400 Index.
The Fund does not expect to hold all of the stocks included in the S&P MidCap
400 Index at any particular time; however, the Adviser believes it will be able
to construct and maintain the Fund's investment portfolio so that it reasonably
tracks the performance of the S&P MidCap 400 Index by using a capitalization
weighting and sector balancing technique.
The Adviser believes the quarterly performance of the Fund and the S&P MidCap
400 Index will be within (+/-)0.3% under normal market conditions. The Adviser
believes that through the application of a capitalization weighting and sector
balancing technique it will be able to construct and maintain the Fund's
investment portfolio so it reasonably tracks the performance of the S&P MidCap
400 Index. In the event the performance of the Fund is not comparable to the
performance of the S&P MidCap 400 Index, the Board
............................................................................. 87
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of Directors will examine the reasons for the deviation and the availability of
corrective measures. These measures would include additional fee waivers by the
Adviser and Administrator or adjustments to the Adviser's portfolio management
practices. If substantial deviation in the Fund's performance continued for
extended periods, it is expected the Board of Directors would consider possible
changes to the Fund's investment objective.
The Fund may invest in futures contracts. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell an asset in the
future at an agreed upon price. The Fund may invest in futures contracts and
options on futures contracts for hedging purposes, to have fuller exposure to
price movements in a stock or bond index, to increase total return or to
maintain liquidity to meet potential shareholder redemptions, invest cash
balances or dividends or minimize trading costs. In addition, the Fund may
purchase and sell futures and related options (based only on the S&P MidCap 400
Index) to maintain cash reserves while simulating full investment in the stocks
underlying the S&P MidCap 400 Index, to keep substantially all of its assets
exposed to the market (as represented by the S&P MidCap 400 Index), and to
reduce transaction costs.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which the Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. Your
investment follows the mid-cap portion of the U.S. stock market, as measured by
the S&P MidCap 400 Index, during upturns as well as downturns. Because of its
indexing strategy, the Fund cannot take steps to reduce market volatility or to
lessen the effects of a declining market. Whenever mid-cap stocks underperform
large- or small-cap stocks, the Fund may underperform funds that have exposure
to those segments. Further, the Fund will not necessarily dispose of a security
in response to adverse events affecting the issuer of a security (such as
adverse credit factors or failure to pay dividends) if disposal would not be
consistent with the Fund's indexing strategy.
The Adviser may be required to sell common stock if the issuer is eliminated
from the S&P MidCap 400 Index. Such sales may result in:
.lower prices, or
.losses that may not have been incurred if the Adviser did not have to sell the
securities.
The Fund's futures transactions involve derivatives risk. Derivatives risk is
the risk of loss from transactions which may be more sensitive to or otherwise
not react in tandem with interest rate changes or market moves and may be
leveraged. Futures contracts could cause the Fund to track the Index less
closely if they don't perform as expected.
The Fund's ability to duplicate the performance of the S&P MidCap 400 Index
will depend to some extent on the size and timing of cash flows into and out of
the Fund, as well as the Fund's expenses.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves investment risks,
including the risk that you may lose money.
Standard & Poor's makes no representation or warranty regarding the
advisability of investing in index funds or the ability of the S&P MidCap 400
Index to track general stock market performance.
There is no performance information in this section for the Fund because it
commenced operations on November 4, 1999.
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses you may pay if you buy and hold Y Shares of
the MidCap Index Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.25%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.60%
-------
Total Annual Fund Operating Expenses (before
waivers) 0.85%
Fee Waivers and Expense Reimbursements/4/ (0.10)%
-------
Net Annual Fund Operating Expenses/4/ 0.75%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the MidCap Index
Fund is 0.15% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the MidCap Index Fund until October 31,
2001, so that Net Annual Fund Operating Expenses will be no more than 0.75%
of the Fund's average daily net assets for the current fiscal year. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years
--------------------------------------------
<S> <C> <C>
MidCap Index Fund - Y Shares $77 $261
</TABLE>
--------------------------------------------------------------------------------
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MidCap Core Equity Fund
Objective
[GRAPHIC]
The MidCap Core Equity Fund (formerly Special Growth Fund) seeks capital
appreciation. This investment objective may be changed by the Board of
Directors without approval of Shareholders, although no change is currently
anticipated.
Principal Investment Strategies
[GRAPHIC]
Equity Securities/Potential Price Appreciation
The Fund selects securities based on their potential for price appreciation.
During normal market conditions, the Fund invests at least 65% of total assets
in equity securities of medium-sized companies. Most of these equity securities
are publicly traded common stocks of companies incorporated in the U.S.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
Medium-Sized Companies
The Fund generally invests in medium-sized companies with stock market
capitalizations between $700 million and $10 billion that the Adviser considers
to be well-managed and to have attractive fundamental financial characteristics
(see box on page 45 for examples of these characteristics). If the market
capitalization of a company in which the Fund has invested increases above $10
billion, the Fund may continue to hold the security. The Fund may also invest a
portion of its assets in companies with smaller or larger market
capitalizations.
Other
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks, and may invest up to 5% of net assets in other
types of securities having common stock characteristics, such as rights and
warrants to purchase equity securities.
The Fund may purchase non-convertible debt and preferred stocks that, in the
opinion of the Adviser, present opportunities for capital appreciation. These
obligations must be investment-grade at time of purchase or unrated but deemed
comparable by the Adviser. See "Short-Term Bond Fund, Intermediate Bond Fund
and Bond IMMDEX(TM) Fund" for a description of investment grade securities.
After purchase, a security may cease to be rated or may have its rating reduced
below the minimum rating required by the Fund for purchase. The Adviser will
consider whether to continue to hold the security.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume risk in search of
long-term capital appreciation. The Adviser believes, however, that there is
greater potential for price appreciation among medium-sized companies in which
the Fund invests, since they tend to be less widely followed by other
securities analysts and thus may be more likely to be undervalued by the
market.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which a Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. The
Fund's investments in debt securities are subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Convertible securities frequently have
speculative characteristics and may be acquired without regard
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to minimum quality ratings. The Fund intends to invest no more than 5% of net
assets in securities rated non-investment grade at the time of purchase or
unrated securities of comparable quality. Convertible securities and
obligations rated in the lowest of the top four rating categories are subject
to greater credit and interest rate risk than higher rated securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
Y Shares of the Fund are new and have no performance history. For this reason,
the performance information shown below is for another class of shares (Retail
A Shares) that is not offered in this prospectus but would have substantially
similar annual returns because both classes of shares will be invested in the
same portfolio of securities. Annual returns will differ only to the extent
that the classes do not have the same expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Prior to January 10, 1995, the Fund offered to investors one series of shares
with neither a sales charge nor a service fee. For periods prior to January 10,
1995, performance does not reflect service organization fees. If the service
organization fees were reflected, performance would be reduced. Performance
does not reflect the sales load applicable to Retail A shares. If the sales
load were reflected, performance would be reduced. Performance reflects fee
waivers in effect. If these fee waivers were not in place, the Fund's
performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990 1.00%
1991 57.96%
1992 7.22%
1993 8.02%
1994 (2.01)%
1995 29.63%
1996 18.60%
1997 17.13%
1998 4.64%
1999 2.28%
The MidCap Core Equity Fund's total returns for Retail A Shares for the nine-
month period ended September 30, 2000 was 31.74%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q4 '99 24.17%
Worst Quarter: Q3 '98 -19.68%
</TABLE>
--------------------------------------------------------------------------------
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Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------------------------------------------------
<S> <C> <C> <C>
MidCap Core Equity Fund
Retail A Shares 2.28% 14.02% 13.31%
S&P 500 Index 21.04% 28.56% 18.21%
S&P MidCap 400 Index 14.72% 23.05% --
------------------------------------------------
</TABLE>
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally
considered representative of the U.S. stock market. The Index is heavily
weighted towards stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. The S&P MidCap 400 Index is a capitalization weighted index that
represents the aggregate market value of the common equity of 400 stocks chosen
by S&P with a median capitalization of approximately $700 million and measures
the performance of the mid-range sector of the U.S. stock market. The Index
figures do not reflect any fees or expenses. Investors cannot invest directly
in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold Y Shares
of the MidCap Core Equity Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service Fees None
Other Expenses/3/ 0.46%
-------
Total Annual Fund Operating Expenses (before
waivers) 1.21%
Fee Waivers and Expense Reimbursements/4/ (0.01)%
-------
Net Annual Fund Operating Expenses/4/ 1.20%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the MidCap Core
Equity Fund is 0.74% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the MidCap Core Equity Fund until October
31, 2001, so that Net Annual Fund Operating Expenses will be no more than
1.20% of the Fund's average daily net assets for the current fiscal year.
These fee waivers and expense reimbursements may be terminated at any time
after October 31, 2001 at the discretion of the service providers.
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Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
MidCap Core Equity Fund - Y Shares $122 $383 $664 $1,465
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Small Cap Index Fund
Objective
[GRAPHIC]
The investment objective of the Small Cap Index Fund is to provide investment
results that, before deduction of operating expenses, approximate the price and
yield performance of U.S. common stocks with smaller stock market
capitalizations, as represented by the S&P SmallCap 600 Index. The investment
objective may be changed by the Board of Directors without approval of
Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Indexing is a strategy whereby the Fund attempts to weight its securities to
match those of a broadly-based securities index in an attempt to approximate
the index's performance.
The Fund uses an "indexing" strategy through the use of sophisticated computer
models to approximate the investment performance of the S&P SmallCap 600 Index.
The Fund will invest at least 80% of its total assets in securities listed in
the S&P SmallCap 600 Index and typically will hold all 600 stocks represented
in the Index. Under certain circumstances, however, the Fund may not hold all
600 stocks in the Index because of shareholder activity or changes in the
Index. In general, each stock's percentage weighting in the Fund is based on
its weighting in the S&P SmallCap 600 Index. When stocks are removed from or
added to the Index, those changes are reflected in the Fund. The Fund
periodically "rebalances" its holdings as dictated by changes in shareholder
purchase and redemption activity and in the composition of the S&P SmallCap 600
Index.
To the extent that, from time to time, the stocks in a particular market
sector, such as technology, comprise a significant portion of the S&P SmallCap
600 Index, those stocks will be represented in substantially the same
proportion in the Fund.
Under normal market conditions, it is expected that the quarterly performance
of the Fund, before expenses, will track the performance of the S&P SmallCap
600 Index within a .95 correlation coefficient.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value of
the securities in which the Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. Your
investment follows the small-cap portion of the U.S. stock market, as measured
by the S&P SmallCap 600 Index, during upturns as well as downturns. Because of
its indexing strategy, the Fund cannot take steps to reduce market volatility
or to lessen the effects of a declining market. Whenever small-cap stocks
underperform large- or mid-cap stocks, the Fund may underperform funds that
have exposure to those segments. Further, the Fund will not necessarily dispose
of a security in response to adverse events affecting the issuer of a security
(such as adverse credit factors or failure to pay dividends) if disposal would
not be consistent with the Fund's indexing strategy.
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The Adviser may be required to sell common stock if the issuer is eliminated
from the S&P SmallCap 600 Index. Such sales may result in:
.lower prices, or
.losses that may not have been incurred if the Adviser did not have to sell the
securities.
The Fund's ability to duplicate the performance of the S&P SmallCap 600 Index
will depend to some extent on the size and timing of cash flows into and out of
the Fund, as well as the Fund's expenses.
To the extent that stocks in a particular market sector, such as technology,
comprise a significant portion of the S&P Small Cap 600 Index and,
correspondingly, the Fund's holdings, the Fund will be especially susceptible
to market sector risk. Stock of technology companies may be subject to greater
price volatility than stocks of companies in other sectors. Technology
companies may produce or use products or services that prove commercially
unsuccessful, become obsolete or become adversely impacted by government
regulation. Technology stocks may experience significant price movements caused
by disproportionate investor optimism or pessimism.
The Fund's holdings are subject to small cap stock risks. Small capitalization
stocks involve greater risks than those associated with larger, more
established companies. These factors increase risk and may result in more
significant losses than other Firstar Funds. By typically investing in all 600
stocks in the Index, the Fund remains broadly diversified, which may reduce
some of this risk. Small company stocks may be subject to more abrupt or
erratic price movements. Also, securities of small-cap companies are less
liquid, and are subject to liquidity risk. Liquidity risk is the risk that
certain securities may be difficult or impossible to sell at a desirable time
and price. There normally is less publicly available information concerning
these securities. They may be subject to wide fluctuations in market value. The
trading market for any given security may be sufficiently thin as to make it
difficult for the Fund to dispose of a substantial block of such securities.
These securities are less liquid than other more widely traded securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves investment risks,
including the risk that you may lose money.
Standard & Poor's makes no representation or warranty regarding the
advisability of investing in index funds or the ability of the S&P SmallCap 600
Index to track general stock market performance.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Y Shares from year to year; and (b) how the average annual returns of the
Fund's Y Shares compare to those of a broad-based securities market index. The
Fund began operations on December 30, 1998 as the Mercantile Small Cap Equity
Index Portfolio, a separate portfolio of Mercantile Mutual Funds, Inc. (the
"Predecessor Mercantile Portfolio"). On December 11, 2000, the Predecessor
Mercantile Portfolio was reorganized as a new portfolio of Firstar Funds, Inc.
upon the closing of reorganizations between Firstar Funds, Inc. and each of
Mercantile Mutual Funds, Inc. and Firstar Stellar Funds (together, the "Firstar
Reorganization"). The performance set forth below is based on the performance
of a corresponding class of the Predecessor Mercantile Portfolio. The
Predecessor Mercantile Portfolio was managed by a different investment adviser
for the periods shown below until March 1, 2000. See "Management of the Fund"
for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
................................................................................
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[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999 7.54%
The Small Cap Index Fund's total return for Y Shares for the nine-month period
ended September 30, 2000 was 11.74%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 2 '99 15.02%
Worst Quarter: Q 1 '99 -10.90%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Y Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Index Fund -
Y Shares 7.54% -- -- 10.09%
(December 30, 1998)
S&P SmallCap 600 Index 12.40% -- -- 12.40%
(December 31, 1998)
-------------------------------------------------------------------
</TABLE>
The S&P SmallCap 600 Index is a widely-recognized unmanaged index that tracks
the performance of 600 domestic companies traded on the New York Stock
Exchange, the American Stock Exchange and Nasdaq. This Index is heavily
weighted with the stocks of small companies with market capitalizations that
currently range between $28 million and $4.2 billion. S&P does not endorse any
stock in the S&P SmallCap 600 Index and is not a sponsor of, or affiliated in
any way with, the Fund. The Index figures do not reflect any fees or expenses.
Investors cannot invest directly in an Index.
............................................................................. 95
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the Small Cap Index Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.40%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.59%
-------
Total Annual Fund Operating Expenses (before
waivers) 0.99%
Fee Waivers and Expense Reimbursements/4/ (0.06)%
-------
Net Annual Fund Operating Expenses/4/ 0.93%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Small Cap Index
Fund is 0.34% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Small Cap Index Fund until October 31,
2001, so that Net Annual Fund Operating Expenses will be no more than 0.93%
of the Fund's average daily net assets for the current fiscal year. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Index Fund - Y Shares $95 $309 $541 $1,208
</TABLE>
--------------------------------------------------------------------------------
................................................................................
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Small Cap Core Equity Fund
Objective
[GRAPHIC]
The investment objective of the Small Cap Core Equity Fund (formerly Emerging
Growth Fund) is to seek capital appreciation. The investment objective may be
changed by the Board of Directors without approval of Shareholders, although no
change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund selects securities the Adviser believes have above-average prospects
for capital appreciation. During normal market conditions, the Fund invests at
least 65% of total assets in equity securities. These equity securities may be
listed on a national securities exchange or may be unlisted securities with or
without an established over-the-counter market.
The Fund also invests in stocks the Adviser believes are undervalued or to a
limited extent in initial public offerings (IPOs) of new companies that
demonstrate the potential for price appreciation. The Adviser selects stocks
based on a number of factors, including historical and projected earnings,
asset value, potential for price appreciation and earnings growth, and quality
of the products manufactured or services offered.
Small-Sized Companies
The Fund generally invests at least 65% of its total assets in small- to
medium-sized companies with market capitalizations between $100 million and $2
billion. The Fund may also invest a portion of its assets in larger companies
that the Adviser believes offer improved growth possibilities because of
rejuvenated management, product changes or other developments likely to
stimulate earnings or asset growth.
The Fund may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume an above-average
level of market risk in search of long-term capital appreciation. The Adviser
believes, however, that there is greater potential for price appreciation among
small-sized companies in which the Fund invests, since they tend to be less
widely followed by other securities analysts and thus may be more likely to be
undervalued by the market.
The Fund is subject to market risk, management risk and small-cap stock risk.
Market risk is the risk that the value of the securities in which a Fund
invests may go up or down in response to the prospects of individual companies
and/or general economic conditions. In addition, different types of equity
securities tend to shift in and out of favor depending on market and economic
conditions. Management risk is the risk that the evaluation by the investment
adviser of the rewards and risks presented by all securities purchased by the
Fund and how they advance the Fund's investment objectives may prove to be
inaccurate. Small-cap stock risk refers to the fact that small capitalization
stocks involve greater risks than those associated with larger, more
established companies. Small company stocks may be subject to more abrupt or
erratic price movements, for reasons including that the stocks are traded in
lower volume and that the issuers are more sensitive to changing conditions and
have less certain growth prospects. Also, there are fewer market makers for
these stocks and wider spreads between quoted bid and asked prices in the over-
the-counter market for these stocks. Small cap stocks tend to be less liquid,
particularly during periods of market disruption. There normally is less
publicly available information concerning these securities. Small companies in
which the Fund may invest have limited product lines, markets or financial
resources, or may be dependant on a small management group. In particular,
investments in unseasoned companies present risks considerably greater than
investments in more established companies.
To the extent that the Fund emphasizes particular companies or market sectors,
such as technology, it will be especially susceptible to sector/technology
risk. Stocks of technology companies may be subject to greater
............................................................................. 97
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price volatility than stocks of companies in other sectors. Technology
companies may produce or use products or services that prove commercially
unsuccessful, become obsolete or become adversely impacted by government
regulation. Technology stocks may experience significant price movements caused
by disproportionate investor optimism or pessimism.
The Fund's performance results may reflect periods of above-average performance
attributable to investing a portion of its assets in the securities of
companies offering shares in IPOs. It is possible that the above-average
performance of such companies may not be repeated in the future.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Y Shares from year to year; and (b) how the average annual returns of the
Fund's Y Shares compare to those of a broad-based securities market index.
On November 27, 2000, the Mercantile Small Cap Equity Portfolio (a "Predecessor
Mercantile Portfolio"), a portfolio of Mercantile Mutual Funds, Inc.
reorganized into the Firstar Small Cap Core Equity Fund. At that time, the
Firstar Small Cap Core Equity Fund adopted an investment objective and certain
non-fundamental investment policies and restrictions that are substantially the
same as those of the Predecessor Mercantile Portfolio. The performance set
forth below is based on the performance of the corresponding class of the
Predecessor Mercantile Portfolio. The Predecessor Mercantile Portfolio began
operations on May 6, 1992.
The Predecessor Mercantile Portfolio was managed by a different investment
adviser for the periods shown below until March 1, 2000. See "Management of the
Funds" for more information.
The bar chart and performance table assume reinvestment of dividends and
distributions. Performance reflects fee waivers in effect. If these fee waivers
were not in place, the Fund's performance would be reduced. Remember, past
performance is not indicative of future results.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Y Shares)
1990
1991
1992
1993
1994
1995 16.90%
1996 10.61%
1997 20.50%
1998 -8.02%
1999 16.75%
The Small Cap Core Equity Fund's total return for Y Shares for the nine-month
period ending September 30, 2000 was 24.72%.
................................................................................
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--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q-2 '99 17.00%
Worst Quarter: Q-3 '98 -24.96%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Y Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5 Since inception
1 Year Years 10 Years (inception date)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Core Equity Fund -
Y Shares 16.75% 10.84% -- 9.34%
(January 3, 1994)
Russell 2000 Index 21.26% 16.69% -- 13.38%
(December 31, 1993)
S&P SmallCap 600 12.40% 17.04% -- 13.09%
(December 31, 1993)
Wilshire Next 1750 Index 25.32% 18.74% -- 15.13%
(December 31, 1993)
-------------------------------------------------------------------------
</TABLE>
The Russell 2000 Index is an unmanaged index comprised of the 2,000 smallest of
the 3,000 largest U.S. companies based on market capitalization. The S&P
SmallCap 600 Index is a capitalization weighted index that measures the
performance of selected U.S. stocks with small market capitalizations. The
Wilshire Next 1750 Index is an unmanaged index, which shows the next largest
1,750 companies after the Top 750 of the Wilshire 5000 Stock Index. The Index
figures do not reflect any fees or expenses. Investors cannot invest directly
in an Index. Prior to November 27, 2000, the S&P SmallCap 600 and Wilshire Next
1750 Index were the performance benchmarks of the Fund. The Russell 2000 Index
was the performance benchmark of the Predecessor Mercantile Portfolio. The S&P
SmallCap 600 Index has been selected as the sole performance benchmark for the
Fund as the market capitalization of the Index is closely aligned with that of
the Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the Small Cap Core Equity Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 99
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 0.75%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.48%
-------
Total Annual Fund Operating Expenses (before
waivers) 1.23%
Fee Waivers and Expense Reimbursements/4/ (0.02)%
-------
Net Annual Fund Operating Expenses/4/ 1.21%
=======
---------------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the Small Cap Core
Equity Fund is 0.73% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Small Cap Core Equity Fund until
October 31, 2001, so that Net Annual Fund Operating Expenses will be no more
than 1.21% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Core Equity Fund - Y Shares $124 $388 $674 $1,487
----------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
Science & Technology Fund
Objective
[GRAPHIC]
The investment objective of the Science & Technology Fund is to maximize growth
and capital appreciation by investing in equity securities of companies in the
science and technology industry. This investment objective may be changed by
the Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund seeks to achieve its investment objective by investing primarily in
equity securities of companies in the science and/or technology sectors. Under
normal market conditions, the Fund will invest at least 65% of the value of its
total assets in common stock, preferred stocks and warrants of companies of any
size principally engaged in science and technology business activities. The
Fund is a non-diversified investment company. The Fund considers science and
technology sectors to include companies whose primary business is to provide
goods or services in the fields of science (i.e., medical and health) or
technology (i.e., computers and communications). Such companies include those
that:
.make or sell products used in health care;
.make or sell medical equipment and devices and related technologies;
.make or sell software or information-based services and consulting,
communications and related services;
.design, manufacture or sell electronic components and systems;
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.research, design, develop, manufacture or distribute products, processes or
services that relate to hardware technology within the computer industry;
.develop, produce or distribute products or services in the computer, semi-
conductor, electronics, communications, health care and biotechnology sectors;
and
.engage in the development, manufacturing or sale of communications services or
communications equipment.
The Adviser believes that because of rapid advances in technology and science,
an investment in companies with business operations in these areas will offer
substantial opportunities for long-term capital appreciation. It is important
to note that prices of common stocks of even the best managed, most profitable
corporations are subject to market risk, which means their stock prices can
decline.
The Adviser's overall stock selection for the Fund is not based on the
capitalization or size of the company but rather on an assessment of the
company's fundamental prospects. The Fund may invest in small, medium or large
size companies. The Adviser will select securities while attempting to maintain
an acceptable level of risk largely through the use of proprietary fundamental
research and "bottom-up" stock selection. The Adviser will consider the
following factors when assessing a particular security:
.price/earnings ratios,
.historical and projected earnings growth rates,
.historical sales growth rates,
.historical return on equity,
.market capitalization,
.average daily trading volume, and
.credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The Adviser uses fundamental research together with economic forecasts and
assessments of the risk and volatility of the company's industry. To a limited
degree, the Fund may invest in foreign securities and options and futures for
hedging purposes.
The Fund may also participate in the initial public offering (IPO) market, and
a portion of the Fund's returns may have been attributable to its investments
in IPOs.
Temporary Investments
To respond to adverse market, economic, political or other conditions, the Fund
may invest up to 100% of its assets in high quality U.S. short-term money
market instruments. The Fund may invest up to 35% of its assets in these
securities to maintain liquidity. Some of these short-term money market
instruments include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements (collateralized by U.S. Treasury obligations and U.S.
government agencies)
To the extent the Fund engages in this temporary, defensive strategy, the Fund
may not achieve its investment objective.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume market risk,
industry risk and non-diversification risk in search of long-term capital
appreciation. Market risk is that risk that the value of the securities in
which a Fund may invest may go up or down in response to the prospects of
individual companies. Because the Fund invests in a particular industry it is
subject to industry risk, the risk that a group of related stocks will decline
in price
............................................................................ 101
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due to industry specific developments. Companies in the same or similar
industries may share common characteristics and are more likely to react to
industry specific market or economic developments. Non-diversification risk is
the risk that, because more of the Fund's assets may be concentrated in the
common stock of any single issuer, the value of the Fund's shares may be more
susceptible to adverse developments affecting any single issuer, and more
susceptible to greater losses because of these developments than shares of a
more diversified fund.
The Fund is subject to science and technology concentration risks. Science and
technology related companies face special risks such as competitive pressures
and technological obsolescence and may be subject to greater governmental
regulation than many other industries. Technology and technology related
companies may be subject to short product cycles and aggressive pricing which
may increase their volatility. For example, their products or services may not
prove commercially successful or may become obsolete quickly. The value of the
Fund's shares may be susceptible to factors affecting the science and
technology areas and to greater risk and market fluctuation than an investment
in a fund that invests in a broader range of portfolio securities not
concentrated in any particular industry. Furthermore, companies within the
science and technology industries face greater risks of competition from new
market entrances and increased research and development costs. Additionally,
companies in these areas are dependent upon consumer and business acceptance as
new technologies evolve.
The Fund is also subject to IPO risk. IPOs may not be consistently available to
the Fund for investing, particularly as the Fund's asset base grows. As the
Fund's assets continue to grow, the effect of the Fund's investments in IPOs on
its total returns likely will decline, which will reduce the Fund's total
returns.
The Fund is subject to futures and options on futures risks, as the Fund may
use futures and options on futures for hedging purposes only. The hedging
strategy may not be successful if the Adviser is unable to accurately predict
movements in the prices of individual securities held by the Fund or if the
strategy does not correlate well with the Fund's investments. The use of
futures and options on futures may produce a loss for the Fund, even when used
only for hedging purposes and you could lose money because of the Fund's use of
options.
The Fund's holdings are subject to small and midcap stock risks. Small and
medium-size companies often have narrower markets and more limited managerial
and financial resources than larger, more established companies. As a result,
their performance can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund's portfolio.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Because the Fund has been in existence for less than one calendar year, no
performance information for the Fund is included in this Prospectus. The Fund
began operations on August 9, 1999 as the Firstar Stellar Science & Technology
Fund (the "Predecessor Stellar Fund"), a separate portfolio of Firstar Stellar
Funds. On December 11, 2000, the Predecessor Stellar Fund was reorganized as a
new portfolio of Firstar Funds, Inc. upon the closing of reorganizations
between Firstar Funds, Inc. and each of Mercantile Mutual Funds, Inc. and
Firstar Stellar Funds (together, the "Firstar Reorganization").
................................................................................
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Y Shares of the Science & Technology Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-------------------------------------------------
<S> <C>
Management Fees 1.05%
Distribution and Service (12b-1) Fees None
Other Expenses/2/ 0.51%
-----
Total Annual Fund Operating Expenses/3/ 1.56%
=====
-------------------------------------------------
</TABLE>
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
3 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the Science & Technology Fund until
October 31, 2001 so that Net Annual Fund Operating Expenses will be no more
than 1.56% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Science & Technology Fund - Y Shares $159 $493 $850 $1,856
---------------------------------------------------------------------
</TABLE>
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MicroCap Fund
The MicroCap Fund is currently closed to new investors. Please see the
"Purchasing Shares" section below for additional information.
Objective
[GRAPHIC]
The investment objective of the MicroCap Fund is capital appreciation. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Common Stocks/Potential Price Appreciation
The Fund selects securities based on their potential for price appreciation.
Most of the securities the Fund holds will be common stocks of companies
incorporated in the U.S.
The Adviser may sell a security for reasons including those relating to
fundamental deterioration or valuation. Fundamental deterioration occurs when a
company is no longer able to achieve the results generally expected by the
investment community due to a specific issue, such as a loss of a customer or
pricing pressure in the industry. The Adviser may sell for reasons relating to
valuation when for example a security's price has reached a target specified by
the Adviser, and the Adviser believes potential increases in price are limited.
Micro Capitalization Companies
At least 65% of the Fund's total assets will be invested in equity and debt
securities of micro capitalization companies that, in general, the Adviser
considers to be well managed and to have attractive fundamental financial
characteristics (see box on page 45 for examples of these characteristics).
Micro capitalization companies are those with capitalizations at the time of
purchase below the median market capitalization of the Russell 2000 Index,
which is currently approximately $481 million. The Fund may invest up to 35% of
its assets at the time of purchase in companies in excess of the median market
capitalization of the Russell 2000 Index. If the market capitalization of a
company in which the Fund has invested increases above the median market
capitalization of the Russell 2000 Index, the Fund may continue to hold the
security.
The Adviser believes that there is greater potential for price appreciation
among small-sized companies in which the Fund invests, since they tend to be
less widely followed by other securities analysts and thus may be more likely
to be undervalued by the market.
The Fund intends to invest no more than 5% of net assets in securities rated
non-investment grade at the time of purchase (or unrated securities of
comparable quality).
Other
The Fund may invest up to 25% of total assets in the securities of foreign
issuers, either directly or through sponsored American Depository Receipts.
American Depository Receipts are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. American Depository Receipts may be listed on a national securities
exchange or may trade in the over-the-counter market. American Depository
Receipts are denominated in U.S. dollars. The underlying securities may be
denominated in a foreign currency.
The Fund also invests in bonds, notes, debentures and preferred stocks
convertible into common stocks.
The Fund may purchase non-convertible debt and preferred stocks that, in the
opinion of the Adviser, present opportunities for capital appreciation. These
obligations must be investment grade at time of purchase or be unrated but
deemed comparable by the Adviser. See "Short-Term Bond Fund, Intermediate Bond
Fund and Bond IMMDEX(TM) Fund" for a description of investment-grade
securities. After purchase, a security may cease to be rated or may have its
rating reduced below the minimum rating required by the Fund for purchase. The
Adviser will consider whether to continue to hold the security.
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The Fund may acquire securities of unseasoned companies (companies with less
than three years' of continuous operation) when the Adviser believes the
investments offer possibilities of attractive capital appreciation, but will
not invest more than 20% of the value of its total assets in the securities of
unseasoned companies.
The Fund may also participate in the initial public offering (IPO) market, and
a substantial portion of the Fund's returns have been attributable to its
investments in IPOs.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest without
concern for current income and are financially able to assume an above-average
level of market risk in search of long-term capital gain. Market risk is the
risk that the value of the securities in which a Fund invests may go up or down
in response to the prospects of individual companies and/or general economic
conditions. The Fund's expenses in a year may exceed income. There can be no
assurance the investment objective of the Fund will be realized or the value of
the Fund's investments will not decline in value. You should consider the Fund
to be a long-term investment and not a vehicle for seeking short-term profits
and income.
The Fund's investments in debt securities are subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. In particular, convertible securities
frequently have speculative characteristics and may be acquired without regard
to minimum quality ratings. Obligations rated in the lowest of the top four
rating categories are subject to greater credit and interest rate risk than
higher rated securities.
The Fund's holdings are subject to micro cap stock risks. Micro capitalization
stocks involve greater risks than those associated with larger, more
established companies. Small company stocks may be subject to more abrupt or
erratic price movements. Also securities of micro cap companies are less
liquid, and are subject to liquidity risk. Liquidity risk is the risk that
certain securities may be difficult or impossible to sell at a desirable time
and price. There normally is less publicly available information concerning
these securities. In addition, the Fund's investments in unseasoned companies
present risks considerably greater than investments in more established
companies. Further, the securities in which the Fund invests will often be
traded only in the over-the-counter market or on a regional securities
exchange, may be listed only in the quotation service commonly known as the
"pink sheets," and may not be traded every day or in the volume typical of
trading on a national securities exchange. They may be subject to wide
fluctuations in market value. The trading market for any given security may be
sufficiently thin as to make it difficult for the Fund to dispose of a
substantial block of such securities. These securities are less liquid than
other more widely traded securities. The disposition by the Fund of portfolio
securities to meet redemptions or otherwise may require the Fund to sell these
securities at a discount from market prices or during periods when, in the
Adviser's judgment, such disposition is not desirable or to make many small
sales over a lengthy period of time.
The Fund's investments in foreign securities and American Depository Receipts
are subject to foreign risks. Foreign risks, which are not typically associated
with domestic issuers, result from less government regulation, less public
information and less economic, political and social stability. The Fund will
also be subject to the risk of negative foreign currency fluctuations. Foreign
risks will normally be greatest when the Fund invests in issuers located in
emerging countries.
The Fund is also subject to IPO risk. IPOs may not be consistently available to
the Fund for investing, particularly as the Fund's asset base grows. As the
Fund's assets continue to grow, the effect of the Fund's investment in IPOs on
its total returns likely will decline, which could reduce the Fund's total
returns.
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An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
Y Shares of the Fund are new and have no performance history. For this reason,
the performance information shown below is for another class of shares (Retail
A Shares) that is not offered in this prospectus but would have substantially
similar annual returns because both classes of shares will be invested in the
same portfolio of securities. Annual returns will differ only to the extent
that the classes do not have the same expenses.
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Retail A Shares from year to year; and (b) how the average annual returns of
the Fund's Retail A Shares compare to those of a broad-based securities market
index. The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance does not reflect the sales load applicable to Retail A Shares. If
the sales load were reflected, performance would be reduced. Performance
reflects fee waivers in effect. If these fee waivers were not in place, the
Fund's performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
1990
1991
1992
1993
1994
1995
1996 56.80%
1997 13.63%
1998 (2.73)%
1999 136.23%
The MicroCap Fund's total return for Retail A Shares for the nine-month period
ended September 30, 2000 was 30.58%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 4 '99 70.70%
Worst Quarter: Q 3 '98 -30.87%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (August 1, 1995)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
MicroCap Fund
Retail A Shares 136.23% -- -- 43.20%
Russell 2000 Index 21.26% -- -- 14.06%
</TABLE>
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The Russell 2000 Index, an unmanaged index, consists of the smallest 2,000
companies in a group of 3,000 U.S. companies in the Russell 3000 Index, as
ranked by total market capitalization. The Index figures do not reflect any
fees or expenses. Investors cannot invest directly in the Index.
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the expenses that you may pay if you buy and hold Y Shares
of the MicroCap Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/1/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Y Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/2/ 1.50%
Distribution and Service (12b-1) Fees None
Other Expenses/3/ 0.44%
-------
Total Annual Fund Operating Expenses (before
waivers) 1.94%
Fee Waivers and Expense Reimbursements/4/ (0.01)%
-------
Net Annual Fund Operating Expenses/4/ 1.93%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
2 As a result of fee waivers, the current management fee of the MicroCap Fund
is 1.49% of the Fund's average daily net assets.
3 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Y Shares.
4 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Y Shares of the MicroCap Fund until October 31, 2001,
so that Net Annual Fund Operating Expenses will be no more than 1.93% of the
Fund's average daily net assets for the current fiscal year. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
Y Shares of the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in Y Shares of the Fund for the time
periods indicated, reinvest all of your dividends and distributions, and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
<S> <C> <C> <C> <C>
MicroCap Fund - Y Shares $196 $608 $1,046 $2,263
</TABLE>
--------------------------------------------------------------------------------
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Types of Investment Risk
The principal risks of investing in each Fund are described previously in this
Prospectus. The following list provides more detail about some of those risks,
along with information on additional types of risks which may apply to the
Funds. Risks associated with particular types of investments each Fund makes
are described in this section and in the Additional Statement referred to on
the back cover.
General Risks of Investing in Each of the Funds
[GRAPHIC]
Complete Investment Program - All Funds
An investment in a single Fund, by itself, does not constitute a complete
investment plan.
Credit Risk - Money Market Funds, Bond Funds, Balanced Funds, and any other
Fund to the extent that it invests in fixed-income securities
An issuer of fixed-income securities may default on its obligation to pay
interest and repay principal. Also, changes in the financial strength of an
issuer or changes in the credit rating of a security may affect its value.
Credit risk includes "counterparty risk" - the risk that the other party to a
transaction will not fulfill its contractual obligation. This risk applies, for
example, to repurchase agreements into which each Fund may enter.
Securities rated below investment grade are particularly subject to credit
risk. These securities are predominantly speculative and are commonly referred
to as "junk bonds." To the extent a Fund purchases or holds convertible or
other securities that are below investment grade, a greater risk exists as to
the timely repayment of the principal of, and the timely payment of interest or
dividends on, such securities.
Derivatives Risk - All Funds
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 a Fund's investments in options, futures, swaps, structured securities and
other derivative instruments which may be leveraged. A Fund may use derivatives
to: increase yield; hedge against a decline in principal value; invest with
greater efficiency and lower cost than is possible through direct investment;
adjust the Fund's duration; or provide daily liquidity.
Hedging is the use of one investment to offset the effects of another
investment. To the extent that a derivative is used as a hedge against an
opposite position that the Fund also holds, a loss generated by the derivative
should be substantially offset by gains on the hedged investment, and vice
versa. While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains. Hedging also involves correlation risk - the risk that changes
in the value of a hedging instrument may not match those of the asset being
hedged.
Investment by the Short-Term Bond Fund, Intermediate Bond Fund, U.S. Government
Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM) Fund, Strategic Income
Fund and Large Cap Growth Fund in collateralized mortgage obligations and
mortgage- and asset-backed securities are subject to derivatives risk.
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.
Interest Rate Risk - Money Market Funds, Bond Funds, Balanced Funds and any
other Fund to the extent that it invests in fixed-income securities
When interest rates increase, fixed-income securities tend to decline in value
and when interest rates decrease, fixed-income securities tend to increase in
value. A change in interest rates could cause the value of your investment to
change. Fixed-income securities with longer maturities are more susceptible to
interest rate fluctuations than those with shorter maturities. Therefore, the
risk of interest rate fluctuation is greater
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in the case of the Bond IMMDEX(TM) Fund and the Tax-Exempt Intermediate Bond
Fund than in the case of the Money Market Funds or the Short-Term Bond Fund.
Changes in interest rates may also extend or shorten the duration of certain
types of instruments, such as asset-backed securities, thereby affecting their
value and the return on your investment.
Stripped securities in which the Short-Term Bond Fund, Intermediate Bond Fund,
Bond IMMDEX(TM) Fund and Strategic Income Fund may invest and zero coupon
securities in which the Short-Term Bond Fund, Intermediate Bond Fund, Bond
IMMDEX(TM) Fund and Strategic Income Fund may invest are subject to greater
interest rate risk than may of the more typical fixed income securities.
Liquidity Risk - All Funds
Certain securities may be difficult or impossible to sell at the time and price
that the Fund would like. A Fund may have to lower the price, sell other
securities instead or forego an investment opportunity, any of which could have
a negative effect on fund management or performance. This risk applies, for
example, to: variable and floating rate demand notes, variable amount demand
securities and restricted securities which the Funds may purchase, short-term
funding agreements which the Institutional Money Market Fund may purchase, the
guaranteed investment contracts which the Short-Term Bond Fund, Intermediate
Bond Fund and Bond IMMDEX(TM) Fund may purchase and the futures contracts in
which the Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund
and Strategic Income Fund, Growth & Income Fund, Equity Index Fund, Large Cap
Growth Fund, International Value Fund, Global Equity Fund, International Growth
Fund, Science & Technology Fund and MicroCap Fund may engage. Illiquid
securities also include repurchase agreements and time deposits with
notice/termination dates of greater than seven days and certain unlisted over-
the-counter options and other securities traded in the U.S. but which are
subject to trading restrictions because they are not registered under the
Securities Act of 1933. There may be no active secondary market for these
securities. Each Fund may invest up to 15% of its net assets at the time of
purchase in securities that are illiquid, except that each Money Market Fund
may invest up to 10% of its net assets at the time of purchase in securities
that are illiquid. A domestically traded security which is not registered under
the Securities Act of 1933 will not be considered illiquid if the Adviser (or
Sub-Adviser) determines an adequate investment trading market exists for that
security. Because illiquid and restricted securities may be difficult to sell
at an acceptable price, they may be subject to greater volatility and may
result in a loss to a Fund.
Management Risk - All Funds
A strategy which the Adviser (or Sub-Adviser) uses may fail to produce the
intended results. The particular securities and types of securities a Fund
holds may underperform other securities and types of securities. There can be
no assurance a Fund will achieve its investment objective. The Adviser and each
Sub-Adviser may not change certain investment practices of the Fund without a
shareholder vote. These policies of each Fund, which may not be changed without
a shareholder vote, are described in the Additional Statement.
Market Risk - All Funds
The value of the securities in which a Fund invests may go up or down in
response to the prospects of individual companies and/or general economic
conditions. Price changes may be temporary or last for extended periods. Each
Fund's performance results may reflect periods of above average performance
attributable to its investment in certain securities during the initial public
offering, the performance of a limited number of the securities in the Fund, or
other non-recurring factors. It is possible that the performance may not be
repeated in the future.
Nonprincipal Strategy Risks - All Funds
This Prospectus describes each Fund's principal investment strategies, and the
types of securities in which each Fund principally invests. Each Fund may, from
time to time, make other types of investments and pursue other investment
strategies in support of its overall investment goal. These supplemental
investment
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strategies - and the risks involved - are described in detail in the Additional
Statement, which is referred to on the back cover of this Prospectus.
Portfolio Turnover Risk - All Funds
The Adviser and Sub-Advisers will not consider the portfolio turnover rate a
limiting factor in making investment decisions for a Fund. A high rate of
portfolio turnover (100% or more) involves correspondingly greater expenses
which must be borne by a Fund and its shareholders. It may also result in
higher short-term capital gains taxable to shareholders. See "Financial
Highlights" for the Funds' historical portfolio turnover rates. The Money
Market Funds may have high portfolio turnover, but brokerage commissions are
not normally paid on Money Market instruments. Portfolio turnover is not
expected to have a material effect on the Money Market Funds' net investment
income.
Valuation Risk - All Funds
This is a risk that a Fund has valued certain securities at a higher or lower
price than the Fund can sell them.
Additional Risks Which Apply To Investment In Certain Of The Funds
[GRAPHIC]
Extension Risk - Money Market Funds, Short-Term Bond Fund, Intermediate Bond
Fund, U.S. Government Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM)
Fund, Strategic Income Fund, National Municipal Bond Fund, Balanced Funds and
Large Cap Growth Fund
This is the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a Municipal Security, mortgage- or asset-
backed security) later than expected. This may happen when there is a rise in
interest rates. These events may lengthen the duration and potentially reduce
the value of these securities.
Foreign Risks - Aggregate Bond Fund; Strategic Income Fund; Relative Value
Fund; Large Cap Growth Fund; International Value Fund; Global Equity Fund;
International Growth Fund; SmallCap Core Equity Fund; each other Fund - other
than the Ohio Tax-Exempt Money Market Fund, U.S. Treasury Money Market Fund,
U.S. Government Money Market Fund and Missouri Tax-Exempt Bond Fund - to the
extent it invests in foreign securities
When a Fund invests in foreign securities, it will be subject to special risks
not typically associated with domestic issuers resulting from less government
regulation, less public information and less economic, political and social
stability. Foreign securities, and in particular foreign debt securities, are
sensitive to changes in interest rates. In addition, investment in securities
of foreign governments involves the risk that foreign governments may default
on their obligations or may otherwise not respect the integrity of their debt.
A Fund which invests in foreign securities will also be subject to the
diplomatic risk that an adverse change in the diplomatic relations between the
U.S. and another country might reduce the value or liquidity of investments.
Future political and economic developments, the possible imposition of
withholding taxes on dividend income, the possible seizure or nationalization
of foreign holdings, the possible establishment of exchange controls or freezes
on the convertibility of currency, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks may be
subject to less stringent reserve requirements, and to different accounting,
auditing and recordkeeping requirements.
Foreign risks will normally be greatest when a Fund invests in issuers located
in emerging markets. Securities issued in emerging market countries, in
particular, may be more sensitive to certain economic changes and less liquid.
These countries are located in the Asia/Pacific region, Eastern Europe, Latin
and South America and Africa. In general, the securities markets of these
countries are less liquid, are subject to greater price volatility, have
smaller market capitalizations and have problems with securities registration
and custody. In addition, because the securities settlement procedures are less
developed in these countries, a Fund may be
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required to deliver securities prior to receiving payment and also be unable to
complete transactions during market disruptions. As a result of these and other
risks, investments in these countries generally present a greater risk of loss
to a Fund.
Investment in foreign securities also involves higher costs than investment in
U.S. securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments.
Each of the Funds, other than the money market funds, may invest in foreign
currency denominated securities. A Fund which invests in foreign currency
denominated securities will also be subject to the risk of negative foreign
currency rate fluctuations. A change in the exchange rate between U.S. dollars
and foreign currency may reduce the value of an investment made in a security
denominated in that foreign currency. The International Value Fund and
International Growth Fund may hedge against foreign currency risk, and the
other Funds may do so on unsettled trades, but none of the Funds is required to
do so.
The International Value Fund also may invest in obligations of foreign
countries and political entities ("sovereign debt"), which may trade at a
substantial discount from face value. An issuer of sovereign debt may be
unwilling or unable to repay interests and principal as due. The Fund may
purchase Brady Bonds as part of its investment in sovereign debt of countries
that have restructured or are restructuring their sovereign debt pursuant to
the Brady Plan. The Brady Plan is an initiative announced by former U.S.
Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations
to restructure their external debt. Investments in Brady Bonds can be viewed as
speculative.
European Currency Unification - International Value Fund; Global Equity Fund;
International Growth Fund; each other Fund - other than the Ohio Tax-Exempt
Money Market Fund, U.S. Government Money Market Fund, U.S. Treasury Money
Market Fund and Missouri Tax-Exempt Bond Fund - to the extent it invests in
foreign securities.
Many European countries have adopted a single European currency, the Euro. On
January 1, 1999, the Euro became legal tender for all countries participating
in the Economic and Monetary Union ("EMU"). A new European Central Bank has
been created to manage the monetary policy of the new unified region. On the
same date, the exchange rates were irrevocably fixed between the EMU member
countries. National currencies will continue to circulate until they are
replaced by Euro coins and bank notes by the middle of 2002.
This change is likely to significantly impact the European capital markets in
which a Fund invests and may result in a Fund facing additional risks in
pursuing its investment objective. These risks, which include, but are not
limited to, uncertainty as to proper tax treatment of the currency conversion,
volatility of currency exchange rates as a result of the conversion,
uncertainty as to capital market reaction, conversion costs that may affect
issuer profitability and creditworthiness, and lack of participation by some
European countries, may increase the volatility of a Fund's net asset value per
share.
Initial Public Offering (IPO) Risk - Equity Funds
The Equity Funds may participate in the IPO market. IPOs may have a magnified
performance impact on a Fund with a small asset base. IPOs may not be
consistently available to the Funds for investing, particularly as the Funds'
asset bases grow. The impact of IPOs on a Fund's performance likely will
decrease as the Fund's asset size increases, which could reduce the Fund's
total returns.
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Prepayment Risk - Money Market Funds, Short-Term Bond Fund, Intermediate Bond
Fund, U.S. Government Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM)
Fund, Strategic Income Fund, National Municipal Bond Fund, Balanced Funds,
Large Cap Growth Fund, International Growth Fund and Small Cap Core Equity Fund
This is the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage- or asset-backed security)
earlier than expected. This may happen when there is a decline in interest
rates. These events may make a Fund unable to recoup its initial investment and
may result in reduced yields.
Securities Lending - All Funds other than the Ohio Tax-Exempt Money Market
Fund, Missouri Tax-Exempt Bond Fund and Relative Value Fund
To obtain interest income, the Fund may lend its securities to broker-dealers,
banks or institutional borrowers pursuant to agreements requiring that the
loans be continuously secured by collateral equal at all times in value to at
least the market value of the securities loaned. There is the risk that, when
lending portfolio securities, the securities may not be available to the Fund
on a timely basis. Therefore, the Fund may lose the opportunity to sell the
securities at a desirable price. Additionally, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition of the
securities may be delayed pending court action.
Small and MidCap Stock Risk - Global Equity Fund, MidCap Index Fund, MidCap
Core Equity Fund, Small Cap Index Fund, Small Cap Core Equity Fund, Science &
Technology Fund and MicroCap Fund
Smaller and medium capitalization stocks involve greater risks than those
associated with larger, more established companies. Small and medium company
stocks may be subject to more abrupt or erratic price movements, for reasons
including that the stocks are traded in lower volume and that the issuers are
more sensitive to changing conditions and have less certain growth prospects.
Also, there are fewer market makers for these stocks and wider spreads between
quoted bid and asked prices in the over-the-counter market for these stocks.
Small and medium cap stocks tend to be less liquid, particularly during periods
of market disruption. There normally is less publicly available information
concerning these securities. Small and medium companies in which the Funds may
invest may have limited product lines, markets or financial resources, or may
be dependent on a small management group. In particular, investments in
unseasoned companies present risks considerably greater than investments in
more established companies.
Tax Risk - Tax-Exempt Money Market Fund, Ohio Tax-Exempt Money Market Fund,
U.S. Treasury Money Market Fund, Tax-Exempt Intermediate Bond Fund, Missouri
Tax-Exempt Bond Fund and National Municipal Bond Fund
These Funds may be more adversely impacted by changes in tax rates and policies
than the other Funds. Because interest income on municipal obligations is
normally not subject to regular federal income taxation, the attractiveness of
municipal obligations in relation to other investment alternatives is affected
by changes in federal income tax rates applicable to, or the continuing federal
income tax-exempt status of, such interest income. Any proposed or actual
changes in such rates or exempt status, therefore, can significantly affect the
demand for and supply, liquidity and marketability of municipal obligations,
which could in turn affect a Fund's ability to acquire and dispose of municipal
obligations at desirable yield and price levels.
Investment in tax-exempt securities poses additional risks. In many cases, the
Internal Revenue Service has not ruled on whether the interest received on a
tax-exempt obligation is tax-exempt, and accordingly, purchases of these
securities are based on the opinion of bond counsel to the issuers at the time
of issuance. The Fund and the Adviser rely on these opinions and will not
review the basis for them.
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Temporary Investment Risk - All Funds other than the Index Funds
Each of the Funds may, for temporary defensive purposes, invest a percentage of
its total assets, without limitation, in cash or various short-term instruments
(except for the MicroCap Fund, which may invest up to 30% of its assets in
money market instruments for temporary defensive purposes). This may occur for
example, when a Fund is attempting to respond to adverse market, economic,
political or other conditions. In particular, the U.S. Treasury Money Market
Fund may temporarily hold cash; the Tax-Exempt Money Market Fund, Ohio Tax-
Exempt Money Market Fund, Tax-Exempt Intermediate Bond Fund and the Missouri
Tax-Exempt Bond Fund may, from time to time, hold uninvested cash reserves or
invest in short-term taxable money market obligations (taxable obligations
purchased by each Fund normally will not exceed 20% of total assets at the time
of purchase); and the International Value Fund and International Growth Fund
may invest in money market securities denominated in U.S. or foreign currency.
When a Fund's assets are invested in these instruments, the Fund may not be
achieving its investment objective.
Additional Risks Which Apply To Particular Types Of Securities
[GRAPHIC]
Government Obligations - Money Market Funds other than the Tax-Exempt Money
Market Fund and Ohio Tax-Exempt Money Market Fund, Short-Term Bond Fund,
Intermediate Bond Fund, U.S. Government Securities Fund, Aggregate Bond Fund,
Bond IMMDEX(TM) Fund, Strategic Income Fund and Balanced Funds
In addition to U.S. Treasury obligations, the Funds may invest in other
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities. No assurance can be given that the U.S. government will
provide financial support to U.S. government-sponsored agencies or
instrumentalities when it is not obligated to do so by law.
Mortgage-Backed and Asset-Backed Securities - Short-Term Bond Fund,
Intermediate Bond Fund, U.S. Government Securities Fund, Aggregate Bond Fund,
Bond IMMDEX(TM) Fund, Strategic Income Fund, Balanced Funds and Large Cap
Growth Fund
Each of these Funds may purchase residential and commercial mortgage-backed as
well as other asset-backed securities (i.e., securities backed by credit card
receivables, automobile loans or other assets). In addition to credit and
market risk, mortgage- and asset-backed securities involve prepayment risk
because the underlying assets (loans) may be prepaid at any time. The value of
these securities may also change because of actual or perceived changes in the
creditworthiness of the originator, the servicing agent, the financial
institution providing the credit support, or the counterparty. 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. The relative payment rights of
certain types of mortgage-backed securities may make them subject to greater
volatility and interest rate risk than other types of mortgage-backed
securities. In addition, non-mortgage asset-backed securities involve certain
risks not presented by mortgage-backed securities. Primarily, these securities
do not have the benefit of the same security interest in the underlying
collateral. Credit card receivables are generally unsecured, and the debtors
are entitled to the protection of a number of state and federal consumer credit
laws. Automobile receivables are subject to the risk that the trustee for the
holders of the automobile receivables may not have an effective security
interest in all of the obligations backing the receivables. In times of
financial stress, the secondary market for asset-backed securities 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.
Municipal Securities - Ohio Tax-Exempt Money Market Fund, Missouri Tax-Exempt
Bond Fund and National Municipal Bond Fund
Each of these Funds may purchase municipal securities including general
obligation securities, revenue securities and private activity bonds. The
ability of a Fund to achieve its investment objective is dependent upon the
ability of issuers of municipal securities to meet their continuing obligations
for the payment of principal and interest. Although the National Municipal Bond
Fund may invest 25% or more of its net
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assets in (i) municipal securities whose issuers are in the same state, (ii)
municipal securities the interest on which is paid solely from revenues of
similar projects, and (iii) private activity bonds, the Fund does not presently
intend to do so unless in the opinion of the Adviser the investment is
warranted. To the extent that a Fund's assets are invested in municipal
securities the issuers of which are in the same state or that are payable from
the revenues of similar projects or in private activity bonds, the Fund will be
subject to the peculiar risks presented by the laws and economic conditions
relating to such projects and bonds to a greater extent than it would be if its
assets were not so invested.
Borrowings, Reverse Repurchase Agreements - All Funds
Each Fund may borrow money to the extent allowed (as described in the
Additional Statement) to meet shareholder redemptions from banks and each Fund
other than the National Municipal Bond Fund may enter into reverse repurchase
agreements. These strategies involve leveraging. If the securities held by a
Fund decline in value while these transactions are outstanding, the net asset
value of the Fund's outstanding shares will decline in value by proportionately
more than the decline in value of the securities. In addition, reverse
repurchase agreements involve the risks that the interest income earned by 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 will decline below the price the Fund is obligated to pay to repurchase
the securities, and that the securities may not be returned to the Fund.
Short Sales - MicroCap Fund
Short selling is the selling of securities which have been borrowed on the
expectation that the market price will drop. These transactions may result in
gains if a security's price declines, but may result in losses if a security's
price does not decline in price.
Options - Short-Term Bond Fund, Intermediate Bond Fund, U.S. Government
Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM) Fund, Strategic Income
Fund, Balanced Funds and Equity Funds
An option is a type of derivative instrument that gives the holder the right
(but not the obligation) to buy (a "call") or sell (a "put") an asset in the
future at an agreed upon price prior to the expiration date of the option.
Options can be used to manage exposure to certain markets, enhance income or
hedge against a decline in value of portfolio securities. Options may relate to
particular securities or various stock or bond indices and may or may not be
listed on a national securities exchange and issued by the Options Clearing
Corporation. Purchasing options is a specialized investment technique which
entails a substantial risk of a complete loss of the amount paid as premiums to
the writer of the option.
The value of options can be highly volatile, and their use can result in loss
if the Adviser or Sub-Adviser is incorrect in its expectation of price
fluctuations. The successful use of options for hedging purposes also depends
in part on the ability of the Adviser or Sub-Adviser to manage future price
fluctuations and the degree of correlation between the options and securities
markets.
The Funds, other than the U.S. Government Securities Fund, Aggregate Bond Fund,
International Value Fund, International Growth Fund and Small Cap Core Equity
Fund may purchase put and call options in an amount not to exceed 5% of their
respective net assets. The U.S. Government Securities Fund, Aggregate Bond
Fund, International Growth Fund and Small Cap Core Equity Fund may purchase put
and call options in an amount not to exceed 10% of their respective net assets.
The International Value Fund may purchase put and call options without limit.
The Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund,
Strategic Income Fund and International Value 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
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risk that the broker-dealer will fail to meet its obligations. There is no
assurance 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.
In addition, each Fund may write call options on securities and on various
stock or bond indices. Each Fund may write a call option only if the option is
covered. A Fund may cover a call option by owning the security underlying the
option or through other means which would allow for immediate satisfaction of
its obligation. Such options will be listed on a national securities exchange.
The aggregate value of the Fund's assets subject to options written by the
Short-Term Bond Fund, Intermediate Bond Fund, U.S. Government Securities Fund,
Aggregate Bond Fund, Bond IMMDEX(TM) Fund, Growth & Income Fund, Equity Index
Fund, International Growth Fund, MidCap Index Fund, MidCap Core Equity Fund,
Small Cap Core Equity Fund and MicroCap Fund will not exceed 5%, 5%, 5%, 25%,
25%, 25%, 5%, 25%, 5%, 5%, 5% and 5%, respectively, of the value of its net
assets during the current year. The International Value Fund and International
Growth 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. During the current year the aggregate value of the International Value
Fund's assets subject to options written by the Fund will not exceed 5% of the
value of its net assets. In order to close out an option position, a Fund will
be required to enter into a "closing purchase transaction" (the purchase of a
call option on a security or an index with the same exercise price and
expiration date as the call option which it previously wrote on the same
security or index).
The Balanced Funds, International Value Fund, International Growth Fund, MidCap
Core Equity Fund, Small Cap Core Equity Fund and MicroCap Fund may invest in
warrants. Warrants are options to purchase equity securities at a specific
price valid for a specific period of time. The purchase of warrants involves
the risk that the Fund could lose the purchase value of the 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.
The International Value Fund may also write (i.e., sell) covered put options on
securities and various securities indices. The writer of a put incurs an
obligation to buy the security underlying the option from the put's purchaser
at the exercise price at any time on or before the termination date, at the
purchaser's election (certain options the Fund writes will be exercisable by
the purchaser only on a specific date). Generally, a put is "covered" if the
Fund maintains cash, U.S. government securities or other liquid high grade debt
obligations equal to the exercise price of the option or if the Fund holds a
put on the same underlying security with a similar or higher exercise price. By
writing a covered put option on a security, the Fund receives a premium for
writing the option; however the Fund assumes the risk that the value of the
security will decline before the exercise date, in which event, the Fund may
incur a loss in excess of the premium received when the put is exercised.
Risks associated with the use of options on securities include (i) imperfect
correlation between the change in market value of the securities the Fund holds
and the prices of options relating to the securities purchased or sold by the
Fund; and (ii) the possible lack of a liquid secondary market for an option.
The Additional Statement includes additional information relating to option
trading practices and related risks.
Futures Contracts and Related Options - Short-Term Bond Fund, Intermediate Bond
Fund, U.S. Government Securities Fund, Aggregate Bond Fund, Bond IMMDEX(TM)
Fund, Strategic Income Fund, Balanced Funds and Equity Funds
A futures contract is a type of derivative instrument that obligates the holder
to buy or sell an asset in the future at an agreed upon price. For example, a
futures contract may obligate a Fund, at maturity, to take or
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make delivery of certain domestic or foreign securities, the cash value of a
securities index or a stated quantity of a foreign currency. The International
Growth Fund may invest in futures but may not invest in options. When a Fund
purchases an option on a futures contract, it has the right to assume a
position as a purchaser or seller of a futures contract at a specified exercise
price during the option period. When a Fund sells an option on a futures
contract it becomes obligated to purchase or sell a futures contract if the
option is exercised.
Futures contracts and options present the following risks: imperfect
correlation between the change in market value of a Fund's securities and the
price of futures contracts and options; the possible inability to close a
futures contract when desired; losses due to unanticipated market movements
which are potentially unlimited; and the possible inability of the investment
management team to correctly predict the direction of securities prices,
interest rates, currency exchange rates and other economic factors. The Funds
(other than the U.S. Government Securities Fund and Aggregate Bond Fund) may
buy and sell futures contracts and related options on foreign exchanges or
boards of trade (which do not offer the same protections as U.S. exchanges).
Each Fund's commodities transactions must constitute bona fide hedging or other
permissible transactions pursuant to regulations promulgated by the Commodities
and Futures Trading Commission ("CFTC"). In addition, a Fund may not engage in
such transactions if the sum of the amount of initial margin deposits and
premiums paid for unexpired commodity options, other than for bona fide hedging
transactions, would exceed 5% of the liquidation value of its assets, after
taking into account unrealized profits and unrealized losses on such contracts
it has entered into; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the percentage limitation. Pursuant to SEC requirements, a Fund
may be required to segregate cash or high quality money market instruments in
connection with its commodities transactions in an amount generally equal to
the value of the underlying commodity. Firstar Funds (the "Company") intends to
comply with the regulations of the CFTC exempting the Fund from registration as
a "commodity pool operator."
The Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund,
Strategic Income Fund, Growth & Income Fund, International Growth Fund and
Small Cap Core Equity 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, International Value
Fund, MidCap Index Fund and Small Cap Index Fund intend to limit their
transactions in futures contracts so that not more than 10%, 25%, 10% and 10%
of each Fund's respective net assets are at risk. For a more detailed
description of futures contracts and futures options, including a discussion of
the limitations imposed by federal tax law, see Appendix B to the Additional
Statement.
Guaranteed Investment Contracts and Zero Coupon Securities - Short-Term Bond
Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund and Strategic Income Fund
The Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM) Fund and
Strategic Income Fund may purchase guaranteed investment contracts ("GICs")
issued by highly rated U.S. insurance companies, and zero coupon securities.
GICs are subject to liquidity risk, which is the risk that certain securities
may be difficult or impossible to sell at a desirable time and price.
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Investing With Firstar Funds
This section describes for you the procedures for opening an account and how to
buy, sell or exchange Fund shares.
Share Classes Available
The Firstar Funds offer two classes of Shares in the Money Market Funds, Retail
A Shares and Institutional Shares (except that the Institutional Money Market
Fund and Money Market Fund each offer only one class of Shares), and four
classes of Shares in the Non-Money Market Funds; Retail A, Retail B, Y and
Institutional (except that the Global Equity Fund only offers Y and
Institutional Shares). This prospectus offers only Institutional Shares of the
Money Market Funds and Y Shares of the Non-Money Market Funds. Other share
classes are subject to different fees and expenses (which affect performance),
and are entitled to different services. Information regarding those other share
classes may be obtained by calling the number on the back cover of this
prospectus.
Institutional Shares (Money Market Funds)
No sales charge
Available for:
.All shareholders of the Money Market Funds who were exchanged into
Institutional Shares during November 2000 or December 2000 in connection
with the Firstar Reorganization, and who have continuously maintained an
account with the Company;
.Certain Trust, agency or custodial accounts opened through Firstar Bank,
N.A. (check with Firstar Bank, N.A. to see if you qualify for Institutional
Shares);
.Employer-sponsored qualified retirement plans other than those serviced by
certain external organizations who have service agreements with Firstar or
its affiliates, and other than plans administered by Firstar with assets of
less than $1 million at the time Firstar begins plan administration (but
including plans administered by Firstar which owned Institutional shares
prior to June 18, 1999). Plans administered by Firstar with assets of less
than $1 million at the time Firstar begins plan administration will become
eligible for Institutional Shares when such plans grow to $1 million or
greater as further described in the Additional Statement;
.all clients of Firstar Investment Research & Management Company, LLC
("FIRMCO");
.those purchasing through certain broker-dealers who have agreed to provide
certain services with respect to shares of the Funds, including TD
Waterhouse. Check with your broker-dealer to see if you qualify for
Institutional shares.
Y Shares (Non-Money Market Funds)
No sales charge
Available for:
.All shareholders of the Non-Money Market Funds who were exchanged into Y
Shares during November 2000 or December 2000 in connection with the Firstar
Reorganization, and who have continuously maintained an account with the
Company;
.Certain trust, agency or custodial accounts opened through financial
institutions such as banks (including Firstar Bank, N.A.), trust companies
and thrift institutions (check with Firstar Bank, N.A. or your financial
institution to see if you qualify for Y Shares).
A securities dealer, broker, financial institution or other industry
professional ("Shareholder Organization") may charge transaction or other fees
for providing administrative or other services in connection with investments
in Fund shares.
Shareholder Organizations
The Funds have adopted separate service plans for the Institutional Shares of
the Money Market Funds, and for the Y Shares of the Non-Money Market Funds (the
"Plans"), under which the Funds may pay service fees
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for shareholder services to Institutional and Y shareholders. Under the Plans,
shareholder organizations may be entitled to receive fees from a Fund at an
annual rate of up to 0.25% of the average daily net asset value of the shares
covered by their respective agreements for shareholder support services.
Shareholder support services may include:
.assisting investors in processing purchase, exchange and redemption requests
.processing dividend and distribution payments from the Fund
.providing information periodically to customers showing their positions in
Fund shares
.providing sub-accounting
.forwarding sales literature and advertising
Payments to shareholder organizations, including affiliates of the Adviser,
under the Plans, are not tied directly to their own out-of-pocket expenses and
therefore may be used as they elect (for example, to defray their overhead
expenses), and may exceed their direct and indirect costs.
Under these Plans, a Fund may enter into agreements with shareholder
organizations, including affiliates of the Adviser (such as Firstar Investment
Services, Inc.). The 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. Investors
should read this Prospectus in light of such fee schedules and under the terms
of their shareholder organizations' agreements with Firstar. 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.
Conflict-of-interest restrictions may apply to the receipt of compensation paid
by Firstar to a shareholder organization in connection with the investment of
fiduciary funds in Fund shares. Institutions, including banks regulated by the
Comptroller of the Currency and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult legal counsel before entering into
agreements with Firstar.
Purchasing Shares
The MicroCap Fund currently is closed to new investors. However, this Fund will
continue to accept additional share purchases from existing shareholders in
existing accounts or new accounts of which an existing shareholder is a full or
partial owner. The Fund will also accept purchases through reinvestment of
dividend and capital gain distributions. The Fund may open to new investors in
the future at the discretion of the Adviser based on various factors, including
assets under management and current investment opportunities.
Shares of the Funds are offered and sold on a continuous basis by the
distributor for the Funds, Quasar Distributors, LLC (the "Distributor"), an
affiliate of the Adviser. The Distributor is a registered broker-dealer with
offices at 615 East Michigan Street, Milwaukee, Wisconsin, 53202.
Minimum Investments
There is no minimum initial or subsequent investment for Institutional and Y
Shares of the Funds other than the Institutional Money Market Fund where the
minimum initial investment is $1,000,000. The maximum investment for the
MicroCap Fund is $5,000,000.
Buying Shares
Purchase requests for a Money Market Fund received in proper form prior to the
times listed below on a business day for the Funds will generally be processed
on the same day.
.Ohio Tax-Exempt Money Market Fund - 9:00 a.m. Central time
.Tax-Exempt Money Market Fund and U.S. Government Money Market Fund - 11:30
a.m. Central time
.U.S. Treasury Money Market Fund and Institutional Money Market Fund - 1:00
p.m. Central time
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In order for a purchase request for a Money Market Fund to be processed on the
same day at the times listed above, payment must be received in immediately
available funds wired to the transfer agent by the close of business. All
checks received will be processed at that day's closing price.
Purchase requests for the Money Market Funds accompanied by a check or wire
payment which are received at or after the times listed above, and purchase
requests accompanied by a check or wire payment for any Non-Money Market Fund,
will be executed the same day, at that day's closing price provided that
payment is received by the close of regular trading hours. Orders received
after 3:00 p.m. Central time and orders for which payment is not received by
the close of regular trading hours on the New York Stock Exchange (normally
3:00 p.m. Central time) will be executed on the next business day after receipt
of both order and payment in proper form.
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Through a Shareholder Organization
[GRAPHIC]
Opening an Account
Contact your Shareholder Organization
By Mail
[GRAPHIC]
Complete an application and mail it along with a check payable to Firstar
Funds, P.O. Box 3011, Milwaukee, WI 53201-3011:
For overnight delivery mail to;
615 E. Michigan St., Milwaukee, WI 53202.
By Wire
[GRAPHIC]
Call 1-800-677-FUND prior to sending the wire in order to obtain a confirmation
number and to ensure prompt and accurate handling of funds. Ask your bank to
transmit immediately available funds by wire in the amount of your purchase to:
Firstar Bank, N.A.
ABA # 0420-00013
Firstar Mutual Funds Securities, LLC
Account # 112-952-137
for further credit to [name of Fund]
[name /title on the account].
The Fund and its transfer agent are not responsible for the consequences of
delays resulting from the banking or Federal Reserve Wire system, or from
incomplete wiring instructions.
Internet
www.firstarfunds.com
[GRAPHIC]
Not available
By Telephone Exchange
[GRAPHIC]
Call 1-800-677-FUND to exchange from another Firstar Fund account with the same
registration including name, address and taxpayer ID number.
Through a Shareholder Organization
Adding to an Account
Contact your Shareholder Organization
By Mail
Make your check payable to Firstar Funds. Please include your sixteen-digit
account number on your check and mail it to the address at the left.
By Wire
Call 1-800-677-FUND prior to sending the wire in order to obtain a confirmation
number and to ensure prompt and accurate handling of funds. Ask your bank to
transmit immediately available funds by wire as described at the left. Please
include your sixteen-digit account number. The Fund and its transfer agent are
not responsible for the consequences of delays resulting from the banking or
Federal Reserve Wire system, or from incomplete wiring instructions.
Internet
www.firstarfunds.com
Use Firstar Funds Direct to exchange from another Firstar Fund account with the
same registration including name, address and taxpayer ID number. Purchase
additional shares using an electronic funds transfer from your banking
institution for payment. Call 1-800-677-FUND to authorize this service.
By Telephone Exchange
Call 1-800-677-FUND to exchange from another Firstar Fund account with the same
registration including name, address and taxpayer ID number.
Please Note: All checks must be drawn on a bank
located within the United States and must be
payable in U.S. dollars to Firstar Funds. A $25
fee will be imposed by the Funds' transfer agent
if any check used for investment in an account
does not clear, and the investor involved will be
responsible for any loss incurred by a Fund. Prior
to the transfer agent receiving a completed
application, investors may make an initial
investment. However, redemptions will not be paid
until the transfer agent has received the
completed application.
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Additional Information on Buying Shares
.The Funds will not accept payment in cash or third party checks for the
purchase of shares.
.Federal regulations require that each investor provide a Social Security
number or other certified taxpayer identification number upon opening or
reopening an account. The Funds reserve the right to reject applications
without such a number or an indication that a number has been applied for. If
a number has been applied for, the number must be provided and certified
within sixty days of the date of the application. Any accounts opened without
a proper number will be subject to backup withholding at a rate of 31% on all
liquidations and dividend and capital gain distributions.
.Payment for shares of a Fund in the amount of $1,000,000 or more may, at the
discretion of the Adviser, be made in the form of securities that are
permissible investments for the respective Fund.
The Funds may authorize one or more brokers and other shareholder organizations
to accept on their behalf purchase, redemption and exchange orders, and may
authorize such shareholder organizations to designate other intermediaries to
accept purchase, redemption and exchange orders on the Funds' behalf. In these
cases, a Fund will be deemed to have received an order when an authorized
shareholder organization or intermediary accepts the order, and customer orders
will be priced at the Fund's net asset value next computed after they are
accepted by a shareholder organization or intermediary. Shareholder
organizations and intermediaries will be responsible for transmitting accepted
orders to the Funds within the period agreed upon by them. Shareholders should
contact their shareholder organization or intermediaries to learn whether they
are authorized to accept orders for Funds.
It is the responsibility of shareholder organizations to transmit orders and
payment for the purchase of shares by their customers to the transfer agent on
a timely basis and to provide account statements in accordance with the
procedures previously stated.
For Owners of Y and Institutional Shares
All share purchases are effected pursuant to a customer's account at Firstar
Bank, N.A. Trust Department ("Firstar Trust") or at another chosen institution
or broker-dealer pursuant to procedures established in connection with the
requirements of the account. Confirmations of share purchases and redemptions
will be sent to Firstar Trust or the other shareholder organizations involved.
Firstar Trust and the other shareholder organizations or their nominees will
normally be the holders of record of Fund shares, and will reflect their
customers' beneficial ownership of shares in the account statements provided by
them to their customers. The exercise of voting rights and the delivery to
customers of shareholder communications from the Fund will be governed by the
customers' account agreements with Firstar Trust and the other shareholder
organizations. Investors wishing to purchase shares of the Funds should contact
their account representatives.
In the case of participants in certain employee benefit plans investing in
certain Funds, purchase and redemption orders will be processed on a particular
day based on whether a service organization acting on their behalf received the
order by the close of regular trading on that day.
The Funds may authorize one or more brokers and other shareholder organizations
to accept on their behalf purchase, redemption and exchange orders, and may
authorize such shareholder organizations to designate other intermediaries to
accept purchase, redemption and exchange orders on the Funds' behalf. In these
cases, a Fund will be deemed to have received an order when an authorized
shareholder organization or intermediary accepts the order, and customer orders
will be priced at the Fund's net asset value next computed after they are
accepted by a shareholder organization or intermediary. Shareholder
organizations and intermediaries will be responsible for transmitting accepted
orders to the Funds within the period agreed upon by them. Shareholders should
contact their shareholder organization or intermediaries to learn whether they
are authorized to accept orders for Funds.
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It is the responsibility of shareholder organizations to transmit orders and
payment for the purchase of shares by their customers to the transfer agent on
a timely basis and to provide account statements in accordance with the
procedures previously stated.
Redeeming Shares
Selling Shares
Redemption requests for a Money Market Fund received by the transfer agent by
phone on a business day for the Funds prior to the times listed below generally
will be processed at those times.
.Ohio Tax-Exempt Money Market Fund - 9:00 a.m. Central time
.Tax-Exempt Money Market Fund and U.S. Government Money Market Fund - 11:30
a.m. Central time
.U.S. Treasury Money Market Fund and Institutional Money Market Fund - 1:00
p.m. Central time
Redemption requests for the Money Market Funds received at or after the times
listed above on a business day for the Funds will be executed the same day, at
that day's closing price. Orders received after 3:00 p.m. Central time will be
executed on the next business day.
Redemption requests for Non-Money Market Funds received by the transfer agent
before 3:00 p.m. Central time on a business day for the Funds will be executed
the same day, at that day's closing price. Orders received after 3:00 p.m.
Central time will be executed on the next business day.
Through a Shareholder Organization
[GRAPHIC]
Contact your Shareholder Organization
By Phone
[GRAPHIC]
Call 1-800-677-FUND with your account name, sixteen digit account number and
amount of redemption (minimum $500). Redemption proceeds will only be sent to a
shareholder's address or bank account of a commercial bank located within the
United States as shown on the transfer agent's records. (Available only if
telephone redemptions have been authorized on the account application and if
there has been no change of address by telephone within the preceding 15 days).
By Mail
[GRAPHIC]
Mail your instructions to the Firstar Funds, P.O. Box 3011, Milwaukee, WI
53201-3011 (via overnight delivery to 615 E. Michigan Street, Milwaukee, WI
53202). Include the number of shares or the amount to be redeemed, your
sixteen-digit account number and Social Security number or other taxpayer
identification number. Your instructions must be signed by all persons required
to sign for transactions exactly as their names appear on the account. If the
redemption amount exceeds $50,000, or if the proceeds are to be sent elsewhere
than the address of record, or the address of record has been changed by
telephone within the preceding 15 days, each signature must be guaranteed in
writing by either a commercial bank that is a member of the FDIC, a trust
company, a credit union, a savings association, a member firm of a national
securities exchange or other eligible guarantor institution.
Internet
www.firstarfunds.com
[GRAPHIC]
Use Firstar Funds Direct to redeem up to $25,000. Call 1-800-677-FUND to
authorize this service.
Guarantees must be signed by an eligible guarantor institution and "Signature
Guaranteed" must appear with the signature.
The Funds may require additional supporting documents
for redemptions made by corporations, executors,
administrators, trustees and guardians. A redemption
request will not be deemed to be properly received
until the transfer agent receives all required
documents in proper form as specified above.
Purchases of additional Retail A Shares concurrently
with withdrawals could be disadvantageous because of
the sales charge involved in the additional
purchases.
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Additional Transaction Information
Telephone Requests
In order to arrange for telephone redemptions after you have opened your
account or to change the bank or account designated to receive redemption
proceeds, send a written request to Firstar Mutual Fund Services, LLC ("FMFS")
or contact your shareholder organization. Each shareholder of the account must
sign the request. The Funds may request further documentation from
corporations, executors, administrators, trustees and guardians.
The Funds reserve the right to refuse a telephone redemption if they believe it
is advisable to do so. Procedures for redeeming shares by telephone may be
modified or terminated by the Funds at any time upon notice to shareholders.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If a shareholder is unable to contact the
transfer agent by telephone, shares may also be redeemed by delivering the
redemption request to the transfer agent.
In an effort to prevent unauthorized or fraudulent purchase and redemption
requests by telephone, Firstar employs reasonable procedures to confirm that
such instructions are genuine. Among the procedures used to determine
authenticity, investors electing to transact by telephone will be required to
provide their account number (unless opening a new account). All telephone
transactions will be recorded and, except for transactions in Money Market
Funds, confirmed in writing. Statements of accounts shall be conclusive if not
objected to in writing within 10 days after transmitted by mail. Firstar Funds
may implement other procedures from time to time. If reasonable procedures are
not implemented, Firstar Funds may be liable for any loss due to unauthorized
or fraudulent transactions. In all other cases, the shareholder is liable for
any loss for unauthorized transactions.
Check Redemption (U.S. Treasury Money Market Fund Only)
You may request on the purchase application or by written request that a Fund
provides Redemption Checks ("Checks"). Checks may be made payable in the amount
of $250 or more. Any Checks drawn on a joint account will only require one
signature. There is no charge for the use of the Checks; however, the transfer
agent will impose a $25 charge for stopping payment of a Check upon your
request, or if the transfer agent cannot honor a Check due to insufficient
funds or other valid reason. Because dividends on each Fund accrue daily,
Checks may not be used to close an account, as a small balance is likely to
result.
Checks are not available for any other Firstar Fund, IRAs or other retirement
plans for which Firstar acts as custodian.
Certificates
Certificates are only issued upon shareholder request. If certificates have
been issued, the transfer agent must receive the certificates, properly
endorsed or accompanied by a properly executed stock power and accompanied by
signature guarantees, prior to a redemption request.
Additional Redemption Information
The Funds will make payment for redeemed shares typically within one or two
business days, but no later than the seventh day after receipt by the transfer
agent of a request in proper form as specified above, except as provided by SEC
rules. However, if any portion of the shares to be redeemed represents an
investment made by check, the Funds will delay the payment of the redemption
proceeds until the transfer agent is reasonably satisfied that the check has
been collected, which may take up to twelve days from the purchase date. An
investor must have filed a purchase application before any redemption requests
can be paid.
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Exchanging Shares
Generally, any share class of a Firstar Fund is exchangeable for the same share
class of another Firstar Fund, provided you are eligible to purchase that share
class or Fund at the time of the exchange. In addition, Y Shares of a Non-Money
Market Fund are exchangeable for Institutional Shares of a Money Market Fund.
Telephone exchange privileges automatically apply to each shareholder of record
unless the transfer agent receives written instructions canceling the
privilege.
Firstar Funds reserves the right to terminate the exchange privilege of any
party who requests more than four exchanges within a calendar year. Firstar
Funds may do so with prior notice based on a consideration of both the number
of exchanges and the time period over which those exchange requests have been
made, together with the level of expense to the Funds or other adverse effects
which may result from the additional exchange requests.
For federal income tax purposes, an exchange of shares is a taxable event and,
accordingly, an investor may realize a capital gain or loss. Before making an
exchange request, an investor should consult a tax or other financial adviser
to determine the tax consequences of a particular exchange. No exchange fee is
currently imposed by Firstar Funds on exchanges, however, Firstar Funds
reserves the right to impose a charge in the future. In addition, shareholder
organizations may charge a fee for providing administrative or other services
in connection with exchanges. The Fund reserves the right to reject any
exchange request with prior notice to a shareholder and the exchange privilege
may be modified or terminated at any time. At least sixty days' notice will be
given to shareholders of any material modification or termination except where
notice is not required under SEC regulations. Also keep in mind:
.Exchanges are available only in states where exchanges may be legally made.
.The minimum amount which may be exchanged is $1,000.
.If any portion of the shares to be exchanged represents an investment made by
check, a Fund will delay the acquisition of new shares in an exchange until
the transfer agent is reasonably satisfied that the check has been collected,
which may take up to twelve days from the purchase date.
.It may be difficult to make telephone exchanges in times of drastic economic
or market changes. If this happens, you may initiate transactions in your Fund
accounts by mail or as otherwise described in this Prospectus.
Additional Shareholder Services
[GRAPHIC]
Shareholder Reports
Shareholders will be provided with a report showing portfolio investments and
other information at least semiannually; and after the close of the Fund's
fiscal year with an annual report containing audited financial statements.
Account statements will be mailed to Money Market Shareholders monthly,
summarizing all transactions. For all other funds, account statements will be
mailed after each purchase, reinvestment of dividends and redemption.
Statements of accounts shall be conclusive if not objected to in writing within
10 days after transmitted by mail. Generally, a Fund does not send statements
for funds held in brokerage, retirement or other similar accounts.
Firstar Funds Website (www.firstarfunds.com)
[GRAPHIC]
The site offers educational information and interactive financial planning
tools as well as product-specific information.
Generally, Shareholders can request purchases, exchanges and redemptions of
Fund shares online via the Internet after an account is opened. Redemption
requests of up to $25,000 will be accepted through the Internet. Payment for
shares purchased online must be made by electronic funds transfer from your
banking institution. To authorize this service, call FMFS at 1-800-677-FUND.
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Firstar Funds and their agents will not be responsible for any losses resulting
from unauthorized on-line transactions when procedures are followed which are
designed to confirm that the on-line transaction request is genuine. Statements
of accounts shall be conclusive if not objected to in writing within 10 days
after transmitted by mail. During periods of significant economic or market
change, it may be difficult to reach the Funds on-line. If this happens, you
may initiate transactions in your Fund accounts by mail or as otherwise
described in the prospectus.
Automated Teleresponse Service
Shareholders using a touch-tone(R) telephone can access information on the
Funds twenty-four hours a day, seven days a week. When calling FMFS at 1-800-
677-FUND, shareholders may choose to use the automated information feature or,
during regular business hours (8:00 a.m. to 7:00 p.m. Central time, Monday
through Friday), speak with a Firstar Funds representative.
Retirement Plans
The Fund offers individual retirement accounts including Traditional, Roth,
SIMPLE and SEP IRAs. For details concerning Retirement Accounts (including
service fees), please call FMFS at 1-800-677-FUND.
--------------------------------------------------------------------------------
Additional Information
Dividends, Capital Gains Distributions And Taxes
Dividends and Capital Gains Distributions
Reinvested dividends and distributions receive the same tax treatment as those
paid in cash.
Dividends from net investment income, including net realized gains
and losses, if any, earned on the investments held by the Money
Market Funds are declared on each business day on the shares that
are outstanding immediately after 11:30 a.m. Central time (9:00 a.m.
Central time for the Ohio Tax-Exempt Money Market Fund and 1:00 p.m.
Central time for the Institutional Money Market Fund and U.S.
Treasury Money Market Fund) on the declaration date.
Dividends from net investment income of the Bond Funds are declared and paid
monthly. Dividends from net investment income of the Balanced Income, Balanced
Growth, Growth & Income, Equity Income, Relative Value, Equity Index, MidCap
Index and Small Cap Index Funds are declared and paid quarterly. Dividends from
net investment income of the Large Cap Core Equity, Large Cap Growth,
International Value, Global Equity, International Growth, MidCap Core Equity,
Small Cap Core Equity, Science & Technology and MicroCap Funds are declared and
paid annually. Any capital gains are distributed annually. A shareholder's
dividends and capital gains distributions will be reinvested automatically in
additional shares unless the Fund is notified that the shareholder elects to
receive distributions in cash.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Federal Taxes
Each Fund contemplates declaring as dividends each year all, or substantially
all, of its taxable income, including its net capital gain (the excess of long-
term capital gain over short-term capital loss). Distributions attributable to
the net capital gain of a Fund will be taxable to you as long-term capital
gain, regardless of how long you have held your Shares. Other Fund
distributions will generally be taxable as ordinary income.
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You will be subject to income tax on these distributions regardless of whether
they are paid in cash or reinvested in additional Shares. You will be notified
annually of the tax status of distributions to you.
In the case of any Fund other than a Money Market Fund, you should note that if
you purchase Shares just prior to a capital gain distribution, the purchase
price will reflect the amount of the upcoming distribution, but you will be
taxable on the entire amount of the distribution received, even though, as an
economic matter, the distribution simply constitutes a return of capital. This
is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the Shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held Shares.) Any loss
realized on Shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends that were received on
the Shares. Additionally, any loss realized on a sale or redemption of shares
of a Fund may be disallowed under "wash sale" rules to the extent the shares
disposed of are replaced with other shares of a Fund within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of,
such as pursuant to a dividend reinvestment in shares of a Fund. If disallowed,
the loss will be reflected in an adjustment to the basis of shares acquired.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, Shares held in an IRA (or other tax-
qualified plan) will not be currently taxable.
A Fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the Fund receives from U.S. domestic
corporations may be eligible, in the hands of the corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations.
The International Value Fund and International Growth Fund. It is expected that
the International Value Fund and International Growth Fund will be subject to
foreign withholding taxes with respect to dividends or interest received from
sources in foreign countries. The International Value Fund and International
Growth Fund may make an election to treat a proportionate amount of such taxes
as constituting a distribution to each Shareholder, which would allow each
Shareholder either (1) to credit such proportionate amount of taxes against
U.S. federal income tax liability or (2) to take such amount as an itemized
deduction.
The Tax-Exempt Money Market Fund, Ohio Tax-Exempt Money Market Fund, Tax-Exempt
Intermediate Bond Fund, National Municipal Bond Fund and Missouri Tax-Exempt
Bond Fund. It is expected that the Tax-Exempt Money Market Fund, Ohio Tax-
Exempt Money Market Fund, Tax-Exempt Intermediate Bond Fund, Missouri Tax-
Exempt Bond Fund and National Municipal Bond Fund will distribute dividends
derived from interest earned on Exempt Securities, and these "exempt interest
dividends" will be exempt income for Shareholders for federal income tax
purposes. However, distributions, if any, derived from net capital gains will
generally be taxable to you as capital gains. It is expected that the Tax-
Exempt Intermediate Bond Fund may pay such capital gains distributions from
time to time. Dividends, if any, derived from taxable interest income will be
taxable to you as ordinary income.
Interest on indebtedness incurred by a Shareholder to purchase or carry shares
of the Tax-Exempt Funds generally will not be deductible for federal income tax
purposes.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Exempt Funds may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest
dividends will also be considered along with other adjusted gross income in
determining
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whether any Social Security or railroad retirement payments received by you are
subject to federal income taxes.
If you receive an exempt-interest dividend with respect to any Share and the
Share is held by you for six months or less, any loss on the sale or exchange
of the Share will be disallowed to the extent of such dividend amount.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different United States federal income tax
treatment. You should consult your tax adviser for further information
regarding federal, state, local and/or foreign tax consequences relevant to
your specific situation.
State and Local Taxes
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply, however, to the portions of each
Fund's distributions, if any, that are attributable to interest on Federal
securities or interest on securities of the particular state or localities
within the state. Shareholders should consult their tax advisers regarding the
tax status of distributions in their state and locality.
Management of the Funds
Advisory Services
FIRMCO, a Wisconsin Limited Liability Company and subsidiary of Firstar
Corporation, a bank holding company, serves as investment adviser to each Fund.
FIRMCO, with principal offices at Firstar Center, 777 East Wisconsin Avenue,
8th Floor, Milwaukee, Wisconsin 53202, has provided investment advisory
services since 1986. FIRMCO currently has $32.3 billion in assets under
management.
Firstar Corporation has agreed to permit the Company to use the name "Firstar
Funds" and expansions thereof on a non-exclusive and royalty-free basis in
connection with mutual fund management and distribution services within the
United States, its territories and possessions. This agreement may be
terminated by Firstar Corporation under specified circumstances, including if
no affiliate of Firstar Corporation is serving as investment adviser for any
portfolio offered by the Company.
Subject to the general supervision of the Board of Directors and in accordance
with the respective investment objective and policies of each Fund, the Adviser
manages each Fund's portfolio securities and maintains records relating to such
purchases and sales (except for the International Value and International
Growth Funds). Subject to the general supervision of the Board of Directors and
in accordance with the respective investment objectives and policies of the
International Value and International Growth Funds, the Adviser is responsible
for each Fund's investment program, general investment criteria and policies.
The Adviser has retained Hansberger Global Investors, Inc. ("HGI") as Sub-
Adviser for the International Value Fund, HGI, a Delaware corporation founded
in 1994, with its principal office at 515 East Las Olas Boulevard, Suite 1300,
Fort Lauderdale, Florida 33301, currently has $3.2 billion in assets under
management. HGI is a wholly-owned subsidiary of Hansberger Group, Inc. Subject
to the oversight and supervision of the Fund's Board of Directors and Adviser,
HGI formulates and implements a continuous investment program for the
International Value Fund.
The Adviser has retained Clay Finlay, Inc. ("Clay Finlay") as Sub-Adviser for
the International Growth Fund. Clay Finlay is a New York corporation founded in
1982, with principal offices at 200 Park Avenue, 56th Floor, New York, NY
10166, and, as of June 30, 2000, had $5.7 billion in assets under management.
Clay Finlay is a wholly-owned subsidiary of Old Mutual plc, a South African
financial services company.
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Subject to the oversight and supervision of the Fund's Board of Directors and
Adviser, Clay Finlay formulates and implements a continuous investment program
for the International Growth Fund.
The Adviser (or Sub-Adviser for the International Value Fund and International
Growth Fund, respectively) is authorized to allocate purchase and sale orders
for portfolio securities to shareholder organizations, including, in the case
of agency transactions, shareholder organizations which are affiliated with the
Adviser (or Sub-Advisers), to take into account the sale of Fund shares if the
Adviser (or Sub-Adviser for the International Value Fund or International
Growth Fund, respectively) believes that the quality of the transaction and the
amount of the commission are comparable to what they would be with other
qualified brokerage firms.
FIRMCO is entitled to receive from the Funds contractual fees calculated daily
and payable monthly, at the annual rate (as a percentage of such Fund's average
daily net assets) as follows:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount
Fund Before Waivers
------------------------------------------------------------
<S> <C>
Institutional Money Market Fund 0.49%
Tax-Exempt Money Market Fund 0.50%
Ohio Tax-Exempt Money Market Fund 0.50%
U.S. Government Money Market Fund 0.50%
U.S. Treasury Money Market Fund 0.44%
Short-Term Bond Fund 0.60%
Intermediate Bond Fund 0.50%
U.S. Government Securities Fund 0.60%
Aggregate Bond Fund 0.50%
Bond IMMDEX(TM) Fund 0.30%
Strategic Income Fund 0.95%
Tax-Exempt Intermediate Bond Fund 0.50%
Missouri Tax-Exempt Bond Fund 0.45%
National Municipal Bond Fund 0.55%
Balanced Income Fund 0.75%
Balanced Growth Fund 0.75%
Growth & Income Fund 0.75%
Equity Income Fund 0.75%
Relative Value Fund 0.75%
Equity Index Fund 0.25%
Large Cap Core Equity Fund 0.75%
Large Cap Growth Fund 0.95%
International Value Fund 1.34%
Global Equity Fund 0.75%
International Growth Fund 1.00%
MidCap Index Fund 0.25%
MidCap Core Equity Fund 0.75%
Small Cap Index Fund 0.40%
Small Cap Core Equity Fund 0.75%
Science & Technology Fund 1.05%
MicroCap Fund 1.50%
</TABLE>
--------------------------------------------------------------------------------
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HGI is entitled to a fee, payable by the Adviser, for its services and expenses
incurred with respect to the International Value Fund. The fee is computed
daily and paid monthly at the following annual rates (as a percentage of the
Fund's average daily net assets): 0.75% on the Fund's first $25 million, 0.50%
of the next $75 million and 0.35% of the Fund's average daily net assets in
excess of $100 million.
Clay Finlay is entitled to a fee, payable by the Adviser, for its services and
expenses incurred with respect to the International Growth Fund. The fee is
computed daily and paid monthly at the following annual rates (as a percentage
of the Fund's average daily net assets): 0.75% of the first $50 million of the
Fund's average daily net assets; plus 0.50% of the next $50 million of average
daily net assets; plus 0.25% of average daily net assets in excess of $100
million.
For the fiscal year ended October 31, 1999, the Adviser received from each Fund
a fee, calculated daily and payable monthly, at the following annual rates (as
a percentage of the Fund's average daily net assets):
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Fee Paid
----------------------------------------------
<S> <C>
Institutional Money Market Fund 0.28%
Tax Exempt Money Market Fund 0.49%
U.S. Government Money Market Fund 0.50%
Short-Term Bond Fund 0.32%
Intermediate Bond Fund 0.35%
Bond IMMDEX(TM) Fund 0.30%
Tax-Exempt Intermediate Bond Fund 0.32%
Balanced Income Fund 0.45%
Balanced Growth Fund 0.68%
Growth & Income Fund 0.75%
Equity Index Fund 0.18%
Large Cap Core Equity Fund 0.75%
International Value Fund 1.08%
MidCap Index Fund 0.01%
MidCap Core Equity Fund 0.73%
MicroCap Fund 1.50%
</TABLE>
--------------------------------------------------------------------------------
Prior to March 1, 2000, the Mercantile Government & Corporate Bond Portfolio,
Mercantile U.S. Government Securities Portfolio, Mercantile Missouri Tax-Exempt
Bond Portfolio, Mercantile National Municipal Bond Portfolio, Mercantile Small
Cap Equity Portfolio, Mercantile International Equity Portfolio, Mercantile
Equity Income Portfolio and Mercantile Small Cap Equity Index Portfolio were
managed by Mississippi Valley Advisors Inc. ("MVA"), a subsidiary of Firstar
Corporation.
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For the fiscal year ended November 30, 1999, the Predecessor Mercantile Funds
paid their former investment adviser, MVA, the following fees:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Fee Paid
------------------------------------------------------------
<S> <C>
Mercantile Government & Corporate Bond
Portfolio 0.45%
Mercantile U.S. Government Securities Portfolio 0.45%
Mercantile Missouri Tax-Exempt Bond Portfolio 0.45%
Mercantile National Municipal Bond Portfolio 0.55%
Mercantile Small Cap Equity Portfolio 0.75%
Mercantile International Equity Portfolio 1.00%
Mercantile Equity Income Portfolio 0.75%
Mercantile Small Cap Equity Index Portfolio 0.32%
</TABLE>
--------------------------------------------------------------------------------
Prior to April 1, 2000, the Firstar Stellar Treasury Fund, Firstar Stellar Ohio
Tax-Free Money Market Fund, Firstar Stellar Strategic Income Fund, Firstar
Stellar Science & Technology Fund, Firstar Stellar Growth Equity Fund, Firstar
Stellar Relative Value Fund and Firstar Stellar International Equity Fund were
managed by the Capital Management Division of Firstar Bank, N.A., which is also
a subsidiary of Firstar Corporation.
For the fiscal year ended November 30, 1999, the Predecessor Stellar Funds paid
their former investment adviser, Firstar Bank, N.A., the following fees:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Fee Paid
-------------------------------------------------------------
<S> <C>
Firstar Stellar Treasury Fund 0.50%
Firstar Stellar Ohio Tax-Free Money Market Fund 0.35%
Firstar Stellar Strategic Income Fund 0.95%
Firstar Stellar Science & Technology Fund 0.90%/1/
Firstar Stellar Growth Equity Fund 0.75%
Firstar Stellar Relative Value Fund 0.75%
Firstar Stellar International Equity Fund 0.75%
</TABLE>
--------------------------------------------------------------------------------
/1/Commenced operations August 9, 1999. The fee given is the contractual
advisory fee rate.
Fund Managers
Richard Burling and Bradley Peters co-manage the Short-Term Bond Fund. Mr.
Burling is FIRMCO's Director of Credit Research. He has been with FIRMCO and
its affiliates since 1980 and has 17 years of investment management experience.
Mr. Peters has been with FIRMCO and its affiliates since 1993 and has 18 years
of investment management experience. Mr. Peters is a Certified Public
Accountant, a Certified Financial Planner, and a Certified Management
Accountant. Mr. Burling and Mr. Peters have managed the Fund since February
2000.
David Bethke manages the Intermediate Bond Fund and the U.S. Government
Securities Fund. Mr. Bethke has 19 years of investment management experience
and has been with FIRMCO and its affiliates since 1987. Mr. Bethke has managed
the Intermediate Bond Fund since February 2000. He has managed the Predecessor
Mercantile U.S. Government Securities Portfolio since it commenced operations
in 1988.
George Schupp and David Bethke co-manage the Bond IMMDEX(TM) Fund and Aggregate
Bond Fund. Mr. Schupp serves as FIRMCO's Director of Fixed Income. He has 24
years of investment management experience and has been with Firstar and its
affiliates since 1983. Mr. Schupp and Mr. Bethke have managed the Bond
IMMDEX(TM) Fund since February 2000. Mr. Schupp has managed the Predecessor
Mercantile
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Government & Corporate Bond Portfolio since February 1988, and Mr. Bethke has
managed the Predecessor Mercantile Government & Corporate Bond Portfolio since
February 2000.
George Schupp and Karen Bowie co-manage the Strategic Income Fund. Ms. Bowie
has over 15 years of trust and investment management experience with five of
those years at FIRMCO and its affiliates. Mr. Schupp has managed the Fund since
December 2000 and Ms. Bowie since September 2000.
Peter Merzian manages the Tax-Exempt Intermediate Bond Fund, Missouri Tax-
Exempt Bond Fund and National Municipal Bond Fund. Mr. Merzian joined FIRMCO
and its affiliates in 1993 and has 12 years of investment management
experience. He has managed the Tax-Exempt Intermediate Bond Fund since February
2000. He has managed the Predecessor Mercantile Missouri Tax-Exempt Bond
Portfolio since 1993 and the Predecessor Mercantile National Municipal Bond
Portfolio since it commenced operations in 1996.
Marian Zentmyer and David Bethke co-manage the Balanced Income Fund. Ms.
Zentmyer serves as FIRMCO's Chief Equity Investment Officer. She has been with
FIRMCO and its affiliates since 1982 and has 21 years of investment management
experience. Ms. Zentmyer is a Certified Financial Planner. Ms. Zentmyer has
managed the Fund since its inception in December 1997. Mr. Bethke has managed
the Fund since February 2000.
Walter Dewey and George Schupp co-manage the Balanced Growth Fund. Mr. Dewey
has been with FIRMCO and its affiliates since 1986 and has 16 years of
investment management experience. Mr. Dewey has managed the Fund since November
1999. Mr. Schupp has managed the Fund since February 2000.
Marian Zentmyer and Leon Dodge co-manage the Growth & Income Fund. Ms. Zentmyer
has managed the Fund since February, 1993. Mr. Dodge has been with FIRMCO since
September, 2000. He has 23 years of investment management experience and has
been a portfolio manager of the Fund since September 2000.
Joseph P. Belew manages the Relative Value Fund and the Equity Income Fund. Mr.
Belew joined FIRMCO and its affiliates in 1979 and has 21 years of investment
management experience. He has managed the Predecessor Stellar Relative Value
Fund since its inception in June 1991 and the Predecessor Mercantile Equity
Income Portfolio since October 2000.
Walter Dewey and Jane Snorek co-manage the Large Cap Core Equity Fund. Mr.
Dewey has managed the Fund since July 7, 1997, and Ms. Snorek has managed the
Fund since September 2000. Ms. Snorek has been with FIRMCO and its affiliates
since 1999 and has nine years of investment management experience.
Donald L. Keller and Randy Hare co-manage the Large Cap Growth Fund. Mr. Keller
has been with FIRMCO and its affiliates since 1982 and has 18 years of
investment management experience. Mr. Keller has managed the Predecessor
Stellar Growth Equity Fund since its inception in October 1994. Mr. Hare has
been with FIRMCO and its affiliates since 1998 and has four years of investment
management experience. Mr. Hare has managed the Fund since November 2000.
A Portfolio Management Team lead by Thomas Hansberger, CIC manages the
International Value Fund for Hansberger Global Investors. Mr. Hansberger serves
as the Chief Executive Officer of Hansberger Global Investors and has over
thirty-five years of investment management experience. Before forming
Hansberger Global Investors, Mr. Hansberger served as Chairman, President and
Chief Executive Officer of Templeton Worldwide, Inc. the parent company of the
Templeton group of companies. The Portfolio Management Team has over 20 years
of industry experience.
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Donald L. Keller manages the Global Equity Fund. Mr. Keller has managed the
Predecessor Stellar International Equity Fund since May 1999.
Clay Finlay's International Equity team is responsible for the management of
the International Growth Fund. Frances Dakers, Greg Jones, Virginie Maisonneuve
and Susan Kenneally serve as regional team leaders on the International Equity
team. Each of these individuals is a Principal and Director of the Firm, and
each has an average of more than seventeen years of investment experience. This
team has managed the Predecessor Mercantile International Equity Portfolio
since it began operations in 1994.
Todd Krieg and Matt D'Attilio co-manage the MidCap Core Equity Fund. Mr. Krieg
has been with FIRMCO and its affiliates since 1992 and has seven years of
investment management experience. Mr. Krieg has managed the Fund since
September 1994. Mr. D'Attilio has been with FIRMCO and its affiliates since
1993. He has six years of investment management experience and has managed the
Fund since December 1998.
David Lettenberger and John Potter co-manage the Small Cap Core Equity Fund -
each since September 2000. Mr. Lettenberger has been with FIRMCO and its
affiliates since 1999 and has seven years of investment management experience.
Mr. Potter joined FIRMCO in September 2000 and has six years of investment
management experience.
Randy Hare and Donald L. Keller co-manage the Science & Technology Fund. Mr.
Hare has managed the Predecessor Stellar Science & Technology Fund since
October 2000 and Mr. Keller since its inception in August 1999.
Joe Frohna and Barry Randall co-manage the MicroCap Fund. Mr. Frohna has been
with FIRMCO and its affiliates since 1995. He has seven years of investment
management experience and has managed the Fund since September 1997. Mr.
Randall has been with FIRMCO and its affiliates since May 2000. He has seven
years of investment management experience and has managed the Fund since May
2000.
Administrative Services
FMFS, an affiliate of the Adviser, serves as the Fund's Administrator and
receives fees for those services.
Custodian, Transfer and Dividend Disbursing Agent, and Accounting Services
Agent
FMFS also provides transfer agency, dividend disbursing agency and accounting
services for the Funds and receive fees for these services. Inquiries to the
transfer agent may be sent to: Firstar Mutual Fund Services, LLC, P.O. Box
3011, Milwaukee, Wisconsin 53201-3011. Firstar Bank, N.A., an affiliate of the
Adviser, provides custodial services for the Funds and receives fees for those
services.
Net Asset Value and Days of Operation
The price of the Y and Institutional Shares is based on net asset value per
share. This amount is calculated separately for the Y class of shares by
dividing the value of all securities and other assets attributable to the
Y class, less the liabilities attributable to the class, by the number of
outstanding shares of the class. The price at which a purchase or redemption is
effected is based on the next calculation of net asset value after the order is
accepted.
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Money Market Funds
The Company intends to use its best efforts to maintain the net asset value of
each Money Market Fund at $1.00 per share, although there is no assurance that
it will be able to do so.
The net asset value of the Money
Market Funds for purposes of pricing
purchase and redemption orders is
determined as of 11:30 a.m. Central
time (9:00 a.m. Central time for the
Ohio Tax-Exempt Money Market Fund
and 1:00 p.m. Central time for the
Institutional Money Market Fund and
U.S. Treasury Money Market Fund) and
as of the close of regular trading
hours on the Exchange, normally,
3:00 p.m. Central time, on each day
on which both the Exchange is open
for trading and the Federal Reserve
Banks' Fedline System is open.
Shares of the Funds
are not priced on days the Exchange is closed. For a complete list of days the
Exchange is closed, please see the Additional Statement. Net asset value per
share is calculated by dividing the value of all securities and other assets
owned by each Fund attributable to a particular class, less the liabilities
charged to the Fund attributable to a particular class, by the number of the
Fund's outstanding shares.
Net asset value is computed using the amortized cost method as permitted by SEC
rules.
Non-Money Market Funds
Net asset value for purposes of pricing purchase and redemption orders is
determined as of the close of regular trading hours on the Exchange, normally,
3:00 p.m. Central time, on each day the Exchange is open for trading. Shares of
the Funds are not priced on days the Exchange is closed. For a complete list of
days the Exchange is closed, please see the Additional Statement.
The Funds' investments are valued based on market quotations, except that
restricted securities and securities for which market quotations are not
readily available and other assets are valued at fair value by the Adviser
under the supervision of the Board of Directors. Short-term investments having
a maturity of 60 days or less are valued at amortized cost, unless the
amortized cost does not approximate market value.
Portfolio securities which are primarily traded on foreign securities exchanges
are generally valued at the preceding closing values of such securities on
their respective exchanges, except when an occurrence subsequent to the time a
value was so established is likely to have changed such value. In such an
event, the fair value of those securities will be determined through the
consideration of other factors by or under the direction of the Board of
Directors. A Fund's foreign securities may trade on weekends or other days when
the Fund does not price its shares. Accordingly, the net asset value per share
of a Fund may change on days when shareholders will not be able to purchase or
redeem the Fund's shares.
Each Fund's securities may be valued based on valuations provided by an
independent pricing service. The Adviser reviews these valuations. If the
Adviser believes that a valuation received from the service does not represent
a fair value, it values the security by a method that the Board of Directors
believes will determine a fair value. Any pricing service used may employ
electronic data processing techniques, including a "matrix" system, to
determine valuations.
Quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents using the foreign exchange quotation in effect at the time
net asset value is computed. Foreign securities held by the International Value
Fund and International Growth Fund may trade in their local markets on days the
Funds are closed, and the Funds' net asset value may, therefore, change on days
when investors may not purchase or redeem Fund shares.
............................................................................ 133
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Appendix
Financial Highlights
The financial highlights table is intended to help you understand each Fund's
financial performance for the past 5 years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the table represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions).
The financial highlights tables set forth on the following pages for the Ohio
Tax-Exempt Money Market Fund, U.S. Treasury Money Market Fund, U.S. Government
Securities Fund, Aggregate Bond Fund, Strategic Income Fund, Missouri Tax-
Exempt Bond Fund, National Municipal Bond Fund, Equity Income Fund, Relative
Value Fund, Large Cap Growth Fund, International Growth Fund, Small Cap Index
Fund, Small Cap Core Equity Fund, Science & Technology Fund and Global Equity
Fund are based on the financial history of the predecessor Stellar Ohio Tax-
Free Money Market Fund, predecessor Stellar Treasury Fund, predecessor
Mercantile U.S. Government Securities Portfolio, predecessor Mercantile
Government & Corporate Bond Portfolio, predecessor Stellar Strategic Income
Fund, predecessor Mercantile Missouri Tax-Exempt Bond Portfolio, predecessor
Mercantile National Municipal Bond Portfolio, predecessor Mercantile Equity
Income Portfolio, predecessor Stellar Relative Value Fund, predecessor Stellar
Growth Equity Fund, predecessor Mercantile International Equity Portfolio,
predecessor Mercantile Small Cap Equity Index Portfolio, predecessor Mercantile
Small Cap Equity Portfolio, predecessor Stellar Science & Technology Fund and
predecessor Stellar Global Equity Fund, respectively.
With respect to the Institutional Money Market, Tax-Exempt Money Market, U.S.
Government Money Market, Short-Term Bond, Intermediate Bond, Bond IMMDEX, Tax-
Exempt Intermediate Bond, Balanced Income, Balanced Growth, Growth & Income,
Equity Index, Large Cap Core Equity, International Value, MidCap Index, MidCap
Core Equity and MicroCap Funds, this information for the period ended October
31, 1999 has been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are included in the Annual Report, and
incorporated by reference into the Additional Statement, both of which are
available upon request. The financial statements for the six-month period ended
April 30, 2000 are unaudited and are contained in the Funds' Semi-Annual
Report. Those unaudited financial statements are also incorporated by reference
into the Additional Statement.
With respect to the Predecessor Stellar Funds, this information for the periods
ended November 30, 1999 and prior has been audited by Arthur Andersen LLP,
independent public accountants for the Predecessor Stellar Funds, whose
reports, along with each Fund's financial statements, are included in the
Predecessor Stellar Funds' Annual Report, and incorporated by reference into
the Statement of Additional Information (the "Additional Statement"), all of
which are available upon request. The financial statements for the six-month
period ended May 31, 2000 are unaudited and are contained in the Predecessor
Stellar Funds' Semi-Annual Report. Those unaudited financial statements are
also incorporated by reference into the Additional Statement.
With respect to the Predecessor Mercantile Portfolios, this information for the
periods ended November 30, 1999 and prior has been audited by KPMG LLP,
independent auditors for the Predecessor Mercantile Portfolios, whose reports,
along with each Fund's financial statements, are included in the Predecessor
Mercantile Portfolios' Annual Report, and incorporated by reference into the
Statement of Additional Information (the "Additional Statement"), all of which
are available upon request. The financial statements for the six-month period
ended May 31, 2000 are unaudited and are contained in the Predecessor
Mercantile Portfolios' Semi-Annual Report. Those unaudited financial statements
are also incorporated by reference into the Additional Statement.
Contact FMFS for a free copy of the Annual and Semi-Annual Reports or
Additional Statement.
During the periods shown, the Tax-Exempt Money Market, Ohio Tax-Exempt Money
Market and U.S. Government Money Market Funds did not offer Institutional
Shares. According, there are no financial highlights for Institutional Shares
of these portfolios. The financial highlights shown for the Tax-Exempt Money
................................................................................
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Market, Ohio Tax-Exempt Money Market and U.S. Government Money Market Funds are
for Retail A Shares.
During the periods shown, Y Shares were offered only by the U.S. Government
Securities, Aggregate Bond, Equity Income, International Growth, Small Cap
Index and Small Cap Core Funds. The financial highlights shown for the Short-
Term Bond, Intermediate Bond, Bond IMMDEXTM, Tax-Exempt Intermediate Bond,
Missouri Tax-Exempt Bond, National Municipal Bond, Balanced Income, Balanced
Growth, Growth & Income, Relative Value, Equity Index, Large Cap Core Equity,
International Value, Global Equity, MidCap Index, MidCap Core Equity, Science
and Technology and MicroCap Funds are for Retail A Shares. The financial
highlights shown for the Strategic Income and Large Cap Growth Funds are for
Retail B Shares.
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Money Market Funds
<TABLE>
<CAPTION>
Income from Investment Operations
----------------------------------
Net Dividends Net
Asset Value, Net from Net Asset Value,
Beginning of Investment Investment End of
Period Income/6/ Income Period
<S> <C> <C> <C> <C>
INSTITUTIONAL MONEY MARKET FUND
Year Ended October 31,
1995 $1.00 $0.06 $(0.06) $1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1996 1.00 0.05 (0.05) 1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1997 1.00 0.05 (0.05) 1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1998 1.00 0.05 (0.05) 1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1999 1.00 0.05 (0.05) 1.00
----------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 1.00 0.03 (0.03) 1.00
TAX-EXEMPT MONEY MARKET FUND
Year Ended October 31, 1995 1.00 0.03 (0.03) 1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1996 1.00 0.03 (0.03) 1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1997 1.00 0.03 (0.03) 1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1998 1.00 0.03 (0.03) 1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1999 1.00 0.03 (0.03) 1.00
----------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 1.00 0.03 (0.03) 1.00
OHIO TAX-EXEMPT MONEY MARKET FUND
Period Ended November 30, 1998/7/ 1.00 0.03 (0.03) 1.00
----------------------------------------------------------------------------------------
Year Ended November 30, 1999 1.00 0.03 (0.03) 1.00
----------------------------------------------------------------------------------------
Period Ended May 31, 2000 (unaudited) 1.00 0.02 (0.02) 1.00
U.S. GOVERNMENT MONEY MARKET FUND
Year Ended October 31, 1995 1.00 0.05 (0.05) 1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1996 1.00 0.05 (0.05) 1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1997 1.00 0.05 (0.05) 1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1998 1.00 0.05 (0.05) 1.00
----------------------------------------------------------------------------------------
Year Ended October 31, 1999 1.00 0.04 (0.04) 1.00
----------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 1.00 0.02 (0.02) 1.00
U.S. TREASURY MONEY MARKET FUND
March 25, 1997/10/ to November 30, 1997 1.00 0.03 (0.03) 1.00
----------------------------------------------------------------------------------------
Year Ended November 30, 1998 1.00 0.05 (0.05) 1.00
----------------------------------------------------------------------------------------
Year Ended November 30, 1999 1.00 0.04 (0.04) 1.00
----------------------------------------------------------------------------------------
Period Ended May 31, 2000 (unaudited) 1.00 0.02 (0.02) 1.00
----------------------------------------------------------------------------------------
</TABLE>
1 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
31, 1999, 1998, 1997, 1996, 1995 would have been 0.63%, 0.62%,
0.64%, 0.66%, 0.64%, 0.69%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 5.30%, 4.52%, 5.01%, 4.92%, 4.90%,
5.29%, respectively.
2 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
31, 1999, 1998, 1997, 1996, 1995, 1994 would have been 0.72%,
0.73%, 0.75%, 0.75%, 0.78%, 0.84%, respectively; and ratios of
net investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 3.01%, 2.49%, 2.87%, 2.91%, 2.91%,
3.12%, respectively.
3 Without fees waived ratios of net expenses to average net assets
for the fiscal periods ended May 31, 2000, November 30, 1999 and
November 30, 1998 would have been 1.06%, 1.09%, and 1.29%,
respectively; and ratios of net investment income to average net
assets would have been 2.67%, 2.13% and 2.21%, respectively.
4 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
31, 1999, 1998, 1997, 1996, 1995, 1994 would have been 0.79%,
0.69%, 0.71%, 0.70%, 0.71%, 0.75%, respectively; and ratios of
net investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 4.70%, 4.29%, 4.79%, 4.73%, 4.73%,
5.09%, respectively.
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<TABLE>
<CAPTION>
Supplemental Data and Ratios
----------------------------------------------------------------------------
Ratio of Net
Net Assets, Ratio of Net Investment
End of Expenses Income
Period to Average to Average Total
(000s) Net Assets Net Assets Return
<S> <C> <C> <C>
$ 716,566 0.35%/1/ 5.63%/1/ 5.77%
--------------------------------------------------------------------------------------
750,051 0.35%/1/ 5.19%/1/ 5.32%
--------------------------------------------------------------------------------------
1,201,341 0.35%/1/ 5.23%/1/ 5.38%
--------------------------------------------------------------------------------------
1,623,970 0.35%/1/ 5.30%/1/ 5.41%
--------------------------------------------------------------------------------------
2,356,251 0.38%/1/ 4.76%/1/ 4.85%
--------------------------------------------------------------------------------------
2,185,399 0.39%/1/,/9/ 5.54%/1/,/9/ 2.79%/8/
84,084 0.60%/2/ 3.36%/2/ 3.42%
--------------------------------------------------------------------------------------
79,328 0.60%/2/ 3.09%/2/ 3.13%
--------------------------------------------------------------------------------------
108,639 0.60%/2/ 3.06%/2/ 3.12%
--------------------------------------------------------------------------------------
122,451 0.60%/2/ 3.02%/2/ 3.04%
--------------------------------------------------------------------------------------
153,189 0.71%/2/ 2.51%/2/ 2.53%
--------------------------------------------------------------------------------------
158,938 0.72%/2/,/9/ 3.01%/2/,/9/ 1.50%/8/
57,614 0.69%/3/,/9/ 2.81%/3/,/9/ 2.85%/7/,/8/
--------------------------------------------------------------------------------------
64,475 0.58%/3/ 2.64%/3/ 2.67%
--------------------------------------------------------------------------------------
48,448 0.73%/3/,/9/ 3.10%/3/,/9/ 1.60%/7/,/8/
163,068 0.60%/4/ 5.24%/4/ 5.37%
--------------------------------------------------------------------------------------
198,334 0.60%/4/ 4.84%/4/ 4.96%
--------------------------------------------------------------------------------------
198,592 0.60%/4/ 4.83%/4/ 4.99%
--------------------------------------------------------------------------------------
233,176 0.60%/4/ 4.90%/4/ 4.97%
--------------------------------------------------------------------------------------
209,015 0.68%/4/ 4.30%/4/ 4.37%
--------------------------------------------------------------------------------------
61,186 0.72%/4/,/9/ 4.77%/4/,/9/ 2.46%/8/
659,296 0.72%/5/,/9/ 4.87%/5/,/9/ 3.37%/8/
--------------------------------------------------------------------------------------
1,123,144 0.73%/5/ 4.73%/5/ 4.84%
--------------------------------------------------------------------------------------
1,766,246 0.77%/5/ 4.13%/5/ 4.18%
--------------------------------------------------------------------------------------
1,867,979 0.82%/5/,/9/ 4.83%/5/,/9/ 2.44%/8/
--------------------------------------------------------------------------------------
</TABLE>
5 Without fees waived, ratios of net expenses to average net assets for
the fiscal years (periods) ended May 31, 2000 and November 30, 1999,
1998, 1997, would have been 1.08%, 0.93%, 0.93%, 0.92%, respectively;
and ratios of net investment income to average net assets for the
fiscal years (periods) ended May 31, 2000 and November 30, 1999, 1998,
1997, would have been 4.57%, 3.97%, 4.53%, 4.67%, respectively.
6 For the Tax-Exempt Money Market Fund and the Ohio Tax-Free Money
Market Fund, substantially all the investment income is exempt from
federal income tax.
7 The Ohio Tax-Exempt Money Market Fund has been operating since
December 2, 1997.
8 Not Annualized.
9 Annualized.
10 Reflects operations for the period from March 25, 1997 (date of
initial public investment) to November 30, 1997.
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Bond Funds
<TABLE>
<CAPTION>
Income from Investment Operations
---------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning of Investment or (Losses) on Investment
Period Income Securities Operations
<S> <C> <C> <C> <C>
SHORT-TERM BOND
Year Ended October 31, 1995/8/ $10.03 $ 0.61 $ 0.24 $ 0.85
---------------------------------------------------------------------------------------------
Year Ended October 31, 1996 10.28 0.58/9/ (0.03) 0.55
---------------------------------------------------------------------------------------------
Year Ended October 31, 1997 10.25 0.60 0.02 0.62
---------------------------------------------------------------------------------------------
Year Ended October 31, 1998 10.27 0.58 0.07 0.65
---------------------------------------------------------------------------------------------
Year Ended October 31, 1999 10.34 0.54 (0.22) 0.32
---------------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 10.12 0.28 (0.09) 0.19
INTERMEDIATE BOND
Year Ended October 31, 1995/8/ 9.67 0.60 0.53 1.13
---------------------------------------------------------------------------------------------
Year Ended October 31, 1996 10.21 0.56/9/ (0.02) 0.54
---------------------------------------------------------------------------------------------
Year Ended October 31, 1997 10.19 0.58 0.12 0.70
---------------------------------------------------------------------------------------------
Year Ended October 31, 1998 10.31 0.57 0.19 0.76
---------------------------------------------------------------------------------------------
Year Ended October 31, 1999 10.50 0.56 (0.39) 0.17
---------------------------------------------------------------------------------------------
Period Ended April 30, 2000 (unaudited) 10.10 0.30 (0.18) 0.12
U.S. GOVERNMENT SECURITIES
Year Ended November 30, 1995 10.02 0.63 0.80 1.43
---------------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.82 0.62 (0.15) 0.47
---------------------------------------------------------------------------------------------
Year Ended November 30, 1997 10.64 0.56 (0.04) 0.52
---------------------------------------------------------------------------------------------
Year Ended November 30, 1998 10.58 0.57 0.12 0.69
---------------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.70 0.53 (0.38) 0.15
---------------------------------------------------------------------------------------------
Period Ended May 31, 2000 (unaudited) 10.31 0.28 (0.21) 0.07
---------------------------------------------------------------------------------------------
</TABLE>
1 The total return calculation for the Funds does not reflect the
maximum sales charge of 4.00%.
2 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares
issued.
3 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended April 30, 2000 and
October 31, 1999, 1998, 1997, 1996, 1995 would have been 1.11%,
1.09%, 1.11%, 1.11%, 1.12%, 1.10%, respectively; and ratios of
net investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 5.24%, 4.99%, 5.31%, 5.43%, 5.30%,
5.63%, respectively.
4 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended April 30, 2000 and
October 31, 1999, 1998, 1997, 1996, 1995 would have been 0.94%,
0.95%, 0.96%, 0.98%, 0.99%, 0.98%, respectively; and ratios of
net investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 5.94%, 5.33%, 5.29%, 5.48%, 5.35%,
5.78%, respectively.
5 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended May 31, 2000 and
November 30, 1999, 1998, 1997, 1996, 1995 would have been 1.14%,
1.09%, 1.07%, 1.07%, 1.06%, 1.07%, respectively; and (unaudited)
ratios of net investment income to average net assets for the
fiscal years (periods) ended May 31, 2000 and November 30, 1999,
1998, 1997, 1996, 1995 would have been 5.28%, 5.06%, 5.24%,
5.42%, 5.65%, 5.81%, respectively.
................................................................................
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<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
------------------------------------------ ------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return/1/ (000s) Net Assets Net Assets Rate/2/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(0.60) - $(0.60) $ 10.28 8.74% $47,730 0.69%/3/ 6.04%/3/ 100.58%
--------------------------------------------------------------------------------------------------------------------
(0.58) - (0.58) 10.25 5.54% 58,843 0.75%/3/ 5.67%/3/ 59.62%
--------------------------------------------------------------------------------------------------------------------
(0.60) - (0.60) 10.27 6.21% 65,567 0.75%/3/ 5.79%/3/ 77.12%
--------------------------------------------------------------------------------------------------------------------
(0.58) - (0.58) 10.34 6.58% 75,410 0.75%/3/ 5.67%/3/ 78.20%
--------------------------------------------------------------------------------------------------------------------
(0.54) - (0.54) 10.12 3.16% 65,490 0.81%/3/ 5.27%/3/ 52.28%
--------------------------------------------------------------------------------------------------------------------
(0.28) - (0.28) 10.03 1.89%/6/ 54,738 0.82%/3/,/7/ 5.53%/3/,/7/ 33.23%/6/
(0.59) - (0.59) 10.21 12.04% 11,576 0.69%/4/ 6.07%/4/ 66.69%
--------------------------------------------------------------------------------------------------------------------
(0.56) - (0.56) 10.19 5.51% 17,392 0.75%/4/ 5.59%/4/ 59.29%
--------------------------------------------------------------------------------------------------------------------
(0.58) - (0.58) 10.31 7.09% 20,691 0.75%/4/ 5.71%/4/ 40.61%
--------------------------------------------------------------------------------------------------------------------
(0.57) - (0.57) 10.50 7.57% 29,550 0.75%/4/ 5.50%/4/ 27.29%
--------------------------------------------------------------------------------------------------------------------
(0.56) (0.01) (0.57) 10.10 1.66% 33,779 0.81%/4/ 5.47%/4/ 64.07%
--------------------------------------------------------------------------------------------------------------------
(0.30) - (0.30) 9.92 1.17%/6/ 29,683 0.82%/4/,/7/ 6.06%/4/,/7/ 46.03%/6/
(0.63) - (0.63) 10.82 14.69% 667 0.97%/5/ 5.91%/5/ 93.76%
--------------------------------------------------------------------------------------------------------------------
(0.62) (0.03)/10/ (0.65) 10.64 4.55% 2,232 0.96%/5/ 5.75%/5/ 53.76%
--------------------------------------------------------------------------------------------------------------------
(0.58) - (0.58) 10.58 5.10% 7,049 0.97%/5/ 5.52%/5/ 100.33%
--------------------------------------------------------------------------------------------------------------------
(0.57) - (0.57) 10.70 6.67% 6,140 0.97%/5/ 5.34%/5/ 54.57%
--------------------------------------------------------------------------------------------------------------------
(0.54) - (0.54) 10.31 1.45% 8,584 0.98%/5/ 5.17%/5/ 26.17%
--------------------------------------------------------------------------------------------------------------------
(0.28) - (0.28) 10.10 0.64%/6/ 7,934 1.03%/5/,/7/ 5.39%/5/,/7/ 4.38%/6/
--------------------------------------------------------------------------------------------------------------------
</TABLE>
6 Not Annualized.
7 Annualized.
8 On January 9, 1995, all previously existing series of shares
of each Fund were reclassified as Series A shares. Effective
January 9, 1995, Institutional shareowners exchanged their
Series A shares for the Funds' Institutional series shares.
For the year ended October 31, 1995, the Financial
Highlights ratios of net expenses to average net assets,
ratios of net investment income to average net assets, total
return and the per share income from investment operations
and distributions are presented on a basis whereby the
Funds' net investment income, net expenses, net realized and
unrealized gains (losses) and distributions for the period
November 1, 1994, through January 9, 1995, were allocated to
each class of shares based upon the relative net assets of
each class of shares as of the close of business on January
9, 1995, and the results thereof combined with the results
of operations and distributions for each applicable class
for the period January 10, 1995, through October 31, 1995.
9 Net investment income per share is calculated using ending
balances prior to consideration of adjustments for permanent
book and tax differences.
10 Includes distributions in excess of net realized gains of
$0.03 per share.
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Bond Funds (cont'd.)
<TABLE>
<CAPTION>
Income from Investment Operations
--------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning of Investment or (Losses) on Investment
Period Income Securities Operations
<S> <C> <C> <C> <C>
AGGREGATE BOND
Year Ended November 30, 1995 9.64 0.61 0.89 1.50
----------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.53 0.64 (0.19) 0.45
----------------------------------------------------------------------------------------
Year Ended November 30, 1997 10.34 0.56 0.03 0.59
----------------------------------------------------------------------------------------
Year Ended November 30, 1998 10.37 0.57 0.37 0.94
----------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.74 0.56 (0.68) (0.12)
----------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 9.86 0.30 (0.16) 0.11
BOND IMMDEX(TM)
Year Ended October 31, 1995/7/ 25.67 1.68 2.30 3.98
----------------------------------------------------------------------------------------
Year Ended October 31, 1996 27.82 1.61/8/ (0.26) 1.35
----------------------------------------------------------------------------------------
Year Ended October 31, 1997 27.54 1.66 0.64 2.30
----------------------------------------------------------------------------------------
Year Ended October 31, 1998 28.16 1.64 0.85 2.49
----------------------------------------------------------------------------------------
Year Ended October 31, 1999 29.01 1.64 (1.66) (0.02)
----------------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 27.36 0.86 (0.37) 0.49
----------------------------------------------------------------------------------------
</TABLE>
1 The total return calculation for the Funds does not reflect the
maximum sales charge of 4.00%.
2 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares
issued.
3 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended April 30, 2000 and
October 31, 1999, 1998, 1997, 1996, 1995 would have been 1.11%,
1.08%, 1.06%, 1.05%, 1.05%, 1.05%, respectively; and (unaudited)
ratios of net investment income to average net assets for the
fiscal years (periods) ended April 30, 2000 and October 31,
1999, 1998, 1997, 1996, 1995 would have been 5.24%, 4.99%,
5.31%, 5.43%, 5.30%, 5.63%, respectively.
4 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended April 30, 2000 and
October 31, 1999, 1998, 1997, 1996, 1995 would have been 0.94%,
0.95%, 0.96%, 0.98%, 0.99%, 0.98%, respectively; and (unaudited)
ratios of net investment income to average net assets for the
fiscal years (periods) ended April 30, 2000 and October 31,
1999, 1998, 1997, 1996, 1995 would have been 5.94%, 5.33%,
5.29%, 5.48%, 5.35%, 5.78%, respectively.
................................................................................
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<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
----------------------------------------- ------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return/1/ (000s) Net Assets Net Assets Rate/2/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.61) - (0.61) 10.53 15.98% 9,413 0.95%/3/ 6.01%/3/ 59.32%
-------------------------------------------------------------------------------------------------------------------
(0.64) - (0.64) 10.34 4.51% 14,875 0.95%/3/ 6.06%/3/ 149.20%
-------------------------------------------------------------------------------------------------------------------
(0.56) - (0.56) 10.37 6.00% 16,954 0.95%/3/ 5.55%/3/ 140.72%
-------------------------------------------------------------------------------------------------------------------
(0.57) - (0.57) 10.74 9.30% 20,835 0.96%/3/ 5.41%/3/ 91.14%
-------------------------------------------------------------------------------------------------------------------
(0.56) (0.20)/9/ (0.76) 9.86 (1.12)% 4,753 0.97%/3/ 5.49%/3/ 38.29%
-------------------------------------------------------------------------------------------------------------------
(0.28) - (0.28) 9.69 1.17%/5/ 11,087 1.00%/3/,/6/ 5.79%/3/,/6/ 17.60%/5/
(1.79) (0.04) (1.83) 27.82 16.05% 21,875 0.64%/4/ 6.31%/4/ 41.67%
-------------------------------------------------------------------------------------------------------------------
(1.63) - (1.63) 27.54 5.06% 42,671 0.68%/4/ 5.98%/4/ 33.38%
-------------------------------------------------------------------------------------------------------------------
(1.68) - (1.68) 28.16 8.68% 64,144 0.67%/4/ 6.08%/4/ 35.12%
-------------------------------------------------------------------------------------------------------------------
(1.64) - (1.64) 29.01 9.11% 95,301 0.67%/4/ 5.77%/4/ 20.07%
-------------------------------------------------------------------------------------------------------------------
(1.63) - (1.63) 27.36 (0.05)% 95,635 0.72%/4/ 5.80%/4/ 57.04%
-------------------------------------------------------------------------------------------------------------------
(0.85) - (0.85) 27.00 1.82%/5/ 83,806 0.73%/4/,/6/ 6.30%/4/,/6/ 33.11%/5/
-------------------------------------------------------------------------------------------------------------------
</TABLE>
5 Not Annualized.
6 Annualized.
7 On January 9, 1995, all previously existing series of shares of
each Fund were reclassified as Series A shares. Effective
January 9, 1995, Institutional shareowners exchanged their
Series A shares for the Funds' Institutional series shares. For
the year ended October 31, 1995, the Financial Highlights
ratios of net expenses to average net assets, ratios of net
investment income to average net assets, total return and the
per share income from investment operations and distributions
are presented on a basis whereby the Funds' net investment
income, net expenses, net realized and unrealized gains
(losses) and distributions for the period November 1, 1994,
through January 9, 1995, were allocated to each class of shares
based upon the relative net assets of each class of shares as
of the close of business on January 9, 1995, and the results
thereof combined with the results of operations and
distributions for each applicable class for the period January
10, 1995, through October 31, 1995.
8 Net investment income per share is calculated using ending
balances prior to consideration of adjustments for
permanent book and tax differences.
9 Includes distributions in excess of net realized gains of
$0.07 per share.
............................................................................ 141
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Bond Funds (cont'd.)
<TABLE>
<CAPTION>
Income from Investment Operations
----------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning of Investment or Losses on Investment
Period Income/1/ Securities Operations
<S> <C> <C> <C> <C>
STRATEGIC INCOME
December 12, 1994/2/ to November 30,
1995 $10.00 $0.69 $ 0.55 $ 1.24
-------------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.53 0.73 (0.04) 0.69
-------------------------------------------------------------------------------------------
Year Ended November 30, 1997 10.50 0.73 0.18 0.91
-------------------------------------------------------------------------------------------
Year Ended November 30, 1998 10.67 0.72 (0.94) (0.22)
-------------------------------------------------------------------------------------------
Year Ended November 30, 1999 9.62 0.64 (1.10) (0.46)
-------------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 8.52 0.32 (0.18) 0.14
TAX-EXEMPT INTERMEDIATE BOND
Year Ended October 31, 1995/10/ 9.78 0.42 0.45 0.87
-------------------------------------------------------------------------------------------
Year Ended October 31, 1996 10.23 0.40/12/ (0.01) 0.39
-------------------------------------------------------------------------------------------
Year Ended October 31, 1997 10.21 0.42 0.14 0.56
-------------------------------------------------------------------------------------------
Year Ended October 31, 1998 10.35 0.41 0.17 0.58
-------------------------------------------------------------------------------------------
Year Ended October 31, 1999 10.52 0.42 (0.40) 0.02
-------------------------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 10.12 0.21 (0.09) 0.12
MISSOURI TAX-EXEMPT BOND
Six Months Ended November 30,
1995/11/ 11.52 0.27 0.22 0.49
-------------------------------------------------------------------------------------------
Year Ended November 30, 1996 11.74 0.55 (0.05) 0.50
-------------------------------------------------------------------------------------------
Year Ended November 30, 1997 11.69 0.53 0.18 0.71
-------------------------------------------------------------------------------------------
Year Ended November 30, 1998 11.87 0.52 0.21 0.73
-------------------------------------------------------------------------------------------
Year Ended November 30, 1999 12.08 0.50 (0.74) (0.24)
-------------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 11.31 0.26 (0.19) 0.07
NATIONAL MUNICIPAL BOND
November 18, 1996/2/ to November 30,
1996 10.00 0.02 0.05 0.07
-------------------------------------------------------------------------------------------
Year Ended November 30, 1997 10.05 0.52 0.22 0.74
-------------------------------------------------------------------------------------------
Year Ended November 30, 1998 10.27 0.30 0.30 0.74
-------------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.22 0.41 (0.69) (0.28)
-------------------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 9.43 0.20 (0.18) 0.02
-------------------------------------------------------------------------------------------
</TABLE>
1 For the Tax-Exempt Intermediate Bond Fund, Missouri Tax-Exempt
Bond Fund, and National Municipal Bond Fund, substantially all
investment income is exempt from federal income tax.
2 Period from commencement of operations.
3 The total return calculation for the Funds does not reflect the
maximum sales charge of 4.00%.
4 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended May 31, 2000 and
November 30, 1999, 1998, 1997, 1996, 1995 would have been 1.46%,
1.44%, 1.46%, 1.46%, 1.56%, 1.77%, respectively; and ratios of
net investment income to average net assets for the fiscal years
(periods) ended May 31, 2000 and November 30, 1999, 1998, 1997,
1996, 1995 would have been 7.51%, 6.79%, 6.99%, 6.93%, 7.06%,
7.11%, respectively.
5 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended April 30, 2000 and
October 31, 1999, 1998, 1997, 1996, 1995 would have been 1.11%,
1.07%, 1.06%, 1.13%, 1.22%, 1.20%, respectively; and ratios of
net investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 3.95%, 3.73%, 3.69%, 3.73%, 3.52%,
3.76%, respectively.
6 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended May 31, 2000 and
November 30, 1999, 1998, 1997, 1996, 1995 would have been 0.98%,
1.07%, 1.06%, 1.06%, 1.05%, 1.18%, respectively; and (unaudited)
ratios of net investment income to average net assets for the
fiscal years (periods) ended May 31, 2000 and November 30, 1999,
1998, 1997, 1996, 1995 would have been 4.60%, 4.09%, 4.08%,
4.37%, 4.55%, 4.39%, respectively.
7 Without fees waived, ratios of net expenses to average net
assets for the fiscal years (periods) ended May 31, 2000 and
November 30, 1999, 1998, 1997, 1996 would have been 1.09%,
1.16%, 1.16%, 1.17%, 1.07%, respectively; and (unaudited) ratios
of net investment income to average net assets for the fiscal
years (periods) ended May 31, 2000 and November 30, 1999, 1998,
1997, 1996 would have been 4.27%, 3.94%, 3.97%, 3.89%, 8.38%,
respectively.
................................................................................
142
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
--------------------------------------------- -----------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return/3/ (000s) Net Assets Net Assets Rate/15/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(0.67) $(0.04) $(0.71) $10.53 12.71%/8/ $ 47,513 1.47%/4/,/9/ 7.41%/4/,/9/ 258.00%/8/
-----------------------------------------------------------------------------------------------------------------------
(0.72) - (0.72) 10.50 6.99% 110,775 1.36%/4/ 7.26%/4/ 201.00%
-----------------------------------------------------------------------------------------------------------------------
(0.74) - (0.74) 10.67 9.02% 179,413 1.26%/4/ 7.13%/4/ 142.00%
-----------------------------------------------------------------------------------------------------------------------
(0.73) (0.10) (0.83) 9.62 (2.16)% 202,354 1.26%/4/ 7.19%/4/ 146.00%
-----------------------------------------------------------------------------------------------------------------------
(0.64)/13/ - (0.64) 8.52 (4.99)% 160,605 1.28%/4/ 6.95%/4/ 73.00%
-----------------------------------------------------------------------------------------------------------------------
(0.34) - (0.34) 8.32 1.77%/8/ 138,250 1.35%/4/,/9/ 7.62%/4/,/9/ 29.00%/8/
(0.42) - (0.42) 10.23 9.07% 7,711 0.71%/5/ 4.25%/5/ 44.13%
-----------------------------------------------------------------------------------------------------------------------
(0.41) - (0.41) 10.21 3.87% 10,690 0.75%/5/ 3.99%/5/ 30.46%
-----------------------------------------------------------------------------------------------------------------------
(0.42) - (0.42) 10.35 5.60% 19,199 0.75%/5/ 4.11%/5/ 11.22%
-----------------------------------------------------------------------------------------------------------------------
(0.41) - (0.41) 10.52 5.73% 32,466 0.75%/5/ 4.00%/5/ 14.38%
-----------------------------------------------------------------------------------------------------------------------
(0.41) (0.01) (0.42) 10.12 0.14% 20,016 0.89%/5/ 3.91%/5/ 21.77%
-----------------------------------------------------------------------------------------------------------------------
(0.21) (0.04) (0.25) 9.99 1.14%/8/ 14,798 0.92%/5/,/9/ 4.14%/5/,/9/ 10.68%/8/
(0.27) - (0.27) 11.74 4.32% 24,726 0.95%/6/,/9/ 4.64%/6/,/9/ 1.55%
-----------------------------------------------------------------------------------------------------------------------
(0.55) - (0.55) 11.69 4.41% 25,144 0.85%/6/ 4.75%/6/ 3.66%
-----------------------------------------------------------------------------------------------------------------------
(0.53) - (0.53) 11.87 6.27% 23,722 0.86%/6/ 4.57%/6/ 3.50%
-----------------------------------------------------------------------------------------------------------------------
(0.52) - (0.52) 12.08 6.31% 23,611 0.86%/6/ 4.38%/6/ 6.14%
-----------------------------------------------------------------------------------------------------------------------
(0.51) (0.02) (0.53) 11.31 (2.09)% 21,242 0.86%/6/ 4.30%/6/ 0.76%
-----------------------------------------------------------------------------------------------------------------------
(0.26) - (0.26) 11.12 0.65%/8/ 19,487 0.87%/6/,/9/ 4.71%/6/,/9/ 2.26%/8/
(0.02) - (0.02) 10.05 0.73% 1 0.37%/7/,/9/ 9.08%/7/,/9/ -
-----------------------------------------------------------------------------------------------------------------------
(0.52) - (0.52) 10.27 7.61% 717 0.35%/7/ 4.71%/7/ 83.94%
-----------------------------------------------------------------------------------------------------------------------
(0.44) (0.35) (0.79) 10.22 7.56% 1,162 0.85%/7/ 4.18%/7/ 18.30%
-----------------------------------------------------------------------------------------------------------------------
(0.41)/14/ (0.10)/14/ (0.51) 9.43 (2.87)% 1,582 0.96%/7/ 4.14%/7/ -
-----------------------------------------------------------------------------------------------------------------------
(0.21) - (0.21) 9.24 0.21%/8/ 1,438 0.98%/7/,/9/ 4.38%/7/,/9/ -
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
8 Not Annualized.
9 Annualized.
10 On January 9, 1995, all previously existing series of shares of
each Fund were reclassified as Series A shares. Effective
January 9, 1995, Institutional shareowners exchanged their
Series A shares for the Funds' Institutional series shares. For
the year ended October 31, 1995, the Financial Highlights ratios
of net expenses to average net assets, ratios of net investment
income to average net assets, total return and the per share
income from investment operations and distributions are
presented on a basis whereby the Funds' net investment income,
net expenses, net realized and unrealized gains (losses) and
distributions for the period November 1, 1994, through January
9, 1995, were allocated to each class of shares based upon the
relative net assets of each class of shares as of the close of
business on January 9, 1995, and the results thereof combined
with the results of operations and distributions for each
applicable class for the period January 10, 1995, through
October 31, 1995.
11 Upon reorganizing as a Portfolio of the Arch Fund, Inc., the
Missouri Tax-Exempt Bond Portfolio changed its fiscal year end
from May 31 to November 30.
12 Net investment income per share is calculated using ending
balances prior to consideration of adjustments for permanent
book and tax differences.
13 Includes distributions in excess of net investment income of
$0.01 per share.
14 Includes distributions in excess of net income and net realized
gains of $0.01 and $0.01 per share respectively.
15 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares
issued.
............................................................................ 143
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Equity Funds
<TABLE>
<CAPTION>
Income from Investment Operations
-----------------------------------------
Net Net Realized and Total
Asset Value, Net Unrealized Gains from
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
BALANCED INCOME
December 1, 1997/1/
through October 31, 1998 $10.00 $0.28/10/ $ 0.96 $ 1.24
---------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 11.00 0.28 0.38 0.66
---------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000 (unaudited) 10.94 0.13/10/ 0.21 0.34
BALANCED GROWTH
Year Ended October 31, 1995/9/ 22.10 0.49 3.77 4.26
---------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 25.89 0.47/11/ 2.64 3.11
---------------------------------------------------------------------------------------------------
Year Ended October 31, 1997 27.98 0.58 4.19 4.77
---------------------------------------------------------------------------------------------------
Year Ended October 31, 1998 30.48 0.56 1.86 2.42
---------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 29.82 0.49 1.19 1.68
---------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000 (unaudited) 30.06 0.26 4.21 4.47
GROWTH AND INCOME
Year Ended October 31, 1995/9/ 23.09 0.37 5.14 5.51
---------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 27.62 0.42/11/ 6.61 7.03
---------------------------------------------------------------------------------------------------
Year Ended October 31, 1997 33.07 0.37 8.92 9.29
---------------------------------------------------------------------------------------------------
Year Ended October 31, 1998 39.24 0.36 6.55 6.91
---------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 44.41 0.29 4.92 5.21
---------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000 (unaudited) 46.08 0.07 2.70 2.77
EQUITY INCOME
February 27, 1997/1/
through November 30, 1997 10.00 0.19 1.56 1.75
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 11.56 0.18 0.98 1.16
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.24 0.14 (0.18) (0.04)
---------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000 (unaudited) 7.84 0.05 (0.13) (0.08)
RELATIVE VALUE
Year Ended November 30, 1995 11.36 0.29 3.65 3.94
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 15.02 0.27 4.01 4.28
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1997 19.03 0.67 4.45 5.12
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 23.48 0.11 3.66 3.77
---------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 26.26 0.10 3.01 3.11
---------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000 (unaudited) 29.10 0.13 (0.24) (0.11)
---------------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000, the fiscal year
ended October 31, 1999 and the period ended October 31, 1998
would have been 1.37%, 1.48%, 1.63%, respectively; and ratios of
net investment income to average net assets for the period ended
April 30, 2000, the fiscal year ended October 31, 1999 and the
period ended October 31, 1998 would have been 2.35%, 2.29%,
2.19%, respectively.
5 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 1.27%, 1.25%, 1.24%, 1.25%, 1.28%, 1.25%, respectively; and
ratios of net investment income to average net assets for the
period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 1.57%,
1.52%, 1.67%, 1.80%, 1.52%, 1.74%, respectively.
6 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 1.19%, 1.18%, 1.19%, 1.19%, 1.23%, 1.20%, respectively; and
ratios of net investment income to average net assets for the
period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 0.33%,
0.73%, 0.79%, 1.02%, 1.35%, 1.40%, respectively.
................................................................................
144
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
--------------------------------------------------------------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Net Assets Rate/12/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(0.24) $ - $(0.24) $11.00 12.46%/2/ $ 10,614 1.00%/3/,/4/ 2.82%/3/,/4/ 58.33%/2/
-------------------------------------------------------------------------------------------------------------------
(0.28) (0.44) (0.72) 10.94 6.01% 13,087 1.18%/4/ 2.59%/4/ 48.46%
-------------------------------------------------------------------------------------------------------------------
(0.12) (0.20) (0.32) 10.96 3.20%/2/ 11,413 1.22%/3/,/4/ 2.50%/3/,/4/ 93.42%/2/
(0.47) - (0.47) 25.89 19.55% 21,832 0.94%/5/ 2.05%/5/ 61.87%
-------------------------------------------------------------------------------------------------------------------
(0.47) (0.55) (1.02) 27.98 12.30% 29,034 1.00%/5/ 1.80%/5/ 63.91%
-------------------------------------------------------------------------------------------------------------------
(0.59) (1.68) (2.27) 30.48 18.07% 44,026 1.00%/5/ 2.06%/5/ 69.90%
-------------------------------------------------------------------------------------------------------------------
(0.58) (2.50) (3.08) 29.82 8.60% 59,657 1.00%/5/ 1.91%/5/ 56.44%
-------------------------------------------------------------------------------------------------------------------
(0.49) (0.95) (1.44) 30.06 5.56% 53,807 1.18%/5/ 1.59%/5/ 69.42%
-------------------------------------------------------------------------------------------------------------------
(0.26) (1.67) (1.93) 32.60 15.29%/2/ 53,470 1.22%/3/,/5/ 1.62%/3/,/5/ 81.13%/2/
(0.38) (0.60) (0.98) 27.62 24.75% 42,424 1.09%/6/ 1.51%/6/ 47.85%
-------------------------------------------------------------------------------------------------------------------
(0.39) (1.19) (1.58) 33.07 26.62% 71,310 1.15%/6/ 1.42%/6/ 51.37%
-------------------------------------------------------------------------------------------------------------------
(0.39) (2.73) (3.12) 39.24 30.47% 128,070 1.12%/6/ 1.09%/6/ 31.36%
-------------------------------------------------------------------------------------------------------------------
(0.35) (1.39) (1.74) 44.41 18.08% 190,331 1.12%/6/ 0.86%/6/ 48.56%
-------------------------------------------------------------------------------------------------------------------
(0.35) (3.21) (3.56) 46.06 11.78% 194,089 1.17%/6/ 0.74%/6/ 62.20%
-------------------------------------------------------------------------------------------------------------------
(0.05) (3.90) (3.95) 44.90 6.43%/2/ 181,142 1.19%/3/,/6/ 0.33%/3/,/6/ 91.87%/2/
(0.19) - (0.19) 11.56 17.64%/2/ 1 0.37%/3/,/7/ 2.34%/3/,/7/ 48.33%/2/
-------------------------------------------------------------------------------------------------------------------
(0.19) (2.29) (2.48) 10.24 11.82% 35 1.23%/7/ 1.40%/7/ 98.32%
-------------------------------------------------------------------------------------------------------------------
(0.13) (2.23) (2.36) 7.84 0.09% 95 1.28%/7/ 1.58%/7/ 81.84%
-------------------------------------------------------------------------------------------------------------------
(0.05) (1.11) (1.16) 6.60 0.99%/2/ 121 1.36%/3/,/7/ 1.59%/3/,/7/ 15.81%/2/
(0.28) - (0.28) 15.02 35.10% 131,979 1.06%/8/ 2.17%/8/ 24.00%
-------------------------------------------------------------------------------------------------------------------
(0.26) (0.01) (0.27) 19.03 28.86% 215,843 1.04%/8/ 1.71%/8/ 16.00%
-------------------------------------------------------------------------------------------------------------------
(0.28) (0.39) (0.67) 23.48 27.69% 37,748 1.01%/8/ 1.40%/8/ 18.00%
-------------------------------------------------------------------------------------------------------------------
(0.17) (0.82) (0.99) 26.26 16.67% 50,925 1.29%/8/ 0.70%/8/ 26.00%
-------------------------------------------------------------------------------------------------------------------
(0.16) (0.11) (0.27) 29.10 11.89% 54,825 1.30%/8/ 0.52%/8/ 11.00%
-------------------------------------------------------------------------------------------------------------------
(0.09) - (0.09) 28.90 (0.38)% 49,126 1.35%/3/,/8/ 0.88%/3/,/8/ 4.00%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
7 Without fees waived, ratios of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, 1997, would have been
1.46%, 1.38%, 1.32%, 1.60%, respectively; and (unaudited)
ratios of net investment income to average net assets for
the period ended May 31, 2000 and for the fiscal years ended
November 30, 1999, 1998, 1997 would have been 1.49%, 1.48%,
1.31%, 1.11%, respectively.
8 Without fees waived, the ratio of net expenses to average
net assets for the period ended May 31, 2000 and for the
fiscal years ended November 30, 1999, 1998, 1997, 1996, 1995
would have been 1.46%, 1.46%, 1.49%, 1.21%, 1.24%, 1.26%,
respectively; and ratios of net investment income to average
net assets for the period ended May 31, 2000 and for the
fiscal years ended November 30, 1999, 1998, 1997, 1996, 1995
would have been 0.77%, 0.36%, 0.50%, 1.20%, 1.51%, 1.97%,
respectively.
9 On January 9, 1995, all previously existing series of shares
of each Fund were reclassified as Series A shares. Effective
January 9, 1995, Institutional shareholders exchanged their
Series A shares for the Funds' Institutional series shares.
For the year ended October 31, 1995, the Financial
Highlights ratios of net expenses to average net assets,
ratios of net investment income to average net assets, total
return and the per share income from investment operations
and distributions are presented on a basis whereby the
Funds' net investment income, net expenses, net realized and
unrealized gains (losses) and distributions for the period
November 1, 1994 through January 9, 1995, were allocated to
each class of shares based upon the relative net assets of
each class of shares as of the close of business on January
9, 1995, and the results thereof combined with the results
of operations and distributions for each applicable class
for the period January 10, 1995 through October 31, 1995.
10 Net investment income (loss) per share represents net
investment income divided by the average shares outstanding
throughout the period.
11 Net investment income (loss) per share is calculated using
ending balances prior to consideration of adjustments for
permanent book and tax differences.
12 Portfolio turnover is calculated on the basis of the Fund as
a whole without distinguishing between the classes of shares
issued.
............................................................................ 145
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Equity Funds (cont'd)
<TABLE>
<CAPTION>
Income from Investment Operations
------------------------------------------
Net Net Realized and
Asset Value, Net Unrealized Gains Total from
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
EQUITY INDEX
Year Ended October 31, 1995/7/ $33.41 $ 0.70 $ 7.70 $ 8.40
---------------------------------------------------------------------------------------------
Year Ended October 31, 1996 41.07 0.77/8/ 8.69 9.46
---------------------------------------------------------------------------------------------
Year Ended October 31, 1997 49.40 0.80/9/ 14.33 15.13
---------------------------------------------------------------------------------------------
Year Ended October 31, 1998 63.11 0.84 12.58 13.42
---------------------------------------------------------------------------------------------
Year Ended October 31, 1999 74.58 0.80 17.75 18.55
---------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 91.83 0.40/9/ 5.72 6.12
LARGE CAP CORE EQUITY
Year Ended October 31, 1995/7/ 21.47 (0.02) 4.16 4.14
---------------------------------------------------------------------------------------------
Year Ended October 31, 1996 25.58 (0.07)/8/ 4.81 4.74
---------------------------------------------------------------------------------------------
Year Ended October 31, 1997 30.32 (0.05)/8/ 6.30 6.25
---------------------------------------------------------------------------------------------
Year Ended October 31, 1998 35.27 (0.02)/9/ 5.66 5.64
---------------------------------------------------------------------------------------------
Year Ended October 31, 1999 35.72 (0.12)/9/ 6.42 6.30
---------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 37.96 (0.07) 7.08 7.01
LARGE CAP GROWTH
December 12, 1995/1/ through
November 30, 1995 10.00 0.24 2.67 2.91
---------------------------------------------------------------------------------------------
Year Ended November 30, 1996 12.70 0.17 3.12 3.29
---------------------------------------------------------------------------------------------
Year Ended November 30, 1997 15.17 0.19 2.97 3.16
---------------------------------------------------------------------------------------------
Year Ended November 30, 1998 17.17 0.02 3.32 3.34
---------------------------------------------------------------------------------------------
Year Ended November 30, 1999 19.52 (0.04) 4.88 4.84
---------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 23.89 (0.02) 1.83 1.81
---------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 0.68%, 0.68%, 0.69%, 0.70%, 0.73%, 0.73%, respectively; and
ratios of net investment income to average net assets for the
period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been 0.79%,
0.85%, 1.07%, 1.33%, 1.69%, 2.07%, respectively.
5 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 1.20%, 1.20%, 1.21%, 1.21%, 1.23%, 1.21%, respectively; and
ratios of net investment income to average net assets for the
period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been
(0.32)%, (0.32)%, (0.12)%, (0.24)%, (0.36)%, (0.18)%,
respectively.
6 Without fees waived, ratios of net expenses to average net
assets for the period ended May 31, 2000, the fiscal year ended
November 30, 1999, 1998, 1997, 1996 and the period ended
November 30, 1995 would have been 1.47%, 1.52%, 1.54%, 1.29%,
1.39%, 1.40%, respectively; and ratios of net investment income
to average net assets for the period ended May 31, 2000, the
fiscal year ended November 30, 1999, 1998, 1997, 1996 and the
period ended November 30, 1995 would have been (0.28)%, (0.24)%,
(0.08)%, 0.66%, 1.11%, 1.77%, respectively.
................................................................................
146
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
----------------------------------------------------------------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Net Assets Rate/10/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(0.68) $(0.06) $(0.74) $41.07 25.79% $ 18,663 0.66%/4/ 2.14%/4/ 4.61%
---------------------------------------------------------------------------------------------------------------------
(0.78) (0.35) (1.13) 49.40 23.36% 39,656 0.66%/4/ 1.76%/4/ 7.48%
---------------------------------------------------------------------------------------------------------------------
(0.81) (0.61) (1.42) 63.11 31.08% 76,866 0.63%/4/ 1.40%/4/ 9.81%
---------------------------------------------------------------------------------------------------------------------
(0.84) (1.11) (1.95) 74.58 21.63% 110,129 0.58%/4/ 1.18%/4/ 2.91%
---------------------------------------------------------------------------------------------------------------------
(0.83) (0.47) (1.30) 91.83 25.01% 142,247 0.61%/4/ 0.92%/4/ 13.95%
---------------------------------------------------------------------------------------------------------------------
(0.39) (2.08) (2.47) 95.48 6.64%/2/ 146,680 0.62%/3/,/4/ 0.85%/3/,/4/ 2.80%/2/
(0.03) - (0.03) 25.58 19.31% 10,105 1.09%/5/ (0.06)%/5/ 49.84%
---------------------------------------------------------------------------------------------------------------------
- - - 30.32 18.53% 16,636 1.15%/5/ (0.29)%/5/ 56.75%
---------------------------------------------------------------------------------------------------------------------
- (1.30) (1.30) 35.27 21.30% 25,043 1.14%/5/ (0.16)%/5/ 62.09%
---------------------------------------------------------------------------------------------------------------------
(0.02) (5.17) (5.19) 35.72 18.58% 38,213 1.14%/5/ (0.05)%/5/ 51.82%
---------------------------------------------------------------------------------------------------------------------
(0.02) (4.04) (4.06) 37.96 17.92% 47,238 1.19%/5/ (0.31)%/5/ 59.35%
---------------------------------------------------------------------------------------------------------------------
- (2.03) (2.03) 42.94 18.84%/2/ 51,718 1.19%/3/,/5/ (0.31)%/3/,/5/ 65.02%/2/
(0.21) - (0.21) 12.70 29.44%/2/ 48,699 1.17%/3/,/6/ 2.00%/3/,/6/ 171.00%/2/
---------------------------------------------------------------------------------------------------------------------
(0.16) (0.66) (0.82) 15.17 27.34% 85,311 1.19%/6/ 1.31%/6/ 96.00%
---------------------------------------------------------------------------------------------------------------------
(0.14) (1.02) (1.16) 17.17 22.65% 45,025 1.09%/6/ 0.86%/6/ 60.00%
---------------------------------------------------------------------------------------------------------------------
(0.03) (0.96) (0.99) 19.52 20.76% 66,478 1.34%/6/ 0.12%/6/ 48.00%
---------------------------------------------------------------------------------------------------------------------
(0.02) (0.45) (0.47) 23.89 25.26% 90,468 1.36%/6/ (0.08)%/6/ 28.00%
---------------------------------------------------------------------------------------------------------------------
- - - 25.70 7.58%/2/ 101,800 1.36%/3/,/6/ (0.17)%/3/,/6/ 9.00%/2/
---------------------------------------------------------------------------------------------------------------------
</TABLE>
7 On January 9, 1995, all previously existing series of
shares of each Fund were reclassified as Series A shares.
Effective January 9, 1995, Institutional shareholders
exchanged their Series A shares for the Funds'
Institutional series shares. For the year ended October 31,
1995, the Financial Highlights ratios of net expenses to
average net assets, ratios of net investment income to
average net assets, total return and the per share income
from investment operations and distributions are presented
on a basis whereby the Funds' net investment income, net
expenses, net realized and unrealized gains (losses) and
distributions for the period November 1, 1994 through
January 9, 1995, were allocated to each class of shares
based upon the relative net assets of each class of shares
as of the close of business on January 9, 1995, and the
results thereof combined with the results of operations and
distributions for each applicable class for the period
January 10, 1995 through October 31, 1995.
8 Net investment income (loss) per share is calculated using
ending balances prior to consideration of adjustments for
permanent book and tax differences.
9 Net investment income (loss) per share represents net
investment income divided by the average shares outstanding
throughout the period.
10 Portfolio turnover is calculated on the basis of the Fund
as a whole without distinguishing between the classes of
shares issued.
............................................................................ 147
<PAGE>
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--------------------------------------------------------------------------------
Equity Funds (cont'd)
<TABLE>
<CAPTION>
Income from Investment Operations
-----------------------------------------
Net Net Realized and
Asset Value, Net Unrealized Gains Total from
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
INTERNATIONAL VALUE/6/
Year Ended October 31, 1995/7/ 19.99 0.08 (0.87) (0.79)
---------------------------------------------------------------------------------------------
Year Ended October 31, 1996 19.15 0.07/8/ 1.43 1.50
---------------------------------------------------------------------------------------------
Year Ended October 31, 1997 20.21 0.06/8/ (1.10) (1.04)
---------------------------------------------------------------------------------------------
Year Ended October 31, 1998 18.58 0.20/9/ (3.15) (2.95)
---------------------------------------------------------------------------------------------
Year Ended October 31, 1999 15.18 0.03 3.62 3.65
---------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 18.53 (0.05)/9/ (0.23) (0.28)
GLOBAL EQUITY
Dec. 3, 1997/1/ through Nov. 30,
1998 10.00 0.05 0.34 0.39
---------------------------------------------------------------------------------------------
Year Ended November 30, 1999 10.35 0.09 2.78 2.87
---------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 12.94 0.01 0.47 0.48
---------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 2.04%, 2.10%, 2.16%, 2.50%, 2.61%, 2.85%, respectively; and
ratios of net investment income to average net assets for the
period ended April 30, 2000 and for the fiscal years ended
October 31, 1999, 1998, 1997, 1996, 1995 would have been
(0.74)%, (0.27)%, 0.71%, (0.50)%, (0.48)%, (0.69)%,
respectively.
................................................................................
148
<PAGE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
-----------------------------------------------------------------------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Net Assets Rate/10/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.04) (0.01) (0.05) 19.15 (3.95)% 1,633 1.70%/4/ 0.46%/4/ 15.12%
----------------------------------------------------------------------------------------------------------------------
(0.07) (0.37) (0.44) 20.21 7.95% 3,769 1.75%/4/ 0.37%/4/ 31.57%
----------------------------------------------------------------------------------------------------------------------
(0.13) (0.46) (0.59) 18.58 (5.30)% 6,502 1.75%/4/ 0.25%/4/ 97.09%
----------------------------------------------------------------------------------------------------------------------
(0.08) (0.37) (0.45) 15.18 (16.16)% 6,486 1.75%/4/ 1.12%/4/ 43.96%
----------------------------------------------------------------------------------------------------------------------
(0.30) - (0.30) 18.53 24.48% 6,418 1.81%/4/ 0.56%/4/ 45.50%
----------------------------------------------------------------------------------------------------------------------
(0.01) - (0.01) 18.23 (1.56)%/2/ 5,963 1.82%/3/,/4/ (0.52)%/3/,/4/ 51.16%/2/
(0.04) - (0.04) 10.35 3.95%/2/ 48,459 1.31%/3/,/5/ 0.37%/3/,/5/ 3.00%/2/
----------------------------------------------------------------------------------------------------------------------
(0.10) (0.18) (0.28) 12.94 28.44% 59,496 1.13%/5/ 0.27%/5/ 34.00%
----------------------------------------------------------------------------------------------------------------------
- (0.14) (0.14) 13.28 3.70%/2/ 72,196 1.15%/3/,/5/ 0.21%/3/,/5/ 7.00%/2/
----------------------------------------------------------------------------------------------------------------------
</TABLE>
5 Without fees waived, ratios of net expenses to average net
assets for the periods ended May 31, 2000 and fiscal year
ended November 30, 1999 and the period ended November 30,
1998 would have been 1.26%, 1.29%, 1.51%, respectively; and
ratios of net investment income to average net assets for
the periods ended May 31, 2000 and fiscal year ended
November 30, 1999 and the period ended November 30, 1998
would have been 0.10%, 0.11%, 0.17%, respectively.
6. Effective September 2, 1997, Hansberger Global Investors
assumed the investment sub-advisory responsibilities of
State Street Global Advisors.
7 On January 9, 1995, all previously existing series of
shares of each Fund were reclassified as Series A shares.
Effective January 9, 1995, Institutional shareholders
exchanged their Series A shares for the Funds'
Institutional series shares. For the year ended October 31,
1995, the Financial Highlights ratios of net expenses to
average net assets, ratios of net investment income to
average net assets, total return and the per share income
from investment operations and distributions are presented
on a basis whereby the Funds' net investment income, net
expenses, net realized and unrealized gains (losses) and
distributions for the period November 1, 1994 through
January 9, 1995, were allocated to each class of shares
based upon the relative net assets of each class of shares
as of the close of business on January 9, 1995, and the
results thereof combined with the results of operations and
distributions for each applicable class for the period
January 10, 1995 through October 31, 1995.
8 Net investment income (loss) per share is calculated using
ending balances prior to consideration of adjustments for
permanent book and tax differences.
9 Net investment income (loss) per share represents net
investment income divided by the average shares outstanding
throughout the period.
10 Portfolio turnover is calculated on the basis of the Fund
as a whole without distinguishing between the classes of
shares issued.
............................................................................ 149
<PAGE>
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--------------------------------------------------------------------------------
Equity Funds
<TABLE>
<CAPTION>
Income from Investment Operations
-------------------------------------------
Net Net Realized and
Asset Value, Net Unrealized Gains Total from
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
INTERNATIONAL GROWTH
Year Ended November 30, 1995 $ 9.90 $ 0.01 $ 0.86 $ 0.87
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 10.75 0.01 1.27 1.28
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1997 12.03 (0.03) 0.33 0.30
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 11.97 - 1.78 1.78
--------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 13.25 (0.01) 4.55 4.54
--------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 17.00 (0.14) 1.11 0.97
MIDCAP INDEX
November 4, 1999/1/ through April 30,
2000 (unaudited) 10.00 0.04 1.65 1.69
MIDCAP CORE EQUITY
Year Ended October 31, 1995/8/ 33.19 (0.07) 8.49 8.42
--------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 41.40 (0.13)/9/ 4.70 4.57
--------------------------------------------------------------------------------------------------
Year Ended October 31, 1997 41.38 (0.20)/9/ 8.44 8.24
--------------------------------------------------------------------------------------------------
Year Ended October 31, 1998 44.36 (0.24)/10/ (2.07) (2.31)
--------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 37.59 (0.08)/10/ 0.60 0.52
--------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 37.80 (0.22) 11.63 11.41
SMALL CAP INDEX
December 30, 1998/1/ through November
30, 1999 10.00 - 0.17 0.17
--------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 10.17 (0.01) 0.95 0.94
--------------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 Without fees waived, ratios of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, 1997, 1996, 1995 would have
been 1.64%, 1.75%, 1.75%, 1.75%, 1.76%, 1.75%, respectively; and
(unaudited) ratios of net investment income to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, 1997, 1996, 1995 would have
been (0.34)%, (0.19)%, (0.16)%, (0.37)%, (0.16)%, (0.18)%
respectively.
5 Without fees waived, the ratio of net expenses to average net
assets for the period ended April 30, 2000 would have been
0.94%; and the ratio of net investment income to average net
assets for the period ended April 30, 2000 would have been
0.58%.
6 Without fees waived, ratios of net expenses to average net
assets for the period ended April 30, 2000 and for the fiscal
years ended October 31, 1999, 1998, 1997, 1996, 1995 would have
been 1.22%, 1.21%, 1.20%, 1.20%, 1.17%, respectively; and ratios
of net investment income to average net assets for the period
ended April 30, 2000 and for the fiscal years ended October 31,
1999, 1998, 1997, 1996, 1995 would have been (0.54)%, (0.23)%,
(0.64)%, (0.57)%, (0.42)%, (0.27)%, respectively.
7 Without fees waived, ratios of net expenses to average net
assets for the periods ended May 31, 2000 and November 30, 1999,
would have been 1.07% and 1.12% and (unaudited) ratios of net
investment income to average net assets for the periods ended
May 31, 2000 and November 30, 1999 would have been (0.30)% and
(0.16)%.
................................................................................
150
<PAGE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
--------------------------------------------- --------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Net Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Assets Rate/11/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ - $(0.02)/12/ $(0.02) $10.75 8.78% $ 2,159 1.44%/4/ 0.13%/4/ 62.78%
-------------------------------------------------------------------------------------------------------------------------
- - - 12.03 11.91% 6,059 1.44%/4/ 0.16%/4/ 77.63%
-------------------------------------------------------------------------------------------------------------------------
(0.05)/12/ (0.31) (0.36) 11.97 2.59% 6,798 1.59%/4/ (0.21)%/4/ 75.18%
-------------------------------------------------------------------------------------------------------------------------
(0.07)/12/ (0.43) (0.50) 13.25 15.37% 8,058 1.58%/4/ 0.01%/4/ 88.95%
-------------------------------------------------------------------------------------------------------------------------
(0.04)/12/ (0.75) (0.79) 17.00 36.61% 11,307 1.56%/4/ 0.00%/4/ 93.73%
-------------------------------------------------------------------------------------------------------------------------
(0.10) (1.52) (1.62) 16.35 5.84%/2/ 16,167 1.48%/3/,/4/ (0.18)%/3/,/4/ 44.99%/2/
(0.04) - (0.04) 11.65 16.88%/2/ 1,391 0.75%/3/,/5/ 0.77%/3/,/5/ 23.17%/2/
- (0.21) (0.21) 41.40 25.56% 87,269 1.09%/6/ (0.19)%/6/ 79.25%
-------------------------------------------------------------------------------------------------------------------------
- (4.59) (4.59) 41.38 12.27% 111,159 1.13%/6/ (0.35)%/6/ 103.34%
-------------------------------------------------------------------------------------------------------------------------
- (5.26) (5.26) 44.36 22.18% 147,396 1.12%/6/ (0.50)%/6/ 97.40%
-------------------------------------------------------------------------------------------------------------------------
- (4.46) (4.46) 37.59 (5.91)% 136,146 1.13%/6/ (0.57)%/6/ 77.39%
-------------------------------------------------------------------------------------------------------------------------
- (0.31) (0.31) 37.80 1.31% 95,758 1.19%/6/ (0.21)%/6/ 139.91%
-------------------------------------------------------------------------------------------------------------------------
- (0.79) (0.79) 48.42 30.50%/2/ 100,515 1.20%/3/,/6/ (0.52)%/3/,/6/ 177.11%/2/
- - - 10.17 1.74%/2/ 14,955 0.92%/3/,/7/ (0.06)%/3/,/7/ 35.27%/2/
-------------------------------------------------------------------------------------------------------------------------
- (0.14) (0.14) 10.97 9.33%/2/ 14,978 0.97%/3/,/7/ (0.20)%/3/,/7/ 19.13%/2/
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
8 On January 9, 1995, all previously existing series of shares of
each Fund were reclassified as Series A shares. Effective
January 9, 1995, Institutional shareholders exchanged their
Series A shares for the Funds' Institutional series shares. For
the year ended October 31, 1995, the Financial Highlights ratios
of net expenses to average net assets, ratios of net investment
income to average net assets, total return and the per share
income from investment operations and distributions are
presented on a basis whereby the Funds' net investment income,
net expenses, net realized and unrealized gains (losses) and
distributions for the period November 1, 1994 through January 9,
1995, were allocated to each class of shares based upon the
relative net assets of each class of shares as of the close of
business on January 9, 1995, and the results thereof combined
with the results of operations and distributions for each
applicable class for the period January 10, 1995 through October
31, 1995.
9 Net investment income (loss) per share is calculated using
ending balances prior to consideration of adjustments for
permanent book and tax differences.
10 Net investment income (loss) per share represents net investment
income divided by the average shares outstanding throughout the
period.
11 Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares
issued.
12 Includes distribution in excess of net investment income for the
periods ended November 30, 1999, 1998, 1997 of $0.01, $0.07 and
$0.02 per share respectively. Includes return of capital
distribution of $0.01 per share for the period ended November
30, 1995.
............................................................................ 151
<PAGE>
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--------------------------------------------------------------------------------
Equity Funds (cont'd.)
<TABLE>
<CAPTION>
Income from Investment Operations
-----------------------------------------
Net Net Realized and
Asset Value, Net Unrealized Gains Total from
Beginning of Investment or (Losses) on Investment
Period Income (Loss) Securities Operations
<S> <C> <C> <C> <C>
SMALL CAP CORE EQUITY
Year Ended November 30, 1995 11.96 (0.01) 2.36 2.35
------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 13.40 (0.01) 1.03 1.02
------------------------------------------------------------------------------------------------
Year Ended November 30, 1997 13.36 (0.04) 2.48 2.44
------------------------------------------------------------------------------------------------
Year Ended November 30, 1998 14.98 (0.07) (1.87) (1.94)
------------------------------------------------------------------------------------------------
Year Ended November 30, 1999 11.82 (0.07)/8/ 2.10 2.03
------------------------------------------------------------------------------------------------
Six Months Ended May 31, 2000
(unaudited) 13.80 (0.09)/8/ 3.05 2.96
SCIENCE & TECHNOLOGY
March 31, 2000/1/ through May 31, 2000
(unaudited) 21.93 (0.05) (4.53) (4.58)
MICROCAP
August 1, 1995/1/ through June 30, 1996 10.00 (0.02) 6.10 6.08
------------------------------------------------------------------------------------------------
July 1, 1996 through October 31, 1996 15.42 (0.08)/7/ 0.82 0.74
------------------------------------------------------------------------------------------------
Year Ended October 31, 1997 16.16 (0.18)/7/ 4.24 4.06
------------------------------------------------------------------------------------------------
Year Ended October 31, 1998 17.47 (0.25)/8/ (3.17) (3.42)
------------------------------------------------------------------------------------------------
Year Ended October 31, 1999 12.38 (0.26)/7/ 9.71 9.45
------------------------------------------------------------------------------------------------
Six Months Ended April 30, 2000
(unaudited) 21.80 (0.19) 14.80 14.61
------------------------------------------------------------------------------------------------
</TABLE>
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 Without fees waived, ratios of net expenses to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, 1997, 1996, 1995 would have
been 1.39%, 1.36%, 1.35%, 1.35%, 1.36%, 1.36%, respectively; and
(unaudited) ratios of net investment income to average net
assets for the period ended May 31, 2000 and for the fiscal
years ended November 30, 1999, 1998, 1997, 1996, 1995 would have
been (0.17)%, (0.69)%, (0.55)%, (0.39)%, (0.26)%, (0.21)%,
respectively.
5 Without fees waived, ratios of net expenses to average net
assets for the period ended May 31, 2000 would have been 1.70%,
and the ratio of net investment income to average net assets
would have been (1.19)%.
................................................................................
152
<PAGE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less Distributions Supplemental Data and Ratios
-------------------------------------------- --------------------------------------------------
Ratio of Net
Dividends Net Assets, Ratio of Net Investment
from Net Distributions Net Asset End of Expenses Income (Loss) Portfolio
Investment From Total Value, End Total Period to Average to Average Net Turnover
Income Capital Gains Distributions of Period Return (000s) Net Assets Assets Rate/9/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- (0.91) (0.91) 13.40 21.43% 17,620 1.26%/4/ (0.11)%/4/ 83.13%
--------------------------------------------------------------------------------------------------------------------------
(0.01)/10/ (1.05) (1.06) 13.36 8.39% 30,081 1.26%/4/ (0.13)%/4/ 65.85%
--------------------------------------------------------------------------------------------------------------------------
- (0.82) (0.82) 14.98 19.41% 34,395 1.25%/4/ (0.29)%/4/ 80.23%
--------------------------------------------------------------------------------------------------------------------------
- (1.22)/10/ (1.22) 11.82 (14.17)% 25,037 1.25%/4/ (0.45)%/4/ 69.72%
--------------------------------------------------------------------------------------------------------------------------
- (0.05) (0.05) 13.80 17.27% 2,448 1.26%/4/ (0.59)%/4/ 72.08%
--------------------------------------------------------------------------------------------------------------------------
- (0.27) (0.27) 16.49 21.78%/2/ 4,237 1.28%/3/,/4/ (0.06)%/3/,/4/ 40.05%/2/
- - - 17.35 (20.88)%/2/ 533 1.61%/3/,/5/ (1.10)%/3/,/5/ 31.00%/2/
(0.04) (0.62) (0.66) 15.42 63.52%/2/ 9,036 1.99%/3/,/6/ (0.36)%/3/,/6/ 283.67%/2/
--------------------------------------------------------------------------------------------------------------------------
- - - 16.16 4.80%/2/ 9,273 1.97%/3/,/6/ (1.69)%/3/,/6/ 64.44%/2/
--------------------------------------------------------------------------------------------------------------------------
- (2.75) (2.75) 17.47 29.78% 16,793 1.95%/6/ (1.45)%/6/ 158.39%
--------------------------------------------------------------------------------------------------------------------------
- (1.67) (1.67) 12.38 (21.71)% 12,419 1.99%/6/ (1.63)%/6/ 135.61%
--------------------------------------------------------------------------------------------------------------------------
- (0.03) (0.03) 21.80 76.54% 21,988 2.01%/6/ (1.43)%/6/ 200.09%
--------------------------------------------------------------------------------------------------------------------------
- (6.13) (6.13) 30.28 81.55%/2/ 40,097 1.94%/3/,/6/ (0.52)%/3/,/6/ 231.39%/2/
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
6 Without fees waived, the ratio of net expenses to average
net assets for the period ended April 30, 2000 and for the
fiscal years ended October 31, 1999, 1998, 1997, 1996 and
for the period ended June 30, 1996 would have been 1.94%,
2.02%, 2.06%, 2.03%, 2.04%, 2.22%, respectively; and the
ratio of net investment income (loss) to average net assets
for the period ended April 30, 2000 and for the fiscal years
ended October 31, 1999, 1998, 1997, 1996 and the period
ended June 30, 1996 would have been (0.52)%, (1.44)%,
(1.70)%, (1.53)%, (1.76)%, (0.59)%, respectively.
7 Net investment income (loss) per share is calculated using
ending balances prior to consideration of adjustments for
permanent book and tax differences.
8 Net investment income (loss) per share represents net
investment income divided by the average shares outstanding
throughout the period.
9 Portfolio turnover is calculated on the basis of the Fund as
a whole without distinguishing between the classes of shares
issued.
10 Includes distribution in excess of net capital gains of
$0.03 per share for the period ended November 30, 1998.
Includes distribution in excess of net investment income of
$0.01 per share for the period ended November 30. 1996.
............................................................................ 153
<PAGE>
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--------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Funds' Additional
Statement incorporated herein by reference, in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Funds
or their Distributor. This Prospectus does not constitute an offering by the
Funds or by their Distributor in any jurisdiction in which such offering may
not lawfully be made.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," "500,"
"S&P SmallCap 600 Index", "S&P MidCap 400 Index", "Standard & Poor's MidCap 400
Index", "S&P SmallCap 600" and "Standard & Poor's SmallCap 600" are trademarks
of The McGraw Hill Companies, Inc. and have been licensed for use by Firstar
Funds. The Equity Index Fund, MidCap Index Fund and Small Cap Index Fund are
not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard &
Poor's makes no representation regarding the advisability of investing in the
Equity Index Fund, MidCap Index Fund or Small Cap Index Fund.
The Lehman Brothers 1-3 Year Government/Credit Bond Index, the Lehman Brothers
Intermediate Government/Credit Bond Index and the Lehman Brothers
Government/Credit Bond Index are trademarks of Lehman Brothers. The Fund, its
Adviser and the Administrator are not affiliated in any way with Lehman
Brothers. Inclusion of a security in the bond index in no way implies an
opinion by Lehman Brothers as to its attractiveness or appropriateness as an
investment. Lehman Brothers' publication of the bond index is not made in
connection with any sale or offer for sale of securities or any solicitations
of orders for the purchase of securities.
................................................................................
154
<PAGE>
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--------------------------------------------------------------------------------
For More Information
Annual/Semiannual Reports
Additional information about the Funds' performance and investments is
available in the Funds' annual and semi-annual reports to shareholders. In the
Funds' annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the Funds' performance during
its last fiscal year.
Statement of Additional Information
Additional information about the Funds and their policies is also available in
the Funds' Statement of Additional Information ("Additional Statement"). The
Additional Statement is incorporated by reference into this Prospectus (and is
legally considered part of this Prospectus).
The Funds' annual and semi-annual reports and the Additional Statement are
available free upon request by calling Firstar Funds at 1-800-677-FUND.
To obtain other information and for shareholder inquiries:
By telephone - call 1-800-677-FUND
By mail - Firstar Funds
615 East Michigan Street
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
By e-mail - [email protected]
On the Internet - Text only version of the Funds' documents are located online
and may be downloaded from: SEC - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's Public
Reference Room in Washington, D.C. You may also obtain copies of Fund documents
by paying a duplicating fee and sending an electronic request at the following
e-mail address at: [email protected]., or by sending your request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C. 20549-
0102. Information on the operation of the public reference room may be obtained
by calling the SEC at 1-202-942-8090.
The Fund's Investment Company Act File Number is 811-5380.
................................................................................
<PAGE>
Prospectus
December 11, 2000
MONEY MARKET FUNDS
Institutional Money Market Fund
Money Market Fund
Tax-Exempt Money Market Fund
Ohio Tax-Exempt Money Market Fund
U.S. Government Money Market Fund
U.S. Treasury Money Market Fund
As with all mutual funds, the Securities and Exchange
Commission has not approved or disapproved any shares
of these funds or determined if this prospectus is
truthful or complete. Anyone who tells you otherwise is
committing a criminal offense.
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Table of Contents
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<TABLE>
<S> <C>
Money Market Fund and
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Institutional Money Market Fund 1
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Tax-Exempt Money Market Fund 4
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Ohio Tax-Exempt Money Market Fund 7
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U.S. Government Money Market Fund 12
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U.S. Treasury Money Market Fund 14
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Types of Investment Risk 17
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Investing With Firstar Funds 21
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Share Classes Available 21
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Purchasing Shares 21
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Redeeming Shares 25
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Exchanging Shares 27
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Additional Shareholder Services 28
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Additional Information 29
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Dividends, Capital Gains Distributions and Taxes 29
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Management of the Funds 30
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Net Asset Value and Days of Operation 31
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Appendix 32
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Financial Highlights 32
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</TABLE>
An investment in the Funds is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Although each money market fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Funds.
Learn about each Fund's Objective, Principal Investment Strategies, Principal
Risks, Performance and Expenses.
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Money Market Fund and Institutional Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Money Market Fund and the Institutional Money
Market Fund is to provide a high level of taxable current income consistent
with liquidity, the preservation of capital and a stable net asset value. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
Each Fund invests principally in short-term, high quality, dollar-denominated
money market debt obligations generally maturing in 397 days or less. These
obligations may be issued by entities including domestic and foreign
corporations, banks and other financial institutions and other types of
entities or by investment companies, or they may be issued or guaranteed by a
U.S. or foreign government, agency, instrumentality or political subdivision.
Each Fund will acquire only securities which are rated in the highest short-
term rating category by at least two rating agencies (or by the only rating
agency providing a rating), or are issued or guaranteed by, or otherwise
provide the right to demand payment from, entities with those ratings. If the
securities are unrated, they must be of comparable quality, as determined at
the time of acquisition.
Each Fund maintains an average maturity of 90 days or less.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Funds are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Long-term fixed-income securities will
normally have more price volatility because of this risk than short-term
securities.
An investment in the Funds is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although each Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Funds.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in a Fund by showing changes in the performance of a Fund's shares
from year to year and the average annual returns of each Fund's shares. The bar
charts and performance tables assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If fee waivers were not in place, a
Fund's performance would be reduced.
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[GRAPH]
Year-by-year total return as of 12/31 each year (%)
Money Market Institutional Money Market
90 8.05 0
91 5.87 0
92 3.42 3.58
93 2.67 2.90
94 3.84 4.08
95 5.54 5.81
96 5.00 5.26
97 5.14 5.39
98 5.14 5.38
99 4.57 4.94
The total return for shares of the Money Market Fund and Institutional Money
Market Fund for the nine-month period ended September 30, 2000 was 4.23% and
4.52%, respectively.
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<TABLE>
<CAPTION>
Money Market Fund Institutional Money Market Fund
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Best Quarter: Q 2 '89 2.33% Q 2 '95 1.46%
Worst Quarter: Q 2 '93 0.64% Q 2 '93 0.70%
</TABLE>
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Average Annual Total Return as of 12/31/99
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 10 Years (inception date)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Fund 4.57% 5.07% 4.91% --
Institutional Money Market Fund 4.94% 5.35% -- 4.72%
(April 26, 1991)
</TABLE>
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The 7-day yield for the period ended on 12/31/99 for the Money Market Fund and
the Institutional Money Market Fund was 5.30% and 5.54%, respectively, and
without giving effect to fee waivers was 5.18% and 5.29%, respectively. Figures
reflect past performance. Yields will vary. You may call 1-800-677-FUND to
obtain the current 7-day yield of the Money Market Fund and the Institutional
Money Market Fund.
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Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Money Market Fund and Institutional Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Money Money
Market Fund Market Fund
---------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None/1/ None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None
Redemption Fees None/2/ None/2/
Exchange Fees None None
</TABLE>
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Money Money
Market Fund Market Fund
----------------------------------------------------------------------------
<S> <C> <C>
Management Fees (before waivers)/3/ 0.50% 0.49%
Distribution and Service (12b-1) Fees 0.01%/4/ 0.00%
Other Expenses (before waivers)/5/ 0.51% 0.36%
--------- -------
Total Annual Fund Operating Expenses (before
waivers) 1.02% 0.85%
Fee Waivers and Expense Reimbursements/6/ (0.23)% (0.46)%
--------- -------
Net Annual Fund Operating Expenses/6/ 0.79% 0.39%
========= =======
</TABLE>
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1 A contingent deferred sales charge may be payable upon redemption of shares
of the Money Market Fund which were acquired upon exchange for Retail B
Shares.
2 A fee of $12.00 is charged for each wire redemption for the Money Market Fund
and a fee of $15.00 is charged for each non-systematic withdrawal from a
Retirement Account for which Firstar Bank, N.A. is custodian.
3 As a result of fee waivers, the current management fees of the Money Market
Fund and the Institutional Money Market Fund are 0.43% and 0.28%,
respectively, of each Fund's average daily net assets.
4 12b-1 fees after waivers currently are 0.01% of the average daily net assets
of the shares of the Money Market Fund. The maximum 12b-1 fee applicable to
this Fund is 0.25%.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Funds' Shares. As a result of fee waivers and/or expense
reimbursements, Other Expenses of the Money Market Fund and the Institutional
Money Market Fund currently are 0.35% and 0.11%, respectively, of each Fund's
average daily net assets.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for shares of the Money Market Fund and Institutional
Money Market Fund until October 31, 2001, so that Net Annual Fund Operating
Expenses for the Money Market Fund and the Institutional Money Market Fund
will be no more than 0.79% and 0.39%, respectively, of each Fund's average
daily net assets for the current fiscal year. These fee waivers and expense
reimbursements may be terminated at any time after October 31, 2001 at the
discretion of the service providers.
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Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
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<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Fund $81 $353 $646 $1,481
Institutional Money Market Fund 40 230 435 1,028
</TABLE>
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Tax-Exempt Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Tax-Exempt Money Market Fund is to provide a
high level of current income exempt from federal income taxes consistent with
liquidity, the preservation of capital and a stable net asset value. This
investment objective may be changed by the Board of Directors without approval
of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The Fund invests principally in a diversified portfolio of dollar-denominated
debt obligations ("municipal obligations") issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their authorities, agencies, instrumentalities and political subdivisions. The
Fund will acquire only securities which are rated in the highest short-term
rating category by at least two rating agencies (or by the only rating agency
providing a rating), or are issued or guaranteed by, or otherwise provide the
right to demand payment from, entities with those ratings. If the security is
unrated, it must be of comparable quality to securities with those ratings, as
determined at the time of acquisition. During normal market conditions, the
Fund will invest at least 80% of its net assets in municipal obligations which
are exempt from federal income taxes with remaining maturities of 13 months or
less. (Securities which are subject to demand features and certain U.S.
government obligations may have longer maturities). The Fund maintains an
average portfolio maturity of 90 days or less.
The two principal classifications of municipal obligations which the Tax-Exempt
Money Market Fund invests in are:
General Obligation Revenue Securities
Securities Revenue securities are payable only from the
General obligation revenues derived from a particular facility or
securities are secured class of facilities or, in some cases, from the
by the issuer's pledge proceeds of a special excise tax or other
of its full faith, specific revenue source such as the issuer of the
credit and taxing power facility being financed.
for the payment of
principal and interest.
Municipal obligations purchased by the Fund may include variable and floating
rate instruments which are instruments with interest rates that are adjusted
either on a schedule or when an index or benchmark changes. While there may be
no active secondary market with respect to a particular variable or floating
rate demand instrument, the Fund may demand payment in full of the principal
and interest.
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Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk and interest
rate risk. Credit risk is the risk that an issuer of fixed income securities
may default on its obligation to pay interest and repay principal. Interest
rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value. Long-term fixed-income securities will
normally have more price volatility because of this risk than short-term
securities.
Municipal obligations which the Fund purchases may be backed by letters of
credit issued by banks and other financial institutions. Adverse developments
affecting banks could have a negative effect on the Fund's portfolio
securities.
The Fund may invest more than 25% of its total assets in municipal obligations
issued by entities located in the same state and the interest on which is paid
solely from revenues of similar projects. As a result, changes in economic,
business or political conditions relating to a particular state or types of
projects may have a disproportionate impact on the Fund's share price.
The Fund may acquire municipal lease obligations which are issued by a state or
local government or authority to acquire land and a wide variety of equipment
and facilities. 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.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A Shares from year to year and the average annual returns of the Fund's
Retail A Shares. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, a Fund's performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
90 5.48
91 4.24
92 2.64
93 2.06
94 2.49
95 3.44
96 3.06
97 3.13
98 2.97
99 2.58
The Tax-Exempt Money Market Fund's total return for Retail A Shares for the
nine-month period ending September 30, 2000 was 2.52%.
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<TABLE>
<S> <C> <C>
Best Quarter: Q 2 '89 1.58%
Worst Quarter: Q 1 '94 0.50%
</TABLE>
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Average Annual Total Return as of 12/31/1999 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1
Year 5 Years 10 Years
------------------------------------------------------
<S> <C> <C> <C>
Tax-Exempt Money Market Fund -
Retail A Shares 2.58% 3.03% 3.20%
</TABLE>
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The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
Tax-Exempt Money Market Fund was 3.66% and without giving effect to fee waivers
was 3.66%. Figures reflect past performance. Yields will vary. You may call 1-
800-677-FUND to obtain the current 7-day yield of Retail A Shares of the Tax-
Exempt Money Market Fund.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold
Retail A Shares of the Tax-Exempt Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/2/
Exchange Fees None
</TABLE>
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Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
---------------------------------------------------------
<S> <C>
Management Fees 0.50%
Distribution and Service (12b-1) Fees (before
waivers)/3/ 0.00%
Other Expenses (before waivers)/4/ 0.43%
-------
Total Annual Fund Operating Expenses (before
waivers) 0.93%
Fee Waivers and Expense Reimbusements/5/ (0.14)%
-------
Net Annual Fund Operating Expenses/5/ 0.79%
=======
</TABLE>
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1 A contingent deferred sales charge may be payable upon redemption of Retail A
Shares of the Tax-Exempt Money Market Fund which were acquired upon exchange
for Retail B Shares.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.,
is custodian.
3 The Fund does not intend to pay 12b-1 fees for the current fiscal year. The
maximum 12b-1 fee applicable to this Fund is 0.25%.
4 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the Tax-Exempt Money Market Fund
currently are 0.29% of the Fund's average daily net assets.
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6
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5 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares of the Tax-Exempt Money Market Fund
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 0.79% of the Fund's average daily net assets for the current fiscal
year. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2001 at the discretion of the service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in the shares of the Fund for the time periods
indicated, reinvest all of your dividends and distributions, and then redeem
all of your shares at the end of those periods. The example also assumes that
your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money Market Fund -
Retail A Shares $81 $336 $611 $1,397
</TABLE>
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Ohio Tax-Exempt Money Market Fund
Objective
[GRAPHIC]
The investment objective of the Ohio Tax-Exempt Money Market Fund is to provide
current income exempt from federal income tax and the personal income taxes
imposed by the state of Ohio and Ohio municipalities consistent with stability
of principal. This investment objective may bechanged by the Board of Directors
without approval of Shareholders, although no change is currently anticipated.
Examples of Ohio Municipal Securities
.tax and revenue anticipation notes issued to finance working capital needs in
anticipation of receiving taxes or other revenues
.bond anticipation notes that are intended to be refinanced through a later
issuance of longer term bonds
.municipal commercial paper and other short-term notes
.variable rate demand notes
.municipal bonds and leases
.participation interests in any of the above
Principal Investment Strategies
[GRAPHIC]
The Fund intends to achieve its investment goal by investing its assets so that
at least 80% of its annual interest income is exempt from federal income tax
and not subject to the alternative minimum tax and the personal income taxes
imposed by the state of Ohio and Ohio municipalities. In addition, the Fund
will invest its assets so that under normal circumstances, at least 65% of the
value of its total assets will be invested in Ohio municipal securities exempt
from federal regular income tax and Ohio State income tax. The Fund's portfolio
consists of municipal securities maturing in 397 days or less. The average
maturity, however, of all the securities in the Fund's portfolio will be 90
days or less on a dollar-weighted basis. The Fund may invest more than 25% of
its total assets in securities credit - enhanced by banks. Credit -enhanced
securities are investments backed by a guaranty, a letter of credit or
insurance.
The municipal securities in which the Fund invests are primarily debt
obligations issued by or on behalf of Ohio and its political subdivisions and
financing authorities and obligations of other states, territories and
possessions of the United States and any political subdivision or financing
authority of any of these. The income from such obligations must be exempt from
federal income tax (including alternative minimum tax) and the personal income
taxes imposed by the state of Ohio and its political subdivisions.
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Participation Interests
The Fund may purchase interests in municipal securities from financial
institutions such as commercial and investment banks, savings associations and
insurance companies. Financial institutions provide guarantees, letters of
credit or insurance to the Fund on the underlying municipal securities.
Municipal Leases
The Fund may also invest in municipal leases, which are obligations issued by
state and local governments to finance the acquisition of equipment and
facilities. Municipal leases may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation interest.
Municipal leases may be considered illiquid.
Variable Rate Demand Notes
The Fund may invest in variable rate demand notes, which are obligations with
variable or floating interest rates. The notes provide the Fund with the right
to tender the security for repurchase at its stated principal amount plus
accrued interest. These securities usually bear interest at a rate that allows
the securities to trade at par. Most variable rate demand notes allow the fund
to demand the repurchase of the security on not more than 7 days' notice. Other
notes only permit the Fund to tender the security at the time of each interest
rate adjustment or at other fixed intervals. The Fund treats variable rate
demand notes as maturing on the later of the date of the next interest
adjustment or the date on which the Fund may next tender the security for
repurchase.
Temporary Investments
From time to time, the Fund may invest in tax-exempt or taxable short-term
temporary investments when the Fund's Adviser determines that market conditions
call for a temporary defensive posture. During such times, it is possible for
the Fund not to reach its investment objective. Although the Fund is permitted
to make taxable temporary investments, the Adviser currently has no intention
to generate income subject to federal regular income tax.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that dividends
on your investment will vary. The Fund is subject to credit risk, interest rate
risk and tax risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal;
to the extent the Fund invests in credit enhanced securities, it is especially
susceptible to credit risk. The ability of a state or local government issuer
to make payments can be affected by many factors, including economic
conditions, the flow of tax revenues and changes in the level of federal, state
or local aid. Some municipal securities are payable only from limited revenue
sources or by private entities. Interest rate risk is the risk that, when
interest rates increase, fixed income securities, including municipal
securities, will decline in value. Tax risk is the risk that the Fund may be
more adversely impacted by changes in tax rates and policies than other funds.
Municipal obligations which the Fund purchases may be backed by letters of
credit issued by banks and other financial institutions. Adverse developments
affecting banks could have a negative effect on the Fund's portfolio
securities.
The Fund is also subject to Ohio state-specific risks, as it may invest at
least 65% of its total assets in municipal obligations issued by the state or
entities located in the state of Ohio. Ohio's economy is largely composed of
manufacturing, which is concentrated in the automobile sector and other durable
goods. The
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8
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exposure to these industries, particularly the auto sector, leaves Ohio
vulnerable to an economic slowdown associated with business cycles.
Furthermore, population growth, as in many states around the Great Lakes, has
been stagnant.
The Fund's concentration in securities issued by Ohio and its political
subdivisions provides a greater level of risk than a fund whose assets are
diversified across numerous states and municipal issuers. The ability of Ohio
or its local issuers to meet their obligations will depend on, among other
factors:
1. the availability of tax and other revenues;
2. economic, political and demographic conditions within the state or region of
the state; and
3. the underlying fiscal condition of the state, its counties, municipalities
and school, districts.
See the Additional Statement for additional information regarding Ohio state-
specific risks.
Investing in the Fund has added risks because the Fund is a non-diversified
fund under the Investment Company Act of 1940, as amended (the "1940 Act"),
subjecting the Fund to non-diversification risks. Compared with other mutual
funds, this Fund may invest a greater percentage of its assets in a more
limited number of issues concentrated in one state which, as a result, can
increase the Fund's volatility. The value of the Fund's securities can be
impacted by economic or political developments affecting certain securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A Shares from year to year and the average annual returns of the Fund's
Retail A Shares. The Fund began operations on December 2, 1997 as the Firstar
Stellar Ohio Tax-Free Money Market Fund, a separate portfolio (a "Predecessor
Stellar Fund") of Firstar Stellar Funds. On December 11, 2000, the Predecessor
Stellar Fund was reorganized as a new portfolio of Firstar Funds, Inc. The
performance set forth below is based on the performance of a corresponding
class of the Predecessor Stellar Fund.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, a Fund's performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
90
91
92
93
94
95
96
97
98 2.85
99 2.69
.............................................................................. 9
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The Ohio Tax-Exempt Money Market Fund's total return for Retail A Shares for
the nine-month period ending September 30, 2000 was 2.49%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 2 '98 0.78%
Worst Quarter: Q 2 '99 0.62%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Since inception
Year 5 Years 10 Years (inception date)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ohio Tax-Exempt Money Market Fund -
Retail A Shares 2.69% -- -- 2.77%
(December 2, 1997)
</TABLE>
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The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
Ohio Tax-Exempt Money Market Fund was 3.52% and without giving effect to fee
waivers was 3.20%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-FUND to obtain the current 7-day yield of Retail A Shares of the
Ohio Tax-Exempt Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A Shares of the Ohio Tax-Exempt Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/2/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
................................................................................
10
<PAGE>
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[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
----------------------------------------------------------
<S> <C>
Management Fees (before fee waivers)/3/ 0.50%
Distribution and Service (12b-1) Fees/4/ 0.00%
Other Expenses (before fee waivers)/5/ 0.63%
-------
Total Annual Fund Operating Expenses (before fee
waivers) 1.13%
Fee Waivers and Expense Reimbursements/6/ (0.34)%
-------
Net Annual Fund Operating Expenses/6/ 0.79%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge may be payable upon redemption of Retail
A Shares of the Ohio Tax-Exempt Money Market Fund which were acquired upon
exchange for Retail B Shares.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the Ohio Tax-
Exempt Money Market fund is 0.34% of the Fund's average daily net assets.
4 The Fund does not intend to pay 12b-1 fees for the current fiscal year. The
maximum 12b-1 fee applicable to this Fund is 0.25%.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the Ohio Tax-Exempt Money Market
Fund currently are 0.45% of the Fund's average daily net assets.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares of the Ohio Tax-Exempt Money Market
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than 0.79% of the Fund's average daily net assets for the current
fiscal year. These fee waivers and expense reimbursements may be terminated
at any time after October 31, 2001 at the discretion of the service
providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ohio Tax-Exempt Money Market Fund -Retail
A Shares $81 $379 $699 $1,606
</TABLE>
--------------------------------------------------------------------------------
............................................................................. 11
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
U.S. Government Money Market Fund
Objective
[GRAPHIC]
The investment objective of the U.S. Government Money Market Fund is to provide
a high level of taxable current income consistent with liquidity, the
preservation of capital and a stable net asset value (irrespective of state
income tax considerations). This investment objective may be changed by the
Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The U.S. Government Money Market Fund invests in short term dollar-denominated
debt obligations generally maturing in 397 days or less, issued or guaranteed
as to principal and interest by the U.S. government, its agencies or
instrumentalities. Under normal market conditions, the Fund intends to invest
at least 65% of its total assets in these obligations. The Fund also invests in
variable and floating rate instruments and repurchase agreements.
The Fund maintains an average maturity of 90 days or less.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that the
dividends on your investment will vary. The Fund is subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value.
Even though the U.S. Government Money Market Fund purchases mostly U.S.
government obligations, shares of the Fund are not themselves issued or
guaranteed by any government agency.
There can be no assurance that the U.S. government will provide financial
support to U.S. government-sponsored agencies or instrumentalities where it is
not obligated to do so by law.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A Shares from year to year and the average annual returns of the Fund's
Retail A Shares. The bar chart and performance table assume reinvestment of
dividends and distributions. Remember, past performance is not indicative of
future results. Performance reflects fee waivers in effect. If these fee
waivers were not in place, the Fund's performance would be reduced.
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
90 7.71
91 5.56
92 3.30
93 2.61
94 3.76
95 5.39
96 4.92
97 4.97
98 4.95
99 4.41
................................................................................
12
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
The U.S. Government Money Market Fund's total return for Retail A Shares for
the nine-month period ending September 30, 2000 was 4.12%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q2 '89 2.24%
Worst Quarter: Q2 '93 0.63%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Money Market Fund -
Retail A Shares 4.41% 4.92% 4.75%
</TABLE>
--------------------------------------------------------------------------------
The 7-day yield for the period ended on 12/31/99 for Retail A Shares of the
U.S. Government Money Market Fund was 4.66%, and without giving effect to fee
waivers was 4.66%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-FUND to obtain the current 7-day yield of Retail A Shares the
U.S. Government Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A Shares of the U.S. Government Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/2/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
---------------------------------------------------------
<S> <C>
Management Fees (before waivers)/3/ 0.50%
Distribution and Service (12b-1) Fees (before
waivers)/4/ 0.00%
Other Expenses (before waivers)/5/ 0.66%
-------
Total Annual Fund Operating Expenses (before
waivers) 1.16%
Fee Waivers and Expense Reimbursements/6/ (0.37)%
-------
Net Annual Fund Operating Expenses/6/ 0.79%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge may be payable upon redemption of Retail
A Shares of the U.S. Government Money Market Fund which were acquired upon
exchange for Retail B Shares.
............................................................................. 13
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 As a result of fee waivers, the current management fee of the U.S.
Government Money Market Fund is 0.31% of the Fund's average daily net
assets.
4 The Fund does not intend to pay 12b-1 fees for the current fiscal year. The
maximum 12b-1 fee applicable to this Fund is 0.25%.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the U.S. Government Money Market
Fund currently are 0.48% of the Fund's average daily net assets.
6 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares of the U.S. Government Money Market
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than of the 0.79% of the Fund's average daily net assets for the
current fiscal year. These fee waivers and expense reimbursements may be
terminated at any time after October 31, 2001 at the discretion of the
service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Money Market Fund -
Retail A Shares $81 $385 $712 $1,637
</TABLE>
--------------------------------------------------------------------------------
U.S. Treasury Money Market Fund
Objective
[GRAPHIC]
The investment objective of the U.S. Treasury Money Market Fund is to seek
stability of principal and current income consistent with stability of
principal. This investment objective may be changed by the Board of Directors
without approval of Shareholders, although no change is currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The U.S. Treasury Money Market Fund invests exclusively in short-term U.S.
Treasury obligations that have a maturity of 397 days or less from the date of
purchase. The Fund may purchase repurchase agreements collateralized by U.S.
Treasury obligations. The Fund intends to invest in the agreements that provide
for repurchase within 397 days from the date of acquisition. The average
maturity of these securities is 120 days or less. The average maturity,
however, of all the securities in the Fund's portfolio will be 90 days or less
on a dollar-weighted basis. Securities subject to repurchase agreements are
marked to market on a daily basis. U.S. Treasury obligations are issued by the
U.S. government and are fully guaranteed as to principal and interest by the
United States government. The Fund may also retain assets in cash and may
purchase U.S. Treasury obligations on a when-issued or delayed delivery basis.
................................................................................
14
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The rate of income on Fund shares will vary from day to day so that the
dividends on your investment will vary. The Fund is subject to credit risk and
interest rate risk. Credit risk is the risk that an issuer of fixed income
securities may default on its obligation to pay interest and repay principal.
Interest rate risk is the risk that, when interest rates increase, fixed income
securities will decline in value.
Even though the U.S. Treasury Money Market Fund purchases mostly U.S.
government obligations, shares of the Fund are not themselves issued or
guaranteed by any government agency.
The Fund is subject to when-issued and delayed delivery transaction risks.
When-issued and delayed delivery transactions involve securities with payment
and delivery scheduled for a future time. One of the risks of investing in
when-issued or delayed delivery transactions is if the seller chooses not to
complete the transaction, the Fund could miss an advantageous price or yield.
The Fund may enter into transactions to sell its purchase commitments to third
parties at current market rates and simultaneously acquire other commitments to
purchase similar securities at later dates. The Fund may realize short-term
profits or losses on the sale of these kinds of commitments.
The Fund is also subject to repurchase agreement risk. Repurchase agreements
are arrangements in which banks, broker/dealers and other financial
institutions sell securities to the Fund and agree to repurchase them at a
certain time and price within one year. Repurchase agreement risk is the risk
that the seller may not repurchase the securities from the Fund, which may
result in the Fund selling the security for less than the agreed upon price.
Another risk of repurchase agreements is that the seller may default or file
for bankruptcy. That could mean the Fund might have to wait through lengthy
court actions before selling the securities.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Bar Chart and Performance Table
[GRAPHIC]
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the performance of the Fund's
Retail A Shares from year to year and the average annual returns of the Fund's
Retail A Shares.
On November 27, 2000, the Mercantile Treasury Money Market Portfolio, a
portfolio of Mercantile Mutual Funds, Inc., and the Firstar Stellar Treasury
Fund, a portfolio of Firstar Stellar Funds, reorganized into the Firstar U.S.
Treasury Money Market Fund. At that time, the Firstar U.S. Treasury Money
Market Fund adopted an investment objective and certain non-fundamental
investment policies and restrictions that are substantially the same as those
of the Firstar Stellar Treasury Fund (a "Predecessor Stellar Fund"). The
performance set forth below for the U.S. Treasury Money Market Fund is based on
the performance of a corresponding class of the Firstar Stellar Treasury Fund.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Performance reflects fee waivers in effect. If these fee waivers were not in
place, the Fund's performance would be reduced.
............................................................................. 15
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
[GRAPH]
Year-by-year total return as of 12/31 each year (%) (Retail A Shares)
90 7.64
91 5.49
92 3.26
93 2.54
94 3.51
95 5.26
96 4.77
97 4.86
98 4.61
99 4.06
The U.S. Treasury Money Market Fund's total return for Retail A Shares for the
nine-month period ending September 30, 2000 was 3.81%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q 3 '90 1.89%
Worst Quarter: Q 4 '93 0.62%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Return as of 12/31/99 (Retail A Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
-----------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Money Market Fund -
Retail A Shares 4.06% 4.71% 4.59%
</TABLE>
--------------------------------------------------------------------------------
The 7-day yield for the period ended on 12/31/99 for the Retail A Shares of the
U.S. Treasury Money Market Fund was 3.98%, and without giving effect to fee
waivers was 3.98%. Figures reflect past performance. Yields will vary. You may
call 1-800-677-FUND to obtain the current 7-day yield of the U.S. Treasury
Money Market Fund.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
Retail A Shares of the U.S. Treasury Money Market Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
-----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None/1/
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None
Redemption Fees None/2/
Exchange Fees None
</TABLE>
--------------------------------------------------------------------------------
................................................................................
16
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail
A Shares
---------------------------------------------------------
<S> <C>
Management Fees 0.44%
Distribution and Service (12b-1) Fees (before
waivers)/3/ 0.15%
Other Expenses (before waivers)/4/ 0.39%
-------
Total Annual Fund Operating Expenses (before
waivers) 0.98%
Fee Waivers and Expense Reimbursements/5/ (0.04)%
-------
Net Annual Fund Operating Expenses/5/ 0.94%
=======
</TABLE>
--------------------------------------------------------------------------------
1 A contingent deferred sales charge may be payable upon redemption of Retail
A Shares of the U.S. Treasury Money Market Fund which were acquired upon
exchange for Retail B Shares.
2 A fee of $12.00 is charged for each wire redemption and $15.00 for each non-
systematic withdrawal from a Retirement Account for which Firstar Bank, N.A.
is custodian.
3 12b-1 fees after waivers currently are 0.15% of the average daily net assets
of Retail A Shares of the U.S. Treasury Money Market Fund. The maximum 12b-1
fee applicable to this Fund is 0.25%.
4 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
the payment of a shareholder servicing fee to institutions under a service
plan (described below under the heading "Investing with Firstar Funds -
Shareholder Organizations") equal to up to 0.25% of the average daily net
assets of the Fund's Retail A Shares. As a result of fee waivers and/or
expense reimbursements, Other Expenses of the U.S. Treasury Money Market
Fund currently are 0.35% of the Fund's average daily net assets.
5 Certain service providers have contractually agreed to waive fees and
reimburse expenses for Retail A Shares of the U.S. Treasury Money Market
Fund until October 31, 2001, so that Net Annual Fund Operating Expenses will
be no more than of the 0.94% of the Fund's average daily net assets for the
current fiscal year. The fee waivers and expense reimbursements may be
terminated at any time after October 31, 2001 at the discretion of the
service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in shares of the Fund for the time periods indicated,
reinvest all of your dividends and distributions, and then redeem all of your
shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Money Market Fund -
Retail A Shares $76 $330 $582 $1,305
</TABLE>
--------------------------------------------------------------------------------
Types of Investment Risk
The principal risks of investing in each Fund are described previously in this
Prospectus. The following list provides more detail about some of those risks,
along with information on additional types of risks which may apply to the
Funds. Risks associated with particular types of investments each Fund makes
are also described in this section and in the Additional Statement referred to
on the back page.
Complete Investment Program - All Funds
An investment in a single Fund, by itself, does not constitute a complete
investment plan.
General Risks of Investing in each of the Funds
[GRAPHIC]
Credit Risk - All Funds
An issuer of fixed-income securities may default on its obligation to pay
interest and repay principal. Also, changes in the financial strength of an
issuer or changes in the credit rating of a security may affect its value.
Credit risk includes "counterparty risk" - the risk that the other party to a
transaction will not fulfill its contractual obligation. This risk applies, for
example, to repurchase agreements into which each Fund may enter.
............................................................................. 17
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Derivatives Risk - All Funds
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 a Fund's investments in structured securities and other derivative
instruments, which may be leveraged.
Extension Risk - All Funds
This is the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage- or asset-backed security) later
than expected. This may happen when there is a rise in interest rates. These
events may lengthen the duration and potentially reduce the value of these
securities.
Interest Rate Risk - All Funds
When interest rates increase, fixed-income securities tend to decline in value
and when interest rates decrease, fixed-income securities tend to increase in
value. A change in interest rates could cause the value of your investment to
change. Fixed-income securities with longer maturities are more susceptible to
interest rate fluctuations than those with shorter maturities. Changes in
interest rates may also extend or shorten the duration of certain types of
instruments, such as asset-backed securities, thereby affecting their value and
the return on your investment.
Liquidity Risk - All Funds
Certain securities may be difficult or impossible to sell at the time and price
that the Fund would like. A Fund may have to lower the price, sell other
securities instead or forego an investment opportunity, any of which could have
a negative effect on fund management or performance. This risk applies, for
example, to: variable and floating rate demand notes, variable amount demand
securities and restricted securities which the Funds may purchase and short-
term funding agreements which the Money Market Fund may purchase. Illiquid
securities also include repurchase agreements and time deposits with
notice/termination dates of greater than seven days and other securities traded
in the U.S. but are subject to trading restrictions because they are not
registered under the Securities Act of 1933. There may be no active secondary
market for these securities. Each Fund may invest up to 10% of its net assets
at the time of purchase in securities that are illiquid. A domestically traded
security which is not registered under the Securities Act of 1933 will not be
considered illiquid if the Adviser determines an adequate investment trading
market exists for that security. Because illiquid and restricted securities may
be difficult to sell at an acceptable price, they may be subject to greater
volatility and may result in a loss to a Fund.
Management Risk - All Funds
A strategy, which the Adviser uses, may fail to produce the intended results.
The particular securities and types of securities a Fund holds may underperform
other securities and types of securities. There can be no assurance a Fund will
achieve its investment objective. The Adviser may not change certain investment
practices of a Fund without a shareholder vote. The policies of each Fund,
which may not be changed without a shareholder vote are described in the
Additional Statement.
Market Risk - All Funds
The value of the securities in which a Fund invests may go up or down in
response to the prospects of individual companies and/or general economic
conditions. Price changes may be temporary or last for extended periods.
................................................................................
18
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Nonprincipal Strategy Risks - All Funds
This Prospectus describes each Fund's principal investment strategies, and the
types of securities in which each Fund principally invests. Each of the Funds
may, from time to time, make other types of investments and pursue other
investment strategies in support of its overall investment goal. These
supplemental investment strategies - and the risks involved - are described in
detail in the Additional Statement, which is referred to on the back cover of
this Prospectus.
Portfolio Turnover Risk - All Funds
The Adviser will not consider the portfolio turnover rate a limiting factor in
making investment decisions for a Fund. The Funds may have high portfolio
turnover, but brokerage commissions are not normally paid on Money Market
instruments. Portfolio turnover is not expected to have a material effect on
the Funds' net investment income.
Prepayment Risk - All Funds
This is the risk that an issuer will exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage- or asset-backed security)
earlier than expected. This may happen when there is a decline in interest
rates. These events may make a Fund unable to recoup its initial investment and
may result in reduced yields.
Temporary Investment Risk - All Funds
Each Fund may, for temporary defensive purposes, invest a certain percentage of
its total assets without limitation in cash or various short-term instruments.
This may occur, for example, when a Fund is attempting to respond to adverse
market, economic, political or other conditions. In particular, the U.S.
Treasury Money Market Fund may temporarily hold cash; the Tax-Exempt Money
Market Fund and Ohio Tax-Exempt Money Market Fund may from time to time hold
uninvested cash reserves or invest in short-term taxable money market
obligations (taxable obligations purchased by the Fund normally will not exceed
20% of total assets at the time of purchase). When a Fund's assets are invested
in these instruments, the Fund may not be achieving its investment objective.
Valuation Risk - All Funds
This is a risk a Fund has valued certain securities at a higher or lower price
than the Fund can sell them.
Additional Risks Which Apply to Investment in Certain of the Funds
[GRAPHIC]
Foreign Risks - Institutional Money Market Fund, Money Market Fund and Tax-
Exempt Money Market Fund - To The Extent They Invest In Foreign Securities
When a Fund invests in foreign securities, it will be subject to special risks
not typically associated with domestic issuers resulting from less government
regulation, less public information and less economic, political and social
stability. Foreign securities, and in particular foreign debt securities, are
sensitive to changes in interest rates. In addition, investment in the
securities of foreign governments involves the risk that foreign governments
may default on their obligations or may otherwise not respect the integrity of
their debt. A Fund, which invests in foreign securities, will also be subject
to the diplomatic risk that an adverse change in the diplomatic relations
between the U.S. and another country might reduce the value or liquidity of
investments. Future political and economic developments, the possible
imposition of withholding taxes on dividend income, the possible seizure or
nationalization of foreign holdings, the possible establishment of exchange
controls or freezes on the convertibility of currency, or the adoption of other
governmental restrictions might adversely affect an investment in foreign
securities. Additionally, foreign banks and foreign branches of domestic banks
may be subject to less stringent reserve requirements, and to different
accounting, auditing and recordkeeping requirements.
Investment in foreign securities also involves higher costs than investment in
U.S. securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments.
............................................................................. 19
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
European Currency Unification - Institutional Money Market Fund, Money Market
Fund and Tax-exempt Money Market Fund - to the Extent it Invests in Foreign
Securities
Many European countries have adopted a single European currency, the euro. On
January 1, 1999, the euro became legal tender for all countries participating
in the Economic and Monetary Union ("EMU"). A new European Central Bank has
been created to manage the monetary policy of the new unified region. On the
same date, the exchange rates were irrevocably fixed between the EMU member
countries. National currencies will continue to circulate until they are
replaced by euro coins and bank notes by the middle of 2002.
This change is likely to significantly impact the European capital markets in
which a Fund invests and may result in a Fund facing additional risks in
pursuing its investment objective. These risks, which include, but are not
limited to, uncertainty as to proper tax treatment of the currency conversion,
volatility of currency exchange rates as a result of the conversion,
uncertainty as to capital market reaction, conversion costs that may affect
issuer profitability and creditworthiness, and lack of participation by some
European countries, may increase the volatility of a Fund's net asset value per
share.
Tax Risk - Tax Exempt Money Market Fund, Ohio Tax-Exempt Money Market Fund and
U.S. Treasury Money Market Fund
These Funds may be more adversely impacted by changes in tax rates and policies
than the other Funds. Because interest income on municipal obligations is
normally not subject to regular federal income taxation, the attractiveness of
municipal obligations in relation to other investment alternatives is affected
by changes in federal income tax rates applicable to, or the continuing federal
income tax-exempt status of, such interest income. Any proposed or actual
changes in such rates or exempt status, therefore, can significantly affect the
demand for and supply, liquidity and marketability of municipal obligations,
which could in turn affect a Fund's ability to acquire and dispose of municipal
obligations at desirable yield and price levels.
Investment in tax-exempt securities poses additional risks. In many cases, the
Internal Revenue Service has not ruled on whether the interest received on a
tax-exempt obligation is tax-exempt, and accordingly, purchases of these
securities are based on the opinion of bond counsel to the issuers at the time
of issuance. The Funds and the Adviser rely on these opinions and will not
review the basis for them.
Securities Lending - All Funds other than the Ohio Tax-Exempt Money Market Fund
To obtain interest income, the Fund may lend its securities to broker-dealers,
banks or institutional borrowers pursuant to agreements requiring that the
loans be continuously secured by collateral equal at all times in value to at
least the market value of the securities loaned. There is the risk that, when
lending portfolio securities, the securities may not be available to the Fund
on a timely basis. Therefore, the Fund may lose the opportunity to sell the
securities at a desirable price. Additionally, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition of the
securities may be delayed pending court action.
Additional Risks Which Apply to Particular Types of Securities
[GRAPHIC]
Other Investment Companies - All Funds
The Funds may invest their cash balances in other investment companies, which
invest in high quality, short-term debt securities. A pro rata portion of the
other investment companies expenses will be borne by the Fund's shareholders.
Government Obligations - Each Money Market Fund other than the Tax-Exempt Money
Market Fund and the Ohio Tax - Exempt Money Market Fund
In addition to U.S. Treasury obligations, the Funds may invest in other
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities. No assurance can be given that the U.S. government
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will provide financial support to U.S. government-sponsored agencies or
instrumentalities when it is not obligated to do so by law.
Borrowings, Reverse Repurchase Agreements - All Funds
Each Fund may borrow money to the extent allowed (as described in the
Additional Statement) to meet shareholder redemptions from banks or through
reverse repurchase agreements. These strategies involve leveraging. If the
securities held by a Fund declines in value while these transactions are
outstanding, the net asset value of the Fund's outstanding shares will decline
in value by proportionately more than the decline in value of the securities.
In addition, reverse repurchase agreements involve the risks that the interest
income earned by 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 will decline below the price the Fund is obligated to
pay to repurchase the securities, and that the securities may not be returned
to the Fund.
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Investing With Firstar Funds
This section describes for you the procedures for opening an account and how to
buy, sell or exchange Fund shares.
Share Classes Available
The Firstar Funds offer two classes of shares in the Money Market Funds, Retail
A Shares and Institutional Shares (except that the Institutional Money Market
Fund and the Money Market Fund each offer only one class of shares), and four
classes of shares in its Non-Money Market Funds; Retail A, Retail B, Y and
Institutional (except that the Global Equity Fund offers only Y and
Institutional Shares). This prospectus offers only shares of the Institutional
Money Market Fund and Money Market Fund and Retail A Shares of the Tax-Exempt
Money Market Fund, Ohio Tax-Exempt Money Market Fund, U.S. Government Money
Market Fund and U.S. Treasury Money Market Fund. Other share classes are
subject to different fees and expenses (which affect performance), and are
entitled to different services. Information regarding those other share classes
may be obtained by calling the number on the back cover of this prospectus.
Purchasing Shares
Shares of the Funds are offered and sold on a continuous basis by the
distributor for the Funds, Quasar Distributors, LLC (the "Distributor"), an
affiliate of the Adviser. The Distributor is a registered broker-dealer with
offices at 615 East Michigan Street, Milwaukee, Wisconsin 53202.
Minimum Investments
Money Market Fund, Tax-Exempt Money Market Fund, Ohio Tax-Exempt Money Market
Fund, U.S. Government Money Market Fund and U.S. Treasury Money Market Fund
The minimum initial investment for shares in a Fund is $1,000. The minimum
subsequent investment is $50. The minimum initial investment will be waived if
you participate in the Periodic Investment Plan.
Institutional Money Market Fund
The minimum initial investment in the Institutional Money Market Fund is
$1,000,000 by an individual or combination of accounts (including a combination
of accounts purchased through one fund family having an arrangement to make
available the Institutional Money Market Fund). There is no minimum subsequent
investment.
Buying Shares
Purchase requests for a Fund received in proper form prior to the times listed
below on a business day for the Funds will generally be processed on the same
day.
.Ohio Tax-Exempt Money Market Fund - 9:00 a.m. Central time
.Money Market Fund, Tax-Exempt Money Market Fund and U.S. Government Money
Market Fund - 11:30 a.m. Central time
.U.S. Treasury Money Market Fund and Institutional Money Market Fund - 1:00
p.m. Central time
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In order for a purchase request to be processed on the same day at the times
listed above, payment must be received in immediately available funds wired to
the transfer agent by the close of business. All checks received will be
processed at that day's closing price.
Purchase requests for the Funds accompanied by a check or wire payment which
are received at or after the times listed above, will be executed the same day,
at that day's closing price provided that payment is received by the close of
regular trading hours. Orders received after 3:00 p.m. Central time and orders
for which payment is not received by the close of regular trading hours on the
New York Stock Exchange (normally 3:00 p.m. Central time) will be executed on
the next business day after receipt of both order and payment in proper form.
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Through a Shareholder Organization
[GRAPHIC]
Opening an Account
Contact your Shareholder Organization
By Mail
[GRAPHIC]
Complete an application and mail it along with a check payable to: Firstar
Funds, P.O. Box 3011, Milwaukee, WI 53201-3011.
For overnight delivery mail to:
615 E. Michigan St., Milwaukee, WI 53202
Automatically
[GRAPHIC]
Call 1-800-677-FUND to obtain a purchase application, which includes
information for a Periodic Investment Plan or ConvertiFund(R) Account.
By Wire
[GRAPHIC]
Call 1-800-677-FUND prior to sending the wire in order to obtain a confirmation
number and to ensure prompt and accurate handling of funds. Ask your bank to
transmit immediately available funds by wire in the amount of your purchase to:
Firstar Bank, N.A.
ABA # 0420-00013
Firstar Mutual Funds Services, LLC
Account # 112-952-137
for further credit to [name of Fund]
[Name/title on the account].
The Fund and its transfer agent are not responsible for the consequences of
delays resulting from the banking or Federal Reserve Wire system, or from
incomplete wiring instructions.
By Telephone Exchange
[GRAPHIC]
Call 1-800-677-FUND to exchange from another Firstar Fund account with the same
registration including name, address and taxpayer ID number.
Adding to an Account
Contact your Shareholder Organization
Make your check payable to Firstar Funds. Please include your sixteen-digit
account number on your check and mail it to the address at the left.
Complete a Periodic Investment Plan Application to automatically purchase more
shares.
Open a ConvertiFund(R) account to automatically invest proceeds from one
account to another account of the Firstar Funds.
Call 1-800-677-FUND prior to sending the wire in order to obtain a confirmation
number and to ensure prompt and accurate handling of funds. Ask your bank to
transmit immediately available funds by wire as described at the left. Please
also include your sixteen-digit account number. The Fund and its transfer agent
are not responsible for the consequences of delays resulting from the banking
or Federal Reserve Wire system, or from incomplete wiring instructions.
Call 1-800-677-FUND to exchange from another Firstar Fund account with the same
registration including name, address and taxpayer ID number.
Please Note: All checks must be drawn on a bank
located within the United States and must be
payable in U.S. dollars to Firstar Funds. A $25
fee will be imposed by the Funds' transfer agent
if any check used for investment in an account or
any Periodic Investment Plan purchase does not
clear, and the investor involved will be
responsible for any loss incurred by a Fund. Prior
to the transfer agent receiving a completed
application, investors may make an initial
investment. However, redemptions will not be paid
until the transfer agent has received the
completed application.
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Additional Information on Buying Shares
.The Funds will not accept payment in cash or third party checks for the
purchase of shares.
.Federal regulations require that each investor provide a Social Security
number or other certified taxpayer identification number upon opening or
reopening an account. The Funds reserve the right to reject applications
without such a number or an indication that a number has been applied for. If
a number has been applied for, the number must be provided and certified
within sixty days of the date of the application. Any accounts opened without
a proper number will be subject to backup withholding at a rate of 31% on all
liquidations and dividend and capital gain distributions.
.Payment for shares of a Fund in the amount of $1,000,000 or more may, at the
discretion of the Adviser, be made in the form of securities that are
permissible investments for the respective Fund.
The Funds may authorize one or more brokers and other shareholder organizations
to accept on their behalf purchase, redemption and exchange orders, and may
authorize such shareholder organizations to designate other intermediaries to
accept purchase, redemption and exchange orders on the Funds' behalf. In these
cases, a Fund will be deemed to have received an order when an authorized
shareholder organization or intermediary accepts the order, and customer orders
will be priced at the Fund's net asset value next computed after they are
accepted by a shareholder organization or intermediary. Shareholder
organizations and intermediaries will be responsible for transmitting accepted
orders to the Funds within the period agreed upon by them. Shareholders should
contact their shareholder organization or intermediaries to learn whether they
are authorized to accept orders for Funds.
It is the responsibility of shareholder organizations to transmit orders and
payments for the purchase of shares by their customers to the transfer agent on
a timely basis and to provide account statements in accordance with the
procedures previously stated.
For Owners of Institutional Money Market Fund Shares
All share purchases are effected pursuant to a customer's account at Firstar
Bank, N.A. Trust Department ("Firstar Trust") or at another chosen institution
or broker-dealer pursuant to procedures established in connection with the
requirements of the account. Confirmations of share purchases and redemptions
will be sent to Firstar Trust or the other shareholder organizations involved.
Firstar Trust and the other shareholder organizations or their nominees will
normally be the holders of record of Fund shares, and will reflect their
customers' beneficial ownership of shares in the account statements provided by
them to their customers. The exercise of voting rights and the delivery to
customers of shareholder communications from the Fund will be governed by the
customers' account agreements with Firstar Trust and the other shareholder
organizations. Investors wishing to purchase shares of the Institutional Money
Market Fund should contact their account representatives.
In the case of participants in certain employee benefit plans investing in the
Institutional Money Market Fund, purchase and redemption orders will be
processed on a particular day based on whether a service organization acting on
their behalf received the order by the close of regular trading on that day.
The Institutional Money Market Fund may authorize one or more brokers and other
shareholder organizations to accept on its behalf purchase, redemption and
exchange orders, and may authorize such shareholder organizations to designate
other intermediaries to accept purchase, redemption and exchange orders on the
Fund's behalf. In these cases, the Fund will be deemed to have received an
order when an authorized shareholder organization or intermediary accepts the
order, and customer orders will be priced at the Fund's net asset value next
computed after they are accepted by a shareholder organization or intermediary.
Shareholder organizations and intermediaries will be responsible for
transmitting accepted orders to the Fund within the period agreed upon by them.
Shareholders should contact their shareholder organization or intermediaries to
learn whether they are authorized to accept orders for the Fund.
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It is the responsibility of shareholder organizations to transmit orders and
payment for the purchase of shares by their customers to the transfer agent on
a timely basis and to provide account statements in accordance with the
procedures stated above.
Redeeming Shares
Selling Shares
Redemption requests for a Fund received by the transfer agent by phone on a
business day for the Funds prior to the times listed below generally will be
processed at those times.
.Ohio Tax-Exempt Money Market Fund - 9:00 a.m. Central time
.Money Market Fund, Tax-Exempt Money Market Fund and U.S. Government Money
Market Fund - 11:30 a.m. Central time
.U.S. Treasury Money Market Fund and Institutional Money Market Fund - 1:00
p.m. Central time
Redemption requests for the Funds received at or after the times listed above
on a business day for the Funds will be executed the same day, at that day's
closing price. Orders received after 3:00 p.m. Central time will be executed on
the next business day.
Through a Shareholder Organization
[GRAPHIC]
Contact your Shareholder Organization By Mail
By Phone
[GRAPHIC]
Call 1-800-677-FUND with your account name, sixteen digit account number and
amount of redemption (minimum $500). Redemption proceeds will only be sent to a
shareholder's address or bank account of a commercial bank located within the
United States as shown on the transfer agent's records. (Available only if
telephone redemptions have been authorized on the account application and if
there has been no change of address by telephone within the preceding 15 days.)
By Mail
[GRAPHIC]
Mail your instructions to the Firstar Funds, P.O. Box 3011, Milwaukee, WI
53201-3011 (via overnight delivery to 615 E. Michigan Street, Milwaukee, WI
53202). Include the number of shares or the amount to be redeemed, your
sixteen-digit account number and Social Security number or other taxpayer
identification number. Your instructions must be signed by all persons required
to sign for transactions exactly as their names appear on the account. If the
redemption amount exceeds $50,000, or if the proceeds are to be sent elsewhere
than the address of record, or the address of record has been changed by
telephone within the preceding 15 days, each signature must be guaranteed in
writing by either a commercial bank that is a member of the FDIC, a trust
company, a credit union, a savings association, a member firm of a national
securities exchange or other eligible guarantor institution.
Automatically
[GRAPHIC]
Call 1-800-677-FUND for a Systematic Withdrawal Plan application ($5,000
account minimum and $50 minimum per transaction).
Guarantees must be signed by an eligible guarantor institution and "Signature
Guaranteed" must appear with the signature.
The Funds may require additional supporting documents
for redemptions made by corporations, executors,
administrators, trustees and guardians. A redemption
request will not be deemed to be properly received
until the transfer agent receives all required
documents in proper form as specified above.
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Additional Transaction Information
Telephone Requests
In order to arrange for telephone redemptions after you have opened your
account or to change the bank or account designated to receive redemption
proceeds, send a written request to Firstar Mutual Fund Services, LLC ("FMFS")
or contact your shareholder organization. Each shareholder of the account must
sign the request. The Funds may request further documentation from
corporations, executors, administrators, trustees and guardians.
The Funds reserve the right to refuse a telephone redemption if they believe it
is advisable to do so. Procedures for redeeming shares by telephone may be
modified or terminated by the Funds at any time upon notice to shareholders.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If a shareholder is unable to contact the
transfer agent by telephone, shares may also be redeemed by delivering the
redemption request to the transfer agent.
In an effort to prevent unauthorized or fraudulent purchase and redemption
requests by telephone, Firstar employs reasonable procedures to confirm that
such instructions are genuine. Among the procedures used to determine
authenticity, investors electing to transact by telephone will be required to
provide their account number (unless opening a new account). All telephone
transactions will be recorded. Statements of accounts shall be conclusive if
not objected to in writing within 10 days after transmitted by mail. Firstar
Funds may implement other procedures from time to time. If reasonable
procedures are not implemented, Firstar Funds may be liable for any loss due to
unauthorized or fraudulent transactions. In all other cases, the shareholder is
liable for any loss for unauthorized transactions.
Check Redemption
You may request on the purchase application or by written request that a Fund
provides Redemption Checks ("Checks"). Checks may be made payable in the amount
of $250 or more. Any checks drawn on a joint account will only require one
signature. There is no charge for the use of the Checks; however, the transfer
agent will impose a $25 charge for stopping payment of a Check upon your
request, or if the transfer agent cannot honor a Check due to insufficient
funds or other valid reason. Because dividends on each Fund accrue daily,
Checks may not be used to close an account, as a small balance is likely to
result.
Checks are not available for the Institutional Money Market Fund, IRAs or other
retirement plans for which Firstar acts as custodian.
Certificates
Certificates are only issued upon shareholder request. If certificates have
been issued, the transfer agent must receive the certificates, properly
endorsed or accompanied by a properly executed stock power and accompanied by
signature guarantees, prior to a redemption request.
Additional Redemption Information
The Funds will make payment for redeemed shares typically within one or two
business days, but no later than the seventh day after receipt by the transfer
agent of a request in proper form as specified above, except as provided by SEC
rules. However, if any portion of the shares to be redeemed represents an
investment made by check, the Funds will delay the payment of the redemption
proceeds until the transfer agent is reasonably satisfied that the check has
been collected, which may take up to twelve days from the purchase date. An
investor must have filed a purchase application before any redemption requests
can be paid.
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Accounts Below the Minimum Balance
If your account falls below $1,000, other than due to market fluctuations, the
Funds may redeem your account. The Fund will impose no charge and will give you
sixty days written notice and an opportunity to raise the account balance prior
to any redemption. A Fund, in certain cases, may make payment for redemption in
securities. Investors would bear any brokerage or other transaction costs
incurred in converting the securities so received to cash. See the Additional
Statement for more information on involuntary redemptions.
Exchanging Shares
Generally, any share class of a Firstar Fund is exchangeable for the same class
of another Firstar Fund, provided you are eligible to purchase that share class
or Fund at the time of the exchange. Retail B Shares of a Non-Money Market Fund
may be exchanged for Retail A Shares of a Money Market Fund. However, such
shares may not then be exchanged for Retail A Shares of a Non-Money Market
Fund. Shares of the Institutional Money Market Fund are not exchangeable for
Retail A or Retail B Shares of any Non-Money Market Fund.
Unless you qualify for a sales charge exemption, an initial sales charge will
be imposed on the exchange if the shares of the Fund being acquired have an
initial sales charge and the shares being redeemed were purchased without a
sales charge. Retail A Money Market Fund shares acquired in an exchange for
Retail B Shares will be subject to a contingent deferred sales charge upon
redemption in accordance with the prospectus describing the Retail B Shares.
For purposes of computing the contingent deferred sales charge, the length of
time of ownership will be measured from the date of the original purchase of
Retail B Shares.
Telephone exchange privileges automatically apply to each shareholder of record
unless the transfer agent receives written instructions canceling the
privilege.
Firstar Funds reserves the right to terminate the exchange privilege of any
party who requests more than four exchanges within a calendar year. Firstar
Funds may do so with prior notice based on a consideration of both the number
of exchanges and the time period over which those exchange requests have been
made, together with the level of expense to the Funds or other adverse effects
which may result from the additional exchange requests.
For federal income tax purposes, an exchange of shares is a taxable event and,
accordingly, an investor may realize a capital gain or loss. Before making an
exchange request, an investor should consult a tax or other financial adviser
to determine the tax consequences of a particular exchange. No exchange fee is
currently imposed by Firstar Funds on exchanges, however, Firstar Funds
reserves the right to impose a charge in the future. In addition, Shareholder
organizations may charge a fee for providing administrative or other services
in connection with exchanges. The Fund reserves the right to reject any
exchange request with prior notice to a shareholder and the exchange privilege
may be modified or terminated at any time. At least sixty days' notice will be
given to shareholders of any material modification or termination except where
notice is not required under SEC regulations. Also keep in mind:
.Exchanges are available only in states where exchanges may be legally made.
.The minimum amount which may be exchanged is $1,000.
.If any portion of the shares to be exchanged represents an investment made by
check, a Fund may delay the acquisition of new shares in an exchange until the
transfer agent is reasonably satisfied that the check has been collected,
which may take up to twelve days from the purchase date.
.It may be difficult to make telephone exchanges in times of drastic economic
or market changes. If this happens, you may initiate transactions in your Fund
accounts by mail or as otherwise described in this Prospectus.
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Additional Shareholder Services
Shareholder Organizations
The Funds (other than the Institutional Money Market Fund) have adopted a
distribution and service plan for Retail A Shares. These Funds, including the
Institutional Money Market Fund, also have adopted a service plan under which
the Funds may pay service fees for shareholder services to money market
shareholders. Under either of these plans, shareholder organizations may be
entitled to receive fees from a Fund at an annual rate of up to 0.25% of the
average daily net asset value of the shares covered by their respective
agreements for distribution and/or shareholder support services, as the case
may be.
Shareholder support services may include:
.assisting investors in processing purchase, exchange and redemption requests
.processing dividend and distribution payments from the Funds
.providing information periodically to customers showing their positions in
Fund shares
.providing sub-accounting
.forwarding sales literature and advertising
The Funds make no payments to their Distributor under the plans. Payments to
shareholder organizations, including affiliates of the Adviser, under the plans
are not tied directly to their own out-of-pocket expenses and therefore may be
used as they elect (for example, to defray their overhead expenses), and may
exceed their direct and indirect costs.
Distribution fees are regulated by Rule 12b-1 under the Investment Company Act
of 1940 and are subject to the NASD Conduct Rules. Because these fees are paid
out of a Fund's assets on an ongoing basis, over time, these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges.
Under these plans, the Funds may enter into agreements with shareholder
organizations, including affiliates of the Adviser (such as Firstar Investment
Services, Inc.). The 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. Investors
should read this Prospectus in light of such fee schedules and under the terms
of their shareholder organization's agreement with Firstar. 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.
Conflict-of-interest restrictions may apply to the receipt of compensation paid
by Firstar to a shareholder organization in connection with the investment of
fiduciary funds in Fund shares. Institutions, including banks regulated by the
Comptroller of the Currency and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult legal counsel before entering into
agreements with Firstar.
Shareholder Reports
Shareholders will be provided with a report showing portfolio investments and
other information at least semiannually; and after the close of the Fund's
fiscal year with an annual report containing audited financial statements. To
eliminate unnecessary duplication, only one copy of shareholder reports will be
sent to shareholders with the same mailing address. Shareholders may request
duplicate copies free of charge.
Account statements will be mailed to Shareholders monthly, summarizing all
transactions. Generally, a Fund does not send statements for funds held in
brokerage, retirement or other similar accounts.
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Automated Teleresponse Service
Shareholders using a touch-tone(R) telephone can access information on the
Funds twenty-four hours a day, seven days a week. When calling FMFS at 1-800-
677-FUND, shareholders may choose to use the automated information feature or,
during regular business hours (8:00 a.m. to 7:00 p.m. Central time, Monday
through Friday), speak with a Firstar Funds representative.
Retirement Plans
The Fund offers individual retirement accounts including Traditional, Roth,
SIMPLE and SEP IRAs. For details concerning Retirement Accounts (including
service fees), please call FMFS at 1-800-677-FUND.
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Additional Information
Dividends, Capital Gains Distributions and Taxes
Reinvested dividends and distributions receive the same tax treatment as those
paid in cash.
Dividends and Capital Gains Distributions
Dividends from net investment income, including net realized gains
and losses, if any, earned on the investments held by a Fund, are
declared on each business day on the shares that are outstanding
immediately after 11:30 a.m. Central time (9:00 a.m. Central time
for the Ohio Tax-Exempt Money Market Fund and 1:00 p.m. Central
time for the U.S. Treasury Money Market Fund and Institutional
Money Market Fund) on the declaration date.
A shareholder's dividends and capital gains distributions will be reinvested
automatically in additional shares unless the Fund is notified that the
shareholder elects to receive distributions in cash.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks. The Funds do
not expect to realize net long-term capital gains.
Federal Taxes
Distributions from the Money Market Fund, Institutional Money Market Fund, U.S.
Government Money Market Fund and the U.S. Treasury Money Market Fund will
generally be taxable to shareholders. Each such fund expects that all, or
substantially all, of its distributions will consist of ordinary income. You
will be subject to income tax on these distributions regardless of whether they
are paid in cash or reinvested in additional shares. The one major exception to
these tax principles is that distributions on shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
Generally, distributions from the U.S. Treasury Money Market Fund will be
exempt from state and local taxes.
Distributions from the Tax-Exempt Money Market Fund and the Ohio Tax-Exempt
Money Market Fund will generally constitute tax-exempt income to shareholders
for federal income tax purposes. It is possible, depending upon the Funds'
investments, that a portion of their distributions could be taxable to
shareholders as ordinary income or capital gains, but it is not expected that
this will be the case. Moreover, although the distributions are exempt for
federal income tax purposes, they will generally constitute taxable income for
state and local income tax purposes except that, subject to limitations that
vary depending on the state, distributions from interest paid by a state or
municipal entity may be exempt from tax in that state.
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Interest on indebtedness incurred by a shareholder to purchase or carry shares
of the Tax-Exempt Funds generally will not be deductible for federal income tax
purposes.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Exempt Funds may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest
dividends will also be considered along with other adjusted gross income in
determining whether any Social Security or railroad retirement payments
received by you are subject to federal income taxes.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different United States federal income tax
treatment. You should also consult your tax adviser for further information
regarding the federal, state, local and/or foreign tax consequences with
respect to your specific situation.
State and Local Taxes
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply, however, to the portions of each
Fund's distributions, if any, that are attributable to interest on Federal
securities or interest on securities of the particular state. Shareholders
should consult their tax advisers regarding the tax status of distributions in
their state and locality.
Management of the Funds
Advisory Services
FIRMCO, a Wisconsin Limited Liability Company and subsidiary of Firstar
Corporation, a bank holding company, serves as investment adviser to each Fund.
FIRMCO, with principal offices at Firstar Center, 777 East Wisconsin Avenue,
8th Floor, Milwaukee, Wisconsin 53202, has provided investment advisory
services since 1986. FIRMCO currently has $32.3 billion in assets under
management.
Firstar Corporation has agreed to permit the Company to use the name "Firstar
Funds" and expansions thereof on a non-exclusive and royalty-free basis in
connection with mutual fund management and distribution services within the
United States, its territories and possessions. This agreement may be
terminated by Firstar Corporation under specified circumstances, including if
no affiliate of Firstar Corporation is serving as investment adviser for any
portfolio offered by the Company.
Subject to the general supervision of the Board of Directors and in accordance
with the respective investment objective and policies of each Fund, the Adviser
manages each Fund's portfolio securities and maintains records relating to such
purchases and sales.
The Adviser is authorized to allocate purchase and sale orders for portfolio
securities to shareholder organizations, including, in the case of agency
transactions, shareholder organizations which are affiliated with the Adviser,
to take into account the sale of Fund shares if the Adviser believes that the
quality of the transaction and the amount of the commission are comparable to
what they would be with other qualified brokerage firms.
FIRMCO is entitled to receive from the Funds contractual fees calculated daily
and payable monthly, at the annual rate (as a percentage of such Fund's average
daily net assets) as follows:
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<PAGE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount
Fund Before Waivers
----------------------------------------------------
<S> <C>
Institutional Money Market Fund 0.49%
Money Market Fund 0.50%
Tax-Exempt Money Market Fund 0.50%
Ohio Tax-Exempt Money Market Fund 0.50%
U.S. Government Money Market Fund 0.50%
U.S. Treasury Money Market Fund 0.44%
</TABLE>
--------------------------------------------------------------------------------
For the fiscal year ended October 31, 1999, the Adviser received from each Fund
a fee, calculated daily and payable monthly, at the following annual rates (as
a percentage of the Fund's average daily net assets): 0.28% for the
Institutional Money Market Fund, 0.38% for the Money Market Fund, 0.50% for the
U.S. Government Money Market Fund and 0.49% for the Tax-Exempt Money Market
Fund.
Prior to April 1, 2000, the Firstar Stellar U.S. Treasury Money Market Fund and
the Firstar Stellar Ohio Tax-Free Money Market Fund were managed by the Capital
Management Division of Firstar Bank N.A., which is also a subsidiary of Firstar
Corporation. For the fiscal year ended November 30, 1999, the Predecessor
Firstar Stellar Funds paid their former investment adviser, Firstar Bank, N.A.,
the following fees:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Fee Paid
------------------------------------------------------------
<S> <C>
Firstar Stellar Ohio Tax-Free Money Market Fund 0.35%
Firstar Stellar U.S. Treasury Money Market Fund 0.50%
</TABLE>
--------------------------------------------------------------------------------
Administrative Services
FMFS, an affiliate of the Adviser, serves as the Fund's Administrator and
receives fees for those services.
Custodian, Transfer and Dividend Disbursing Agent, and Accounting Services
Agent
FMFS also provides transfer agency, dividend disbursing agency and accounting
services for the Funds and receives fees for these services. Inquiries to the
transfer agent may be sent to: Firstar Mutual Fund Service, LLC, P.O. Box 3011,
Milwaukee, Wisconsin 53201-3011. Firstar Bank, N.A. an affiliate of the
Adviser, provides custodial services for the Funds and receives fees for these
services.
Net Asset Value and Days of Operation
The Company intends to use its best efforts to maintain the net asset value of
each Fund at $1.00 per share, although there is no assurance that it will be
able to do so.
The net asset value of the Funds for purposes of pricing
purchase and redemption orders is determined as of 11:30
a.m. Central time (9:00 a.m. Central time for the Ohio
Tax-Exempt Money Market Fund and 1:00 p.m. Central time
for the U.S. Treasury Money Market Fund and Institutional
Money Market Fund) and as of the close of regular trading
hours on the Exchange, normally, 3:00 p.m. Central time,
on each day on which both the Exchange is open for
trading and the Federal Reserve Banks' Fedline System is open. Shares of the
Funds are not priced on days the Exchange is closed. For a complete list of
days the Exchange is closed, please see the Additional Statement. Net asset
value per share is calculated by dividing the value of all securities and other
assets owned by each Fund attributable to a particular class, less the
liabilities charged to the Fund attributable to a particular class, by the
number of the Fund's outstanding shares. Net asset value is computed using the
amortized cost method as permitted by SEC rules.
............................................................................. 31
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Appendix
Financial Highlights
The financial highlights tables are intended to help you understand each Fund's
financial performance for the past 5 years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in each Fund (assuming
reinvestment of all dividends and distributions).
With respect to the Institutional Money Market Fund, Money Market Fund, Tax-
Exempt Money Market Fund and the U.S. Government Money Market Fund, this
information for the period ended October 31, 1999 has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's financial
statements, are included in the Annual Report, and incorporated by reference
into the Additional Statement, both of which are available upon request. The
financial statements for the six-month period ended April 30, 2000 are
unaudited and are contained in the Funds' Semi-Annual Report. Those unaudited
financial statements are also incorporated by reference into the Additional
Statement.
For the Ohio Tax-Exempt Money Market Fund, the financial highlights tables set
forth on the following pages are based on the financial history of the
predecessor Firstar Stellar Ohio Tax-Exempt Money Market Fund. For the U.S.
Treasury Money Market Fund, the financial highlights tables set forth on the
following pages are based on the financial history of the predecessor Firstar
Stellar Treasury Fund. With respect to the predecessor Firstar Stellar Ohio
Tax-Exempt Money Market Fund and predecessor Firstar Stellar Treasury Fund,
this information has been audited by Arthur Andersen LLP, independent public
accountants for the Predecessor Stellar Funds, whose reports, along with each
Fund's financial statements, are included in the Predecessor Stellar Funds'
Annual Reports, and incorporated by reference into the Statements of Additional
Information (the "Additional Statements"), all of which are available upon
request. The financial statements for the six-month period ending May 31, 2000
are unaudited and are contained in the Predecessor Stellar Funds' Semi-Annual
Report, which are also incorporated by reference into the Additional
Statements.
Contact FMFS for a free copy of the Annual and Semi-Annual Reports or
Additional Statement.
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Money Market Funds
<TABLE>
<CAPTION>
Net Asset Dividends Net
Value, Net from Net Asset Value,
Beginning Investment Investment End of
of Period Income/6/ Income Period
<S> <C> <C> <C> <C>
INSTITUTIONAL MONEY MARKET FUND
Year Ended October 31, 1995 $1.00 $0.06 $(0.06) $1.00
---------------------------------------------------------------------------
Year Ended October 31, 1996 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1997 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1998 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1999 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 1.00 0.03 (0.03) 1.00
MONEY MARKET FUND
Year Ended October 31, 1995 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1996 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1997 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1998 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1999 1.00 0.04 (0.04) 1.00
---------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 1.00 0.03 (0.03) 1.00
TAX-EXEMPT MONEY MARKET FUND
Year Ended October 31, 1995 1.00 0.03 (0.03) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1996 1.00 0.03 (0.03) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1997 1.00 0.03 (0.03) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1998 1.00 0.03 (0.03) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1999 1.00 0.03 (0.03) 1.00
---------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 1.00 0.03 (0.03) 1.00
OHIO TAX-FREE MONEY MARKET FUND
Period Ended November 30,
1998/7/ 1.00 0.03 (0.03) 1.00
---------------------------------------------------------------------------
Year Ended November 30, 1999 1.00 0.03 (0.03) 1.00
---------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 1.00 0.02 (0.02) 1.00
U.S. GOVERNMENT MONEY MARKET FUND
Year Ended October 31, 1995 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1996 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1997 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1998 1.00 0.05 (0.05) 1.00
---------------------------------------------------------------------------
Year Ended October 31, 1999 1.00 0.04 (0.04) 1.00
---------------------------------------------------------------------------
Period Ended April 30, 2000
(unaudited) 1.00 0.02 (0.02) 1.00
---------------------------------------------------------------------------
</TABLE>
1 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
31, 1999, 1998, 1997, 1996, 1995 would have been 0.63%, 0.62%,
0.64%, 0.66%, 0.64%, 0.69%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 5.30%, 4.52%, 5.01%, 4.92%, 4.90%,
5.29%, respectively.
2 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
31, 1999, 1998, 1997,1996, 1995 would have been 0.96%, 0.85%,
0.86%, 0.84%, 0.81%, 0.90%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 4.94%, 4.31%, 4.79%, 4.73%, 4.73%,
5.06%, respectively.
3 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended April 30, 2000 and October
31, 1999, 1998, 1997, 1996, 1995, would have been 0.72%, 0.73%,
0.75%, 0.75%, 0.78%, 0.84%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended April 30, 2000 and October 31, 1999, 1998, 1997,
1996, 1995 would have been 3.01%, 2.49%, 2.87%, 2.91%, 2.91%,
3.12%, respectively.
................................................................................
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<TABLE>
<CAPTION>
Supplemental Data and Ratios
----------------------------------------------------------------------------------------
Ratio of Net
Net Assets, Ratio of Net Investment
End Expenses Income
of Period to Average to Average Total
(000s) Net Assets Net Assets Return
<S> <C> <C> <C>
$ 716,566 0.35%/1/ 5.63%/1/ 5.77%
---------------------------------------------------------------------------------------------
750,051 0.35%/1/ 5.19%/1/ 5.32%
---------------------------------------------------------------------------------------------
1,201,341 0.35%/1/ 5.23%/1/ 5.38%
---------------------------------------------------------------------------------------------
1,623,970 0.35%/1/ 5.30%/1/ 5.41%
---------------------------------------------------------------------------------------------
2,356,251 0.38%/1/ 4.76%/1/ 4.85%
---------------------------------------------------------------------------------------------
2,185,399 0.39%/1/,/9/ 5.54%/1/,/9/ 2.79%/8/
172,261 0.60%/2/ 5.36%/2/ 5.51%
---------------------------------------------------------------------------------------------
224,036 0.60%/2/ 4.94%/2/ 5.06%
---------------------------------------------------------------------------------------------
261,017 0.60%/2/ 4.98%/2/ 5.12%
---------------------------------------------------------------------------------------------
289,088 0.60%/2/ 5.05%/2/ 5.16%
---------------------------------------------------------------------------------------------
283,481 0.72%/2/ 4.44%/2/ 4.52%
---------------------------------------------------------------------------------------------
181,997 0.75%/2/,/9/ 5.15%/2/,/9/ 2.61%/8/
84,084 0.60%/3/ 3.36%/3/ 3.42%
---------------------------------------------------------------------------------------------
79,328 0.60%/3/ 3.09%/3/ 3.13%
---------------------------------------------------------------------------------------------
108,639 0.60%/3/ 3.06%/3/ 3.12%
---------------------------------------------------------------------------------------------
122,451 0.60%/3/ 3.02%/3/ 3.04%
---------------------------------------------------------------------------------------------
153,189 0.71%/3/ 2.51%/3/ 2.53%
---------------------------------------------------------------------------------------------
158,938 0.72%/3/,/9/ 3.01%/3/,/9/ 1.50%/8/
57,614 0.69%/4/,/9/ 2.81%/4/,/9/ 2.85%/8/
---------------------------------------------------------------------------------------------
64,475 0.58%/4/ 2.64%/4/ 2.67%
---------------------------------------------------------------------------------------------
48,448 0.73%/4/,/9/ 3.10%/4/,/9/ 1.60%/8/
163,068 0.60%/5/ 5.24%/5/ 5.37%
---------------------------------------------------------------------------------------------
198,334 0.60%/5/ 4.84%/5/ 4.96%
---------------------------------------------------------------------------------------------
198,592 0.60%/5/ 4.83%/5/ 4.99%
---------------------------------------------------------------------------------------------
233,176 0.60%/5/ 4.90%/5/ 4.97%
---------------------------------------------------------------------------------------------
209,015 0.68%/5/ 4.30%/5/ 4.37%
---------------------------------------------------------------------------------------------
61,186 0.72%/5/,/9/ 4.77%/5/,/9/ 2.46%/8/
---------------------------------------------------------------------------------------------
</TABLE>
4 Without fees waived ratios of net expenses to average net assets for
the fiscal periods ended May 31, 2000, November 30, 1999 and November
30, 1998 would have been 1.06%, 1.09%, and 1.29% respectively; and
ratios of net investment income to average net assets would have been
2.67%, 2.13% and 2.21% respectively.
5 Without fees waived, ratios of net expenses to average net assets for
the fiscal years (periods) ended April 30, 2000 and October 31, 1999,
1998, 1997, 1996, 1995 would have been 0.79%, 0.69%, 0.71%, 0.70%,
0.71%, 0.75%, respectively; and ratios of net investment income to
average net assets for the fiscal years (periods) ended April 30, 2000
and October 31, 1999, 1998, 1997, 1996, 1995 would have been 4.70%,
4.29%, 4.79%, 4.73%, 4.73%, 5.09% respectively.
6 For the Tax-Exempt Money Market Fund and the Ohio Tax-Free Money Market
Fund, substantially all the investment income is exempt from federal
income tax.
7 The Ohio Tax-Exempt Money Market Fund has been operating since December
2, 1997.
8 Not Annualized.
9 Annualized.
............................................................................. 35
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Money Market Funds (cont'd.)
<TABLE>
<CAPTION>
Net Asset Dividends Net Asset
Value, Net from Net Value,
Beginning Investment Investment End of
of Period Income Income Period
<S> <C> <C> <C> <C>
U.S. TREASURY MONEY MARKET FUND
Year Ended November 30, 1995 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------
Year Ended November 30, 1996 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------
Year Ended November 30, 1997 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------
Year Ended November 30, 1998 1.00 0.05 (0.05) 1.00
-------------------------------------------------------------------------------
Year Ended November 30, 1999 1.00 0.04 (0.04) 1.00
-------------------------------------------------------------------------------
Period Ended May 31, 2000
(unaudited) 1.00 0.02 (0.02) 1.00
-------------------------------------------------------------------------------
</TABLE>
1 Without fees waived, ratios of net expenses to average net assets
for the fiscal years (periods) ended May 31, 2000 and November
30, 1999, 1998, 1997, 1996, 1995 would have been 1.08%, 1.08%,
1.08%, 0.93%, 0.90%, 0.91%, respectively; and ratios of net
investment income to average net assets for the fiscal years
(periods) ended May 31, 2000 and November 30, 1999, 1998, 1997,
1996, 1995 would have been 4.57%, 3.82%, 4.38%, 4.53%, 4.49%,
4.94%, respectively.
2 Not Annualized.
3 Annualized.
................................................................................
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<PAGE>
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<TABLE>
<CAPTION>
Supplemental Data and Ratios
----------------------------------------------------------------------------------------
Ratio of Net
Net Assets, Ratio of Net Investment
End Expenses Income
of Period to Average to Average Total
(000s) Net Assets Net Assets Return
<S> <C> <C> <C>
654,963 0.71%/1/ 5.14%/1/ 5.23%
---------------------------------------------------------------------------------------------
829,259 0.70%/1/ 4.69%/1/ 4.80%
---------------------------------------------------------------------------------------------
469,400 0.73%/1/ 4.73%/1/ 4.85%
---------------------------------------------------------------------------------------------
542,430 0.88%/1/ 4.58%/1/ 4.69%
---------------------------------------------------------------------------------------------
1,049,641 0.92%/1/ 3.98%/1/ 4.02%
---------------------------------------------------------------------------------------------
1,483,384 0.97%/1/,/3/ 4.68%/1/,/3/ 2.36%/2/
---------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
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No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Funds' Additional
Statement incorporated herein by reference, in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Funds
or their Distributor. This Prospectus does not constitute an offering by the
Funds or by their Distributor in any jurisdiction in which such offering may
not lawfully be made.
................................................................................
38
<PAGE>
For More Information
Annual/Semiannual Reports
Additional information about the Funds' performance and investments is
available in the Funds' annual and semiannual reports to shareholders.
Statement of Additional Information
Additional information about the Funds and their policies is also available in
the Funds' Statement of Additional Information ("Additional Statement"). The
Additional Statement is incorporated by reference into this Prospectus (and is
legally considered part of this Prospectus).
The Funds' annual and semiannual reports and the Additional Statement are
available free upon request by calling Firstar Funds at 1-800-677-FUND.
To obtain other information and for shareholder inquiries:
By telephone - call 1-800-677-FUND
By mail - Firstar Funds,
615 East Michigan Street
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
By e-mail - [email protected]
On the Internet - Text only version of the Funds' documents are located online
and may be downloaded from: - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room may be obtained by calling the SEC at 1-202-942-8090. You may
also obtain copies of Fund documents by paying a duplicating fee and sending an
electronic request at the following e-mail address: at [email protected], or
by sending your request and a duplicating fee to the SEC's Public Reference
Section, Washington, D.C. 20549-0102.
The Fund's Investment Company Act File Number is 811-5380.
www.firstarfunds.com
[LOGO OF FIRSTAR]
<PAGE>
Prospectus
December 11, 2000
FIRSTAR REIT FUND
As with all mutual funds, the Securities and Exchange
Commission has not approved or disapproved any shares
of this fund or determined if this prospectus is
truthful or complete. Anyone who tells you otherwise is
committing a criminal offense.
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<PAGE>
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Table of Contents
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
--------------------------------------------------------
<S> <C>
Risk/Return Summary 1
--------------------------------------------------------
Types of Investment Risk 5
--------------------------------------------------------
Investing with Firstar Funds 9
--------------------------------------------------------
Share Classes Available 9
--------------------------------------------------------
Sales Charges and Waivers 10
--------------------------------------------------------
Purchasing Shares 14
--------------------------------------------------------
Redeeming Shares 17
--------------------------------------------------------
Exchanging Shares 19
--------------------------------------------------------
Additional Shareholder Services 20
--------------------------------------------------------
Additional Information 21
--------------------------------------------------------
Dividends, Capital Gains Distributions and Taxes 21
--------------------------------------------------------
Management of the Fund 22
--------------------------------------------------------
Net Asset Value and Days of Operation 23
--------------------------------------------------------
Appendix 25
--------------------------------------------------------
Financial Highlights 25
--------------------------------------------------------
</TABLE>
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured by the Federal Deposit Insurance Corporation, or any other government
agency.
Learn about the Fund's Objective, Principal Investment Strategies, Principal
Risks, Performance and Expenses.
................................................................................
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Risk/Return Summary
Objective
[GRAPHIC]
The investment objective of the REIT Fund is to provide above average income
and long-term growth of capital. This investment objective may be changed by
the Board of Directors without approval of Shareholders, although no change is
currently anticipated.
Principal Investment Strategies
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund attempts to achieve its investment goals by investing primarily in
real estate investment trusts ("REITs") plus other real estate related equity
securities (including common stock, preferred stock and securities convertible
into common stock). Under normal circumstances, the Fund will invest at least
65% of its total assets in REITs. The Fund will invest primarily in equity
REITs that invest in office, residential, retail, industrial and specialty
properties. The Fund may also invest in mortgage REITs that invest in real
estate mortgages. Real estate related equity securities also include those
issued by real estate developers, companies with substantial real estate
holdings (for investment or as part of their operations), as well as companies
whose products and services are directly related to the real estate industry,
such as building supply manufacturers, mortgage lenders or mortgage servicing
companies.
The Fund's Adviser selects securities and attempts to maintain an acceptable
level of risk and volatility largely through the use of quantitative and
analytical measurement techniques. The Adviser considers the following factors
when using these research techniques:
.the ratio of the company's income from operations compared to the price of the
security ("price to income ratio"),
.historical and projected income growth rates,
.management strategy,
.real estate portfolio analysis,
.market capitalization,
.average daily trading volume and
.the amount of the company's debt, and how that debt could affect the company's
ability to make additional investments.
The Fund primarily purchases REITs with above average income growth rates
(compared to other REITs) coupled with low price to income ratios. The Adviser
believes that these companies, when managed successfully, will produce above
average income and will eventually become more widely recognized by investors
as valuable investment opportunities. These factors should result in long-term
growth of capital.
When selling securities, the Adviser considers three factors: (1) Have the
objectives of the Fund been met? (2) Has the attractiveness of the securities
deteriorated? (3) Has the Adviser's outlook changed? If the Adviser can answer
each question positively, then the Adviser will sell the securities.
Temporary Investments
To respond to adverse market, economic, political or other conditions, the Fund
may invest up to 100% of its assets in high quality U.S. and foreign short-term
money market instruments. The Fund may invest up to 35% of its assets in these
securities to maintain liquidity. Some of these short-term money market
instruments include:
.commercial paper
.certificates of deposit, demand and time deposits and bankers' acceptances
.U.S. government securities
.repurchase agreements collateralized by U.S. government securities
.money market funds
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To the extent the Fund engages in this temporary, defensive strategy, the Fund
may not achieve its investment objective. To the extent the Fund invests in
money market funds, shareholders will be subject to duplicative management
fees.
Principal Risks
[GRAPHIC]
The following principal investment risks are described in more detail under the
heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk and industry risk. Market risk is the risk
that the value of the securities in which the Fund invests may go up or down in
response to the prospects of individual companies and/or general economic
conditions. Industry risk is the risk that a group of related stocks will
decline in price due to industry specific developments. Companies in the same
or similar industries may share common characteristics and are more likely to
react to industry specific market or economic developments. In addition, the
Fund will generally be subject to risks associated with direct ownership of
real estate, such as decreases in real estate values or fluctuations in rental
income caused by a variety of factors, including increases in interest rates,
increases in property taxes and other operating costs, casualty or condemnation
losses, possible environmental liabilities and changes in supply and demand for
properties. Because of the Fund's strategy to concentrate in the real estate
industry, it may not perform as well as other mutual funds that do not
concentrate in only one industry.
The Fund is also subject to real estate investment trust risks. Some of the
risks of equity and mortgage REITs are that they depend on management skills
and are not diversified. As a result, REITs are subject to the risk of
financing either single projects or any number of projects. REITs depend on
heavy cash flow and may be subject to defaults by borrowers and self-
liquidation. Additionally, equity REITs may be affected by any changes in the
value of the underlying property owned by the trusts. Mortgage REITs may be
affected by the quality of any credit extended. The Adviser tries to minimize
these risks by selecting REITs diversified by sector (i.e., shopping malls,
apartment building complexes, health care facilities) and geographic location.
Many REITs are smaller in size and therefore are subject to liquidity risk.
Liquidity risk is the risk that certain securities may be difficult or
impossible to sell at the time and price that the Adviser would like to sell.
The Adviser may have to lower the price, sell other securities instead or
forego an investment opportunity, any of which could have a negative effect on
Fund management or performance.
The Fund's holdings are subject to small and midcap stock risks. Small and
medium-size companies often have narrower markets and more limited managerial
and financial resources than larger, more established companies. As a result,
their performance can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund's portfolio. The
trading volume of small and medium size companies is normally less than that of
larger companies and, therefore, may disproportionately affect their market
price, tending to make them fall more in response to selling pressure than is
the case with larger companies. These factors could negatively affect the price
of the stock and reduce the value of the Fund.
An investment in the Fund is not a deposit of Firstar Bank, N.A. and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risk, including the risk
of losing money.
Bar Chart and Performance Table
[GRAPHIC]
The Fund offers four types of shares, as described under "Investing with
Firstar Funds" - Retail A, Retail B, Y and Institutional Shares. These types of
shares bear differing levels of expenses, as described under "Investing with
Firstar Funds."
The following bar chart and table provide an indication of the risks of
investing in the Fund by showing: (a) changes in the performance of the Fund's
Institutional Shares from year to year; and (b) how the average
................................................................................
2
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annual returns of the Fund's Retail B Shares and Institutional Shares compare
to those of a broad-based securities market index. The Fund began operations on
June 24, 1997 as a separate portfolio (the "Predecessor Select Fund") of
Firstar Select Funds. On December 11, 2000, the Predecessor Select Fund was
reorganized as a new portfolio of Firstar Funds, Inc. The performance set forth
below is based on the performance of corresponding classes of the Predecessor
Select Fund. As of the date of this Prospectus, the Fund has not offered Retail
A or Y Shares. Because those shares have less than one calendar year's
performance, no average annual returns are shown for them.
The performance for the period prior to June 24, 1997 is the performance of a
common trust fund managed by the Adviser which operated during the periods
prior to commencement of operations of the Predecessor Fund using materially
equivalent investment objectives, policies, guidelines and restrictions as the
Predecessor Select Fund. The common trust fund transferred its assets to the
Predecessor Select Fund at the commencement of operations. At the time of the
transfer, the Adviser did not manage any other collective investment or common
trust funds using materially equivalent investment objectives, policies and
guidelines and restrictions to those of the Predecessor Select Fund. The common
trust fund was not registered under the Investment Company Act of 1940 (the
"1940 Act") and was not subject to certain restrictions that are imposed by the
1940 Act and the Internal Revenue Code. The common trust fund's performance was
adjusted to reflect expenses of 1.34% (the percentage of expenses estimated for
the Predecessor Select Fund in its original prospectus). If the common trust
fund had been registered under the 1940 Act, performance may have been
adversely affected.
The bar chart and performance table assume reinvestment of dividends and
distributions. Remember, past performance is not indicative of future results.
Year-by-year total return as of 12/31 each year (%) (Institutional Shares)
[GRAPH]
90 -17.87
91 28.83
92 18.30
93 18.94
94 0.02
95 10.07
96 32.00
97 16.75
98 -15.96
99 -4.39
The total return for Institutional Shares for the nine-month period ended
September 30, 2000 was 20.24%.
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Best Quarter: Q1 "93 17.77%
Worst Quarter: Q3 "90 -12.22%
------------------------------
</TABLE>
Average Annual Total Return as of 12/31/99 (Retail B Shares and Institutional
Shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since inception
1 Year 5 Years 10 Years (inception date)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail B Shares -4.49% -- -- -11.32%
(April 1, 1998)
Institutional Shares -4.39% 6.39% 7.33% --
Morgan Stanley REIT Index -3.32% 7.97% -- -12.18%
(March 31, 1998)
</TABLE>
--------------------------------------------------------------------------------
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The Morgan Stanley REIT Index is a widely-recognized unmanaged index comprised
of the most actively traded REITs. The Index figures do not reflect any fees or
expenses. Investors cannot invest directly in the Index.
Fees and Expenses of the Fund
[GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail A Retail B Y Institutional
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases
(as a percentage of offering
price) 5.50% None None None
Maximum Deferred Sales Charge
(Load)
(as a percentage of offering
price) None 5.00%/1/ None None
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends None None None None
Redemption Fees None/2/ None/2/ None/2/ None/2/
Exchange Fees None None None None
-----------------------------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail A Retail B Y Institutional
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees (before waivers)/3/ 0.75% 0.75% 0.75% 0.75%
Distribution and Service (12b-1)
Fees/4/ 0.00% 0.75% 0.00% 0.00%
Other Expenses/5/ 1.03% 1.03% 1.03% 0.78%
------- ------- ------- -------
Total Annual Fund Operating Expenses
(before waivers) 1.78% 2.53% 1.78% 1.53%
Fee Waivers and Expense
Reimbursements/6/ (0.20)% (0.20)% (0.20)% (0.20)%
------- ------- ------- -------
Net Annual Fund Operating Expenses/6/ 1.58% 2.33% 1.58% 1.33%
======= ======= ======= =======
------------------------------------------------------------------------------
</TABLE>
1 A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the
second year, 3% in the third and fourth year, 2% in the fifth year, declining
to 1% in the sixth year. Thereafter Retail B Shares convert to Retail A
Shares, which do not bear a contingent deferred sales charge.
2 A fee of $12.00 is charged for each wire redemption (Retail A and Retail B
Shares only) and a fee of $15.00 is charged for each non-systematic
withdrawal from a Retirement Account for which Firstar Bank, N.A. is
custodian.
3 As a result of fee waivers, current management fees of the Fund are 0.55% of
the Fund's average daily net assets.
4 The total of all 12b-1 fees and shareholder servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for the Retail A Shares. The Fund does not intend to pay 12b-1 fees
with respect to the Retail A Shares for the current fiscal year.
5 "Other Expenses" includes: (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above; and (2)
for the Retail A, Retail B and Y Shares, the payment of a shareholder
servicing fee to institutions under a Service Plan (described below under the
heading "Investing with Firstar Funds - Shareholder Organizations") equal to
0.25% of the average daily net assets of the Fund's Retail A, Retail B and Y
Shares, respectively.
6 Certain service providers have contractually agreed to waive fees and
reimburse other expenses for Retail A, Retail B, Y and Institutional Shares
until October 31, 2001, so that Net Annual Fund Operating Expenses will be no
more than 1.58%, 2.33%, 1.58% and 1.33% for each class, respectively, for the
current fiscal year. These fee waivers and expense reimbursements may be
terminated at any time after October 31, 2001 at the discretion of the
service providers.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in the Fund for the time periods indicated, reinvest
all of your dividends and distributions, and then redeem all of your shares at
the end of those periods. The example also assumes that your investment has a
5% return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
................................................................................
4
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail A Shares $702 $1,060 $1,442 $2,510
Retail B Shares
Assuming complete redemption at end of period 736 1,067 1,525 2,493
Assuming no redemption 236 767 1,325 2,493
Y Shares 161 540 944 2,074
Institutional Shares 135 463 814 1,803
------------------------------------------------------------------------------
</TABLE>
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
--------------------------------------------------------------------------------
Types of Investment Risk
The principal risks of investing in the Fund are described previously in this
Prospectus. The following list provides more detail about some of those risks,
along with information on additional types of risks which may apply to the
Fund. Risks associated with particular types of investments the Fund makes are
described in this section and in the Additional Statement referred to on the
back page.
General Risks of Investing in the Fund
[GRAPHIC]
Complete Investment Program
An investment in the Fund, by itself, does not constitute a complete investment
plan.
Credit Risk
An issuer of fixed-income securities may default on its obligation to pay
interest and repay principal. Also, changes in the financial strength of an
issuer or changes in the credit rating of a security may affect its value.
Credit risk includes "counterparty risk" - the risk that the other party to a
transaction will not fulfill its contractual obligation. This risk applies, for
example, to repurchase agreements into which the Fund may enter.
Derivatives Risk
The Fund may invest in certain derivative investments. The term derivative
covers a wide number of investments, but in general it refers to any financial
instrument whose value is derived, at least in part, from the price of another
security or a specified index, asset or rate. Some derivatives may be more
sensitive to or otherwise not react in tandem with interest rate changes or
market moves, and some may be susceptible to changes in yields or values due to
their structure or contract terms. Loss may result from the Fund's investments
in options, futures, swaps, structured securities and other derivative
instruments which may be leveraged. The Fund may use derivatives to: increase
yield; hedge against a decline in principal value; invest with greater
efficiency and lower cost than is possible through direct investment; adjust
the Fund's duration; or provide daily liquidity.
Hedging is the use of one investment to offset the effects of another
investment. To the extent that a derivative is used as a hedge against an
opposite position that the Fund also holds, a loss generated by the derivative
should be substantially offset by gains on the hedged investment, and vice
versa. While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains. Hedging also involves correlation risk - the risk that
changes in the value of a hedging instrument may not match those of the asset
being hedged.
To the extent that a derivative is not used as a hedge, the Fund is directly
exposed to the risks of that derivative. Gains or losses from speculative
positions in a derivative may be substantially greater than the derivative's
original cost.
.............................................................................. 5
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Interest Rate Risk
When interest rates increase, fixed-income securities tend to decline in value
and when interest rates decrease, fixed-income securities tend to increase in
value. A change in interest rates could cause the value of your investment to
change. Fixed-income securities with longer maturities are more susceptible to
interest rate fluctuations than those with shorter maturities. Changes in
interest rates may also extend or shorten the duration of certain types of
instruments, such as asset-backed securities, thereby affecting their value and
the return on your investment.
Liquidity Risk
Certain securities may be difficult or impossible to sell at the time and price
that the Fund would like. The Fund may have to lower the price, sell other
securities instead or forego an investment opportunity, any of which could have
a negative effect on the Fund's management or performance. This risk applies,
for example, to: variable and floating rate demand notes, variable amount
demand securities and restricted securities which the Fund may purchase.
Illiquid securities also include repurchase agreements and time deposits with
notice/termination dates of greater than seven days and certain unlisted over-
the-counter options and other securities traded in the U.S. but which are
subject to trading restrictions because they are not registered under the
Securities Act of 1933. There may be no active secondary market for these
securities. The Fund may invest up to 15% of its net assets at the time of
purchase in securities that are illiquid. A domestically traded security which
is not registered under the Securities Act of 1933 will not be considered
illiquid if the Adviser determines an adequate investment trading market exists
for that security. Because illiquid and restricted securities may be difficult
to sell at an acceptable price, they may be subject to greater volatility and
may result in a loss to the Fund.
Management Risk
A strategy which the Adviser uses may fail to produce the intended results. The
particular securities and types of securities that the Fund holds may
underperform other securities and types of securities. There can be no
assurance that the Fund will achieve its investment objective. The Adviser may
not change certain investment practices of the Fund without a shareholder vote.
These policies of the Fund, which may not be changed without a shareholder
vote, are described in the Additional Statement.
Market Risk
The value of the securities in which the Fund invests may go up or down in
response to the prospects of individual companies and/or general economic
conditions. Price changes may be temporary or last for extended periods. The
Fund's performance results may reflect periods of above average performance
attributable to its investment in certain securities during the initial public
offering, the performance of a limited number of the securities in the Fund, or
other non-recurring factors. It is possible that the performance may not be
repeated in the future.
Nonprincipal Strategy Risks
This Prospectus describes the Fund's principal investment strategies, and the
types of securities in which the Fund principally invests. The Fund may, from
time to time, make other types of investments and pursue other investment
strategies in support of its overall investment goal. These supplemental
investment strategies - and the risks involved - are described in detail in the
Additional Statement, which is referred to on the back cover of this
Prospectus.
Portfolio Turnover Risk
The Adviser will not consider the portfolio turnover rate a limiting factor in
making investment decisions for the Fund. A high rate of portfolio turnover
(100% or more) involves correspondingly greater expenses which must be borne by
the Fund and its shareholders. It may also result in higher short-term capital
gains taxable to shareholders. See "Financial Highlights" for the Predecessor
Select Fund's historical portfolio turnover rates.
................................................................................
6
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Valuation Risk
This is a risk that the Fund has valued certain securities at a higher or lower
price than the Fund can sell them.
ADDITIONAL RISKS
[GRAPHIC]
Foreign Risks
When the Fund invests in foreign securities, it will be subject to special
risks not typically associated with domestic issuers resulting from less
government regulation, less public information and less economic, political and
social stability. Foreign securities, and in particular foreign debt
securities, are sensitive to changes in interest rates. In addition, investment
in securities of foreign governments involves the risk that foreign governments
may default on their obligations or may otherwise not respect the integrity of
their debt. If the Fund invests in foreign securities, it will also be subject
to the diplomatic risk that an adverse change in the diplomatic relations
between the U.S. and another country might reduce the value or liquidity of
investments. Future political and economic developments, the possible
imposition of withholding taxes on dividend income, the possible seizure or
nationalization of foreign holdings, the possible establishment of exchange
controls or freezes on the convertibility of currency, or the adoption of other
governmental restrictions might adversely affect an investment in foreign
securities. Additionally, foreign banks and foreign branches of domestic banks
may be subject to less stringent reserve requirements, and to different
accounting, auditing and recordkeeping requirements.
Foreign risks will normally be greatest when the Fund invests in issuers
located in emerging markets. Securities issued in emerging market countries, in
particular, may be more sensitive to certain economic changes and less liquid.
These countries are located in the Asia/Pacific region, Eastern Europe, Latin
and South America and Africa. In general, the securities markets of these
countries are less liquid, are subject to greater price volatility, have
smaller market capitalizations and have problems with securities registration
and custody. In addition, because the securities settlement procedures are less
developed in these countries, the Fund may be required to deliver securities
prior to receiving payment and also be unable to complete transactions during
market disruptions. As a result of these and other risks, investments in these
countries generally present a greater risk of loss to the Fund.
Investment in foreign securities also involves higher costs than investment in
U.S. securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments.
The Fund may invest in foreign currency denominated securities. The Fund will
also be subject to the risk of negative foreign currency rate fluctuations. A
change in the exchange rate between U.S. dollars and foreign currency may
reduce the value of an investment made in a security denominated in that
foreign currency. The Fund may hedge against foreign currency risk on unsettled
trades, but is not required to do so.
European Currency Unification
Many European countries have adopted a single European currency, the euro. On
January 1, 1999, the euro became legal tender for all countries participating
in the Economic and Monetary Union ("EMU"). A new European Central Bank has
been created to manage the monetary policy of the new unified region. On the
same date, the exchange rates were irrevocably fixed between the EMU member
countries. National currencies will continue to circulate until they are
replaced by euro coins and bank notes by the middle of 2002.
This change is likely to significantly impact the European capital markets in
which the Fund may invest and may result in the Fund facing additional risks in
pursuing its investment objective. These risks, which include, but are not
limited to, uncertainty as to proper tax treatment of the currency conversion,
volatility of currency exchange rates as a result of the conversion,
uncertainty as to capital market reaction, conversion costs that may affect
issuer profitability and creditworthiness, and lack of participation by some
European countries, may increase the volatility of the Fund's net asset value
per share.
.............................................................................. 7
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To obtain interest income, the Fund may lend its securities to broker-dealers,
banks or institutional borrowers pursuant to agreements requiring that the
loans be continuously secured by collateral equal at all times in value to at
least the market value of the securities loaned. There is a risk that, when
lending portfolio securities, the securities may not be available to the Fund
on a timely basis. Therefore, the Fund many lose the opportunity to sell the
securities at a desirable price. Additionally, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition of the
securities may be delayed pending court action.
Small and MidCap Stock Risk
Smaller and medium capitalization stocks involve greater risks than those
associated with larger, more established companies. Small and medium company
stocks may be subject to more abrupt or erratic price movements, for reasons
including that the stocks are traded in lower volume and that the issuers are
more sensitive to changing conditions and have less certain growth prospects.
Also, there are fewer market makers for these stocks and wider spreads between
quoted bid and asked prices in the over-the-counter market for these stocks.
Small and medium cap stocks tend to be less liquid, particularly during periods
of market disruption. There normally is less publicly available information
concerning these securities. Small and medium companies in which the Fund may
invest may have limited product lines, markets or financial resources, or may
be dependent on a small management group. In particular, investments in
unseasoned companies present risks considerably greater than investments in
more established companies.
Temporary Investment Risk
The Fund may, for temporary defensive purposes, invest a percentage of its
total assets, without limitation, in cash or various short-term instruments.
This may occur for example, when the Fund is attempting to respond to adverse
market, economic, political or other conditions. When the Fund's assets are
invested in these instruments, the Fund may not be achieving its investment
objective.
Additional Risks Which Apply to Particular Types of Securities
[GRAPHIC]
Borrowings, Reverse Repurchase Agreements
The Fund may borrow money to the extent allowed (as described in the Additional
Statement) to meet shareholder redemptions from banks or through reverse
repurchase agreements. These strategies involve leveraging. If the securities
held by the Fund decline in value while these transactions are outstanding, the
net asset value of the Fund's outstanding shares will decline in value by
proportionately more than the decline in value of the securities. In addition,
reverse repurchase agreements involve the risks that the interest income earned
by the Fund (from the investment of the proceeds) will be less than the
interest expense of the transaction, that the market value of the securities
sold by the Fund will decline below the price the Fund is obligated to pay to
repurchase the securities, and that the securities may not be returned to the
Fund.
Options
The Fund may invest in options. An option is a type of derivative instrument
that gives the holder the right (but not the obligation) to buy (a "call") or
sell (a "put") an asset in the future at an agreed upon price prior to the
expiration date of the option. Options can be used to manage exposure to
certain markets, enhance income or hedge against a decline in value of
portfolio securities. Options may relate to particular securities or various
stock or bond indices and may or may not be listed on a national securities
exchange and issued by the Options Clearing Corporation. Purchasing options is
a specialized investment technique which entails a substantial risk of a
complete loss of the amount paid as premiums to the writer of the option.
The value of options can be highly volatile, and their use can result in loss
if the Adviser is incorrect in its expectation of price fluctuations. The
successful use of options for hedging purposes also depends in part on the
ability of the Adviser to manage future price fluctuations and the degree of
correlation between the options and securities markets.
................................................................................
8
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The Fund may purchase put and call options in an amount not to exceed 5% of its
net assets.
Closing transactions in certain options are usually effected directly with the
same broker-dealer that effected the original option transaction. The Fund
bears the risk that the broker-dealer will fail to meet its obligations. There
is no assurance 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.
In addition, the Fund may write call options on securities and on various stock
or bond indices. The Fund may write a call option only if the option is
covered. The Fund may cover a call option by owning the security underlying the
option or through other means which would allow for immediate satisfaction of
its obligation. Such options will be listed on a national securities exchange.
In order to close out an option position, the Fund will be required to enter
into a "closing purchase transaction" (the purchase of a call option on a
security or an index with the same exercise price and expiration date as the
call option which it previously wrote on the same security or index).
Risks associated with the use of options on securities include (i) imperfect
correlation between the change in market value of the securities that the Fund
holds and the prices of options relating to the securities purchased or sold by
the Fund; and (ii) the possible lack of a liquid secondary market for an
option. The Additional Statement includes additional information relating to
option trading practices and related risks.
--------------------------------------------------------------------
Investing With Firstar Funds
This section describes for you the procedures for opening an account and how to
buy, sell or exchange Fund shares.
The Fund offers four classes of Shares, Retail A, Retail B, Y and
Institutional.
Share Classes Available
Retail A Shares
.Initial sales charge of 5.50% or less
.No deferred sales charge
.Reduced sales charge for larger investments. See "Sales Charges and Waivers"
for more information
.Available to any investor who does not qualify to purchase Institutional or Y
Shares
Retail B Shares
.No initial sales charge
.Deferred sales charge - Maximum of 5% for redemptions during the first year,
4% in the second year, 3% in the third and fourth year, 2% in the fifth year,
1% in the sixth year and 0% thereafter
.Converts to Retail A Shares after six years
.Available to any investor who does not qualify to purchase Institutional or Y
Shares
Y Shares
.No sales charge
.Available for:
.All shareholders who will be exchanged into Y Shares in or about November
2000 in connection with the Firstar-Stellar Reorganization, Firstar-
Mercantile Reorganization and/or Firstar-Select Reorganization and who have
continuously maintained an account with the Company; and
.Certain trust, agency or custodial accounts opened through financial
institutions such as banks (including Firstar Bank, N.A.), trust companies
and thrift institutions (check with Firstar Bank, N.A. or your financial
institution to see if you qualify for Y Shares).
.............................................................................. 9
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Institutional Shares
.No sales charge
.Available for:
.Trust, agency or custodial accounts opened through Firstar Bank, N.A. (check
with Firstar Bank, N.A. to see if you qualify for Institutional Shares);
.Employer-sponsored qualified retirement plans other than those serviced by
certain external organizations who have service agreements with Firstar or
its affiliates, and other than plans administered by Firstar with assets of
less than $1 million at the time Firstar begins plan administration (but
including plans administered by Firstar which owned Institutional shares
prior to June 18, 1999). Plans administered by Firstar with assets of less
than $1 million at the time Firstar begins plan administration will become
eligible for Institutional shares when such plans grow to $1 million or
greater as further described in the SAI;
.All clients of Firstar Investment Research & Management Company, LLC
"FIRMCO"; and
.Those purchasing through certain broker-dealers who have agreed to provide
certain services with respect to shares of the Fund, including TD
Waterhouse. Check with your broker-dealer to see if you qualify for
Institutional shares.
A securities dealer, broker, financial institution or other industry
professional ("Shareholder Organization") may charge transaction or other fees
for providing administrative or other services in connection with investments
in Fund shares.
Sales Charges and Waivers
Initial Sales Charges - for Retail A Shares:
The public offering price for Retail A Shares is the net asset value of the
Retail A Shares purchased plus any applicable front-end sales charge. A sales
charge will not be assessed on Retail A Shares purchased through reinvestment
of dividends or capital gains distributions. The sales charge is as follows:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shareholder
Organization
Sales Charge as a Sales Charge as a Reallowance as a
Amount of Transaction Percentage of Percentage of Net Percentage of
at Offering Price Offering Price Asset Value Offering Price
---------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 5.50% 5.82% 5.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.00%
$500,000 to $999,999 2.00% 2.04% 1.50%
$1,000,000 and above 0.50% 0.50% 0.40%
---------------------------------------------------------------------------
</TABLE>
You only pay a sales charge when you buy shares. The Distributor may reallow
the entire sales charge to certain shareholder organizations and the amount
reallowed may change periodically.
To the extent that 90% or more of the sales charge is reallowed, shareholder
organizations may be deemed to be underwriters under the 1940 Act.
Reducing Your Sales Charges and Waivers - Retail A Shares
To qualify for a reduction of, or exception to, the sales charge you must
notify your shareholder organization or the Distributor at the time of purchase
or exchange. The reduction in sales charge is subject to confirmation of your
holdings through a check of records. Firstar Funds may modify or terminate
quantity discounts at any time.
................................................................................
10
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Waivers - Retail A Shares
You may purchase Retail A Shares without a sales charge if:
.you are an employee, director, retiree or registered representative of Firstar
Corporation or its affiliates or of Firstar Funds;
.you are a spouse, parent, in-law, sibling or child of an individual who falls
within the preceding category;
.you make any purchase for your medical savings account for which Firstar
Corporation or an affiliate serves in a custodial capacity;
.you purchase through certain external organizations that have entered into a
service agreement with Firstar Funds or its affiliates;
.you are part of an employer-sponsored qualified retirement plan administered
by Firstar with assets of less than $1 million at the time Firstar begins plan
administration, provided such administration commenced on or after June 18,
1999;
.you purchase through certain broker-dealers who have agreed to provide certain
services with respect to shares of the Fund, including Charles Schwab Mutual
Fund Marketplace(R). Check with your broker-dealer to see if you qualify for
this waiver; or
.you received shares of the Fund as part of the Firstar-Select Reorganization
and, prior to the reorganization, you qualified to purchase shares without a
sales load at net asset value and you have continuously owned shares of the
Fund since that reorganization.
Reducing Your Sales Charges - Retail A Shares
.Right of Accumulation - Existing Retail A Shares of the Fund and/or other
Firstar Funds' Non-Money Market Funds can be combined with new purchases for
purposes of calculating reduced sales charges.
.Letter of Intent - Fund shares purchased in a 13-month period qualify for the
same reduced sales charge as if purchased all at once. You may obtain a
reduced sales charge by means of a written Letter of Intent which expresses
your non-binding commitment to invest in the aggregate $100,000 or more in
Retail A Shares of the Fund or any other Firstar Funds' non-money market fund.
Any investments you make during the period receive the discounted sales charge
based on the full amount of your investment commitment. The Additional
Statement includes details about the Letter of Intent.
For purposes of applying the Rights of Accumulation and Letter of Intent
privileges, the sales charge schedule applies to the combined purchases made by
any individual and/or spouse purchasing securities for his, her or their own
account, or the aggregate investments of a trustee or other fiduciary or IRA
for the benefit of the persons previously listed.
Contingent Deferred Sales Charge - Retail B Shares
The public offering price for Retail B Shares is the net asset value of the
Retail B Shares purchased. Although investors pay no front-end sales charge on
purchases of Retail B Shares, such Shares are subject to a contingent deferred
sales charge at the rates set forth below if they are redeemed within six years
of purchase.
The amount of any contingent deferred sales charge an investor must pay depends
on the number of years that elapse between the purchase date and the date such
Retail B Shares are redeemed. Solely for purposes of this determination, all
payments during a month will be aggregated and deemed to have been made on the
first day of the month.
............................................................................. 11
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Years Contingent Deferred Sales Charge
Elapsed Since Purchase (as % of dollar amount subject to the charge)
--------------------------------------------------------------------------------
<S> <C>
Less than one 5.00%
At least one but less than two 4.00%
At least two but less than three 3.00%
At least three but less than four 3.00%
At least four but less than five 2.00%
At least five but less than six 1.00%
At least six None
</TABLE>
The contingent deferred sales charge on Retail B Shares is based on the lesser
of the net asset value of the Shares on the redemption date or the original
cost of the Shares being redeemed. As a result, no sales charge is imposed on
any increase in the net asset value of an investor's Retail B Shares. In
addition, a contingent deferred sales charge will not be assessed on Retail B
Shares purchased through reinvestment of dividends or capital gains
distributions.
When a shareholder redeems his or her Retail B Shares, the redemption request
is processed to minimize the amount of the contingent deferred sales charge
that will be charged. Retail B Shares are redeemed first from those shares that
are not subject to a contingent deferred sales charge (that is, Retail B Shares
that were acquired through reinvestment of dividends or distributions or that
qualify for other deferred sales charge exemptions, if any) and after that from
the Retail B Shares that have been held the longest.
Shareholder organizations will receive commissions in connection with sales of
Retail B Shares. A commission equal to 5% of the amount invested is paid to
authorized dealers.
The contingent deferred sales charge a shareholder may pay upon redemption is
remitted to the Distributor or other party, which may use such amounts to
defray the expenses associated with the distribution-related services involved
in selling Retail B Shares.
Waivers - Retail B Shares
Certain types of redemptions may also qualify for a waiver from the contingent
deferred sales charge. If you think you may be eligible for a contingent
deferred sales charge waiver listed below, be sure to notify your shareholder
organization or the Distributor at the time Retail B Shares are redeemed. The
contingent deferred sales charge with respect to Retail B Shares is not
assessed on:
.exchanges described under "Exchange of Shares";
.redemptions in connection with shares sold for certain retirement
distributions or because of disability or death;
.redemptions effected pursuant to the Fund's right to liquidate a shareholder's
account if the aggregate net asset value of Retail B Shares held in the
account is less than the minimum account size set forth under "Redeeming
Shares - Additional Transaction Information - Accounts Below the Minimum
Balance";
.redemptions in connection with the combination of the Fund with any other
investment company registered under the 1940 Act by merger, acquisition of
assets, or by any other transaction;
.redemptions resulting from certain tax-free returns from IRAs of excess
contribution; or
.you received shares of the Fund as part of the Firstar-Select Reorganization
and, prior to the reorganization, you qualified to redeem your shares without
a sales load at net asset value and you have continuously owned shares of the
Fund since that reorganization.
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In addition to the foregoing exemptions, no contingent deferred sales charge
will be imposed on redemptions made pursuant to Firstar Funds' Systematic
Withdrawal Plan. The Fund reserves the right to limit such redemptions without
a contingent deferred sales charge, on an annual basis, to 12% of the value of
your Retail B Shares on the redemption date. See the Additional Statement for
more information.
Conversion - Retail B Shares
Retail B Shares will automatically convert into Retail A Shares of the Fund six
years after the beginning of the calendar month in which the purchase date
occurred. If you acquire Retail B Shares of the Fund by exchange from Retail B
Shares of another Firstar Fund, your Retail B Shares will convert into Retail A
Shares of that Fund based on the date of the initial purchase.
If you acquire Retail B Shares through reinvestment of distributions, your
Retail B Shares will convert into Retail A Shares at the earlier of two dates -
either six years after the beginning of the calendar month in which the
purchase date occurred (based on the date of the initial purchase of the shares
on which the distribution was paid) or the date of conversion of the most
recently purchased Retail B Shares that were not acquired through reinvestment
of dividends or distributions. For example, if a shareholder makes a one-time
purchase of Retail B Shares of the Fund and subsequently acquires additional
Retail B Shares of the Fund only through reinvestment of dividends and/or
distributions, all of such shareholder's Retail B Shares of the Fund, including
those acquired through reinvestment, will convert to Retail A Shares of the
Fund on the same date. Upon conversion, the converted shares will be relieved
of the distribution and shareholder servicing fees borne by Retail B Shares,
although they will be subject to the shareholder servicing fees borne by Retail
A Shares.
Reinstatement Privilege
If you sell shares of the Fund, or any other Firstar Fund, you may reinvest
some or all of the proceeds in the Retail A Shares of any Firstar Fund within
60 days without a sales charge, as long as you notify the transfer agent or
your shareholder organization at the time you reinvest. You may be subject to
taxes as a result of a redemption. Consult your tax adviser concerning the
results of a redemption or reinvestment.
How to Decide Whether to Buy Retail A or Retail B Shares
The decision as to which type of Shares to purchase depends on the amount you
invest, the intended length of the investment and your personal situation.
Retail A Shares - If you are making an investment of an amount that qualifies
for a reduced sales charge, you may consider purchasing Retail A Shares.
Retail B Shares - If you plan to hold your investment for a significant period
of time and would prefer not to pay an initial sales charge, you might consider
purchasing Retail B Shares. By not paying a front-end sales charge, your entire
purchase in Retail B Shares is invested from the time you make your initial
investment. However, the distribution and service fee paid by Retail B Shares
will cause your Retail B Shares (until conversion to Retail A Shares) to have a
higher expense ratio and thus lower performance and lower dividend payments (to
the extent dividends are paid) than Retail A Shares.
Shareholder Organizations - Retail A Shares, Retail B Shares and Y Shares
The Fund has adopted a distribution and service plan for Retail A Shares. The
Fund also has adopted a service plan for Retail A Shares, under which the Fund
may pay service fees for shareholder services to Retail A shareholders. Under
either of these plans, shareholder organizations may be entitled to receive
fees from the Fund at an annual rate of up to 0.25% of the average daily net
asset value of the Retail A Shares covered by their respective agreements for
distribution and/or shareholder support services, as the case may be. Fees
under both these plans will not exceed, in the aggregate, the annual rate of
0.25% of the Fund's average daily net assets for the Retail A Shares.
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Shareholder support services may include:
.assisting investors in processing purchase, exchange and redemption requests
.processing dividend and distribution payments from the Fund
.providing information periodically to customers showing their positions in
Fund shares
.providing sub-accounting
.forwarding sales literature and advertising
The Fund has adopted a distribution and service plan for Retail B Shares. Under
the distribution and service plan for Retail B Shares, the Distributor is
entitled to receive fees at an annual rate of up to 0.75% of the average daily
net asset value of Retail B Shares for distribution services with respect to
Retail B Shares. Also under the distribution and service plan for Retail B
Shares, shareholder organizations may be entitled to receive fees from the Fund
at an annual rate of up to 0.25% of the average daily net asset value of the
Retail B Shares covered by their agreement for shareholder liaison services.
Shareholder liaison services may include responding to customers' inquiries and
providing information on their investments, and other personal and account
maintenance services within NASD Rules.
The Fund also has adopted service plans for Retail B Shares and Y Shares,
respectively, under which the Fund may pay service fees for shareholder
services (as listed above) to Retail B or Y shareholders. Under the service
plans for the Retail B and Y Shares, shareholder organizations may be entitled
to receive fees from the Fund at an annual rate of up to 0.25% of the average
daily net asset value of Retail B Shares or Y Shares covered by their
respective agreements.
Distribution fees are regulated by Rule 12b-1 under the 1940 Act and are
subject to the NASD Conduct Rules. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time, these fees will increase the cost
of your investment and may cost you more than paying other types of sales
charges.
Payments to shareholder organizations, including affiliates of the Adviser,
under the plans, and to the Distributor under the distribution and service
plans for Retail B Shares are not tied directly to their own out-of-pocket
expenses and therefore may be used as they elect (for example, to defray their
overhead expenses), and may exceed their direct and indirect costs.
Under these plans, a Fund may enter into agreements with shareholder
organizations, including affiliates of the Adviser (such as Firstar Investment
Services, Inc.). The 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. Investors
should read this Prospectus in light of such fee schedules and under the terms
of their shareholder organizations' agreements with Firstar. 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.
Conflict-of-interest restrictions may apply to the receipt of compensation paid
by Firstar to a shareholder organization in connection with the investment of
fiduciary funds in Fund shares. Institutions, including banks regulated by the
Comptroller of the Currency and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult legal counsel before entering into
agreements with Firstar.
Purchasing Shares
Shares of the Fund are offered and sold on a continuous basis by the
distributor for the Fund, Quasar Distributors, LLC (the "Distributor"), an
affiliate of the Adviser. The Distributor is a registered broker-dealer with
offices at 615 East Michigan Street, Milwaukee, Wisconsin 53202.
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Minimum Investments
Retail A and Retail B Shares
The minimum initial investment for Retail A Shares and Retail B Shares in the
Fund is $1,000. The minimum subsequent investment is $50. The minimum initial
investment will be waived if you participate in the Periodic Investment Plan.
Institutional and Y Shares
There is no minimum initial or subsequent investment for Institutional or Y
Shares of the Fund.
Buying Shares
Purchase requests accompanied by a check or wire payment which are received by
the transfer agent before 3:00 p.m. Central time on a business day for the Fund
will be executed the same day at that day's closing price provided that payment
is received by the close of regular trading hours on the New York Stock
Exchange (normally 3:00 p.m. Central Time) on that day. Orders received after
3:00 p.m. Central time and order for which payment is not received by the close
of regular trading hours on the New York Stock Exchange will be executed on the
next business day after receipt of both order and payment in proper form.
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Through a Shareholder Organization
[GRAPHIC]
Opening an Account
Contact your Shareholder Organization
By Mail
[GRAPHIC]
Complete an application and mail it along with a check payable to: Firstar
Funds, P.O. Box 3011 Milwaukee, WI 53201-3011.
For overnight delivery mail to:
615 E. Michigan St.
Milwaukee, WI 53202.
Automatically (Retail A and Retail B Shares only)
[GRAPHIC]
Call 1-800-677-FUND to obtain a purchase application, which includes
information for a Periodic Investment Plan or ConvertiFund(R) Account.
By Wire
[GRAPHIC]
Call 1-800-677-FUND prior to sending the wire in order to obtain a confirmation
number and to ensure prompt and accurate handling of funds. Ask your bank to
transmit immediately available funds by wire in the amount of your purchase to:
Firstar Bank, N.A.
ABA # 0420-00013
Firstar Mutual Fund Services, LLC
Account # 112-952-137
for further credit to [name of Fund]
[name /title on the account].
The Fund and its transfer agent are not responsible for the consequences of
delays resulting from the banking or Federal Reserve Wire system, or from
incomplete wiring instructions.
Internet
www.firstarfunds.com
[GRAPHIC]
Not available
By Telephone Exchange
[GRAPHIC]
Call 1-800-677-FUND to exchange from another Firstar Fund account with the same
registration including name, address and taxpayer ID number.
Through a Shareholder Organization
Adding to an Account
Contact your Shareholder Organization
By Mail
Make your check payable to Firstar Funds. Please include your sixteen-digit
account number on your check and mail it to the address at the left.
Automatically (Retail A and Retail B Shares only)
Complete a Periodic Investment Plan Application to automatically purchase more
shares. Open a ConvertiFund(R) account to automatically invest proceeds from
one account to another account of the Firstar Funds.
By Wire
Call 1-800-677-FUND prior to sending the wire in order to obtain a confirmation
number and to ensure prompt and accurate handling of funds. Ask your bank to
transmit immediately available funds by wire as described at the left. Please
include your sixteen-digit account number. The Fund and its transfer agent are
not responsible for the consequences of delays resulting from the banking or
Federal Reserve Wire system, or from incomplete wiring instructions.
Internet
www.firstarfunds.com
Use Firstar Funds Direct to exchange from another Firstar Fund account with the
same registration including name, address and taxpayer ID number. Purchase
additional shares using an electronic funds transfer from your banking
institution for payment. Call 1-800-677-FUND to authorize this service.
By Telephone Exchange
Call 1-800-677-FUND to exchange from another Firstar Fund account with the same
registration including name, address and taxpayer ID number.
Please Note: All checks must be drawn on a bank located within the United
States and must be payable in U.S. dollars to Firstar Funds. A $25 fee will be
imposed by the Fund's transfer agent if any check used for investment in an
account or any Periodic Investment Plan purchase does not clear, and the
investor involved will be responsible for any loss incurred by the Fund. Prior
to the transfer agent receiving a completed application, investors may make an
initial investment. However, redemptions will not be paid until the transfer
agent has received the completed application.
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Additional Information on Buying Shares
.The Fund will not accept payment in cash or third party checks for the
purchase of shares.
.Federal regulations require that each investor provide a Social Security
number or other certified taxpayer identification number upon opening or
reopening an account. The Fund reserves the right to reject applications
without such a number or an indication that a number has been applied for. If
a number has been applied for, the number must be provided and certified
within sixty days of the date of the application. Any accounts opened without
a proper number will be subject to backup withholding at a rate of 31% on all
liquidations and dividend and capital gain distributions.
.Payment for shares of the Fund in the amount of $1,000,000 or more may, at the
discretion of the Adviser, be made in the form of securities that are
permissible investments for the Fund.
The Fund may authorize one or more brokers and other shareholder organizations
to accept on their behalf purchase, redemption and exchange orders, and may
authorize such shareholder organizations to designate other intermediaries to
accept purchase, redemption and exchange orders on the Fund's behalf. In these
cases, the Fund will be deemed to have received an order when an authorized
shareholder organization or intermediary accepts the order, and customer orders
will be priced at the Fund's net asset value next computed after they are
accepted by a shareholder organization or intermediary. Shareholder
organizations and intermediaries will be responsible for transmitting accepted
orders to the Fund within the period agreed upon by them. Shareholders should
contact their shareholder organization or intermediaries to learn whether they
are authorized to accept orders for the Fund.
It is the responsibility of shareholder organizations to transmit orders and
payment for the purchase of shares by their customers to the transfer agent on
a timely basis and to provide account statements in accordance with the
procedures previously stated.
For Owners of Y and Institutional Shares
All share purchases are effected pursuant to a customer's account at Firstar
Bank, N.A. Trust Department ("Firstar Trust") or at another chosen institution
or broker-dealer pursuant to procedures established in connection with the
requirements of the account. Confirmations of share purchases and redemptions
will be sent to Firstar Trust or the other shareholder organizations involved.
Firstar Trust and the other shareholder organizations or their nominees will
normally be the holders of record of Fund shares, and will reflect their
customers' beneficial ownership of shares in the account statements provided by
them to their customers. The exercise of voting rights and the delivery to
customers of shareholder communications from the Fund will be governed by the
customers' account agreements with Firstar Trust and the other shareholder
organizations. Investors wishing to purchase shares of the Fund should contact
their account representatives.
In the case of participants in certain employee benefit plans investing in the
Fund, purchase and redemption orders will be processed on a particular day
based on whether a service organization acting on their behalf received the
order by the close of regular trading on that day.
It is the responsibility of shareholder organizations to transmit orders and
payment for the purchase of shares by their customers to the transfer agent on
a timely basis and to provide account statements in accordance with the
procedures previously stated.
Redeeming Shares
Selling Shares
Redemption requests for the Fund received by the transfer agent by telephone
before 3:00 p.m. Central time on a business day for the Fund generally are
processed at 3:00 p.m. Central time on the same day. Redemption requests
received by the transfer agent before 3:00 p.m. Central time on a business day
for the Fund will be executed the same day, at that day's closing price. Orders
received after 3:00 p.m. Central time will be executed on the next business
day.
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Through a Shareholder Organization
[GRAPHIC]
Contact your shareholder organization
By Phone
[GRAPHIC]
Call 1-800-677-FUND with your account name, sixteen digit account number and
amount of redemption (minimum $500). Redemption proceeds will only be sent to a
shareholder's address or bank account of a commercial bank located within the
United States as shown on the transfer agent's records. (Available only if
telephone redemptions have been authorized on the account application and if
there has been no change of address by telephone within the preceding 15 days).
By Mail
[GRAPHIC]
Mail your instructions to the Firstar Funds, P.O. Box 3011, Milwaukee, WI
53201-3011 (via overnight delivery to 615 E. Michigan Street, Milwaukee, WI
53202). Include the number of shares or the amount to be redeemed, your
sixteen-digit account number and Social Security number or other taxpayer
identification number. Your instructions must be signed by all persons required
to sign for transactions exactly as their names appear on the account. If the
redemption amount exceeds $50,000, or if the proceeds are to be sent elsewhere
than the address of record, or the address of record has been changed by
telephone within the preceding 15 days, each signature must be guaranteed in
writing by either a commercial bank that is a member of the FDIC, a trust
company, a credit union, a savings association, a member firm of a national
securities exchange or other eligible guarantor institution.
Internet
www.firstarfunds.com
[GRAPHIC]
Use Firstar Funds Direct to redeem up to $25,000. Call 1-800-677-FUND to
authorize this service.
Automatically (Retail A and Retail B Shares only)
[GRAPHIC]
Call 1-800-677-FUND for a Systematic Withdrawal Plan application ($5,000
account minimum and $50 minimum per transaction).
Guarantees must be signed by an eligible guarantor institution and "Signature
Guaranteed" must appear with the signature.
The Fund may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees and guardians. A redemption
request will not be deemed to be properly received until the transfer agent
receives all required documents in proper form as specified above. Purchases of
additional Retail A Shares concurrently with withdrawals could be
disadvantageous because of the sales charge involved in the additional
purchases.
Additional Transaction Information
Telephone Requests
In order to arrange for telephone redemptions after you have opened your
account or to change the bank or account designated to receive redemption
proceeds, send a written request to Firstar Mutual Fund Services, LLC ("FMFS")
or contact your shareholder organization. Each shareholder of the account must
sign the request. The Fund may request further documentation from corporations,
executors, administrators, trustees and guardians.
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The Fund reserves the right to refuse a telephone redemption if they believe it
is advisable to do so. Procedures for redeeming shares by telephone may be
modified or terminated by the Fund at any time upon notice to shareholders.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If a shareholder is unable to contact the
transfer agent by telephone, shares may also be redeemed by delivering the
redemption request to the transfer agent.
In an effort to prevent unauthorized or fraudulent purchase and redemption
requests by telephone, Firstar employs reasonable procedures to confirm that
such instructions are genuine. Among the procedures used to determine
authenticity, investors electing to transact by telephone will be required to
provide their account number (unless opening a new account). All telephone
transactions will be recorded and confirmed in writing. Statements of accounts
shall be conclusive if not objected to in writing within 10 days after
transmitted by mail. Firstar Funds may implement other procedures from time to
time. If reasonable procedures are not implemented, Firstar Funds may be liable
for any loss due to unauthorized or fraudulent transactions. In all other
cases, the shareholder is liable for any loss for unauthorized transactions.
Certificates
Certificates are only issued upon shareholder request. If certificates have
been issued, the transfer agent must receive the certificates, properly
endorsed or accompanied by a properly executed stock power and accompanied by
signature guarantees, prior to a redemption request.
Additional Redemption Information
The Fund will make payment for redeemed shares typically within one or two
business days, but no later than the seventh day after receipt by the transfer
agent of a request in proper form as specified above, except as provided by SEC
rules. However, if any portion of the shares to be redeemed represents an
investment made by check, the Fund will delay the payment of the redemption
proceeds until the transfer agent is reasonably satisfied that the check has
been collected, which may take up to twelve days from the purchase date. An
investor must have filed a purchase application before any redemption requests
can be paid.
Accounts Below the Minimum Balance
If your account falls below $1,000, other than due to market fluctuations, the
Fund may redeem your account. The Fund will impose no charge and will give you
sixty days written notice and an opportunity to raise the account balance prior
to any redemption. The Fund, in certain cases, may make payment for redemption
in securities. Investors would bear any brokerage or other transaction costs
incurred in converting the securities so received to cash. See the Additional
Statement for more information on involuntary redemptions.
Exchanging Shares
Generally, any share class of the Fund is exchangeable for the same share class
of another Firstar Fund, provided you are eligible to purchase that share class
or Fund. Listed below are permitted exchanges between different share classes
of the Fund.
.Retail B Shares of the Fund may be exchanged for Retail A Shares of a Money
Market Fund offered by Firstar Funds. However, such shares may not then be
exchanged for Retail A Shares of a Non-Money Market Fund.
.Y Shares of the Fund are exchangeable for Institutional Shares of a Money
Market Fund offered by Firstar Funds.
Unless you qualify for a sales charge exemption, an initial sales charge will
be imposed on the exchange if the shares of the Fund being acquired have an
initial sales charge and the shares being redeemed were purchased
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without a sales charge. Retail B Shares acquired in an exchange and Retail A
Shares of a Money Market Fund acquired in an exchange for Retail B Shares will
be subject to a contingent deferred sales charge upon redemption in accordance
with this Prospectus. For purposes of computing the contingent deferred sales
charge, the length of time of ownership will be measured from the date of the
original purchase of Retail B Shares.
Telephone exchange privileges automatically apply to each shareholder of
record unless the transfer agent receives written instructions canceling the
privilege.
Firstar Funds reserves the right to terminate the exchange privilege of any
party who requests more than four exchanges within a calendar year. Firstar
Funds may do so with prior notice based on a consideration of both the number
of exchanges and the time period over which those exchange requests have been
made, together with the level of expense to the Fund or other adverse effects
which may result from the additional exchange requests.
For federal income tax purposes, an exchange of shares is a taxable event and,
accordingly, an investor may realize a capital gain or loss. Before making an
exchange request, an investor should consult a tax or other financial adviser
to determine the tax consequences of a particular exchange. No exchange fee is
currently imposed by Firstar Funds on exchanges, however, Firstar Funds
reserves the right to impose a charge in the future. In addition, shareholder
organizations may charge a fee for providing administrative or other services
in connection with exchanges. The Fund reserves the right to reject any
exchange request with prior notice to a shareholder and the exchange privilege
may be modified or terminated at any time. At least sixty days' notice will be
given to shareholders of any material modification or termination except where
notice is not required under SEC regulations. Also keep in mind:
.Exchanges are available only in states where exchanges may be legally made.
.The minimum amount which may be exchanged is $1,000.
.If any portion of the shares to be exchanged represents an investment made by
check, the Fund will delay the acquisition of new shares in an exchange until
the transfer agent is reasonably satisfied that the check has been collected,
which may take up to twelve days from the purchase date.
.It may be difficult to make telephone exchanges in times of drastic economic
or market changes. If this happens, you may initiate transactions in your
Fund accounts by mail or as otherwise described in this Prospectus.
Additional Shareholder Services
[GRAPHIC]
Shareholder Reports
Shareholders will be provided with a report showing portfolio investments and
other information at least semiannually; and after the close of the Fund's
fiscal year with an annual report containing audited financial statements. To
eliminate unnecessary duplication, only one copy of shareholder reports will
be sent to shareholders with the same mailing address. Shareholders may
request duplicate copies free of charge.
Account statements will be mailed after each purchase, reinvestment of
dividends and redemption. Statements of accounts shall be conclusive if not
objected to in writing within 10 days after transmitted by mail. Generally,
the Fund does not send statements for funds held in brokerage, retirement or
other similar accounts.
Firstar Funds Website (www.firstarfunds.com)
[GRAPHIC]
The site offers educational information and interactive financial planning
tools as well as product-specific information.
Generally, shareholders can request purchases, exchanges and redemptions of
the Fund's shares online via the Internet after an account is opened.
Redemption requests of up to $25,000 will be accepted through the
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Internet. Payment for shares purchased online must be made by electronic funds
transfer from your banking institution. To authorize this service, call FMFS
at 1-800-677-FUND.
Firstar Funds and their agents will not be responsible for any losses
resulting from unauthorized on-line transactions when procedures are followed
which are designed to confirm that the on-line transaction request is genuine.
Statements of accounts shall be conclusive if not objected to in writing
within 10 days after transmitted by mail. During periods of significant
economic or market change, it may be difficult to reach the Fund on-line. If
this happens, you may initiate transactions in your Fund accounts by mail or
as otherwise described in the Prospectus.
Automated Teleresponse Service
Shareholders using a touch-tone(R) telephone can access information on the
Fund twenty-four hours a day, seven days a week. When calling FMFS at 1-800-
677-FUND, shareholders may choose to use the automated information feature or,
during regular business hours (8:00 a.m. to 7:00 p.m. Central time, Monday
through Friday), speak with a Firstar Funds representative.
Retirement Plans
The Fund offers individual retirement accounts including Traditional, Roth,
SIMPLE and SEP IRAs. For details concerning Retirement Accounts (including
service fees), please call FMFS at 1-800-677-FUND.
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Additional Information
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
Reinvested dividends and distributions receive the same tax treatment as those
paid in cash.
Dividends and Capital Gains Distributions
Dividends from the net investment income of the Fund are declared and paid
annually. Any capital gains are distributed annually. A shareholder's dividends
and capital gains distributions will be reinvested automatically in additional
shares unless the Fund is notified that the shareholder elects to receive
distributions in cash.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Federal Taxes
The Fund contemplates declaring as dividends each year all, or substantially
all, of its taxable income, including its net capital gain (the excess of
long-term capital gain over short-term capital loss). Distributions
attributable to the net capital gain of the Fund will be taxable to you as
long-term capital gain, regardless of how long you have held your Shares.
Other Fund distributions will generally be taxable as ordinary income.
(However, if the Fund's distributions exceed its net income and gain - as may
be the case because REIT distributions often include a non-taxable return of
capital - that excess will generally result in a non-taxable return of capital
to you.)
You will be subject to income tax on these distributions regardless of whether
they are paid in cash or reinvested in additional Shares. You will be notified
annually of the tax status of distributions to you.
You should note that if you purchase Shares just prior to a capital gain
distribution, the purchase price will reflect the amount of the upcoming
distribution, but you will be subject to income tax on the entire amount of
the distribution received, even though, as an economic matter, the
distribution simply constitutes a return of capital. This is known as "buying
into a dividend."
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You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the Shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held Shares.) Any loss
realized on Shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends that were received on
the Shares. Additionally, any loss realized on a sale or redemption of shares
of the Fund may be disallowed under "wash sale" rules to the extent the shares
disposed of are replaced with other shares of the Fund within a period of 61
days beginning 30 days before and ending 30 days after the shares are disposed
of, such as pursuant to a dividend reinvestment in shares of the Fund. If
disallowed, the loss will be reflected in an adjustment to the basis of shares
acquired.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, Shares held in an IRA (or other tax-
qualified plan) will not be currently taxable.
The Fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the Fund receives from U.S. domestic
corporations may be eligible, in the hands of the corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations.
REITs often do not provide complete tax information to the Fund until after
calendar year-end. Consequently, because of the delay, it may be necessary for
the Fund to request permission to extend the deadline for issuance of Form
1099-DIV beyond January 31.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different United States federal income tax
treatment. You should consult your tax adviser for further information
regarding federal, state, local and/or foreign tax consequences relevant to
your specific situation.
State and Local Taxes
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply, however, to the portions of the
Fund's distributions, if any, that are attributable to interest on Federal
securities or interest on securities of the particular state or localities
within the state. Shareholders should consult their tax advisers regarding the
tax status of distributions in their state and locality.
Management of the Fund
Advisory Services
FIRMCO, a Wisconsin limited liability company (the "Adviser") and subsidiary of
Firstar Corporation, a bank holding company, serves as investment adviser to
the Fund. FIRMCO, with principal offices at Firstar Center, 777 East Wisconsin
Avenue, 8th Floor, Milwaukee, Wisconsin 53202, has provided investment advisory
services since 1986. FIRMCO currently has $35.3 billion in assets under
management.
Firstar Corporation has agreed to permit the Company to use the name "Firstar
Funds" and expansions thereof on a non-exclusive and royalty-free basis in
connection with mutual fund management and distribution services within the
United States, its territories and possessions. This agreement may be
terminated by Firstar Corporation under specified circumstances, including if
no affiliate of Firstar Corporation is serving as investment adviser for any
portfolio offered by the Company.
Subject to the general supervision of the Board of Directors and in accordance
with the respective investment objective and policies of the Fund, the Adviser
manages the Fund's portfolio securities and maintains records relating to such
purchases and sales.
................................................................................
22
<PAGE>
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--------------------------------------------------------------------------------
The Adviser is authorized to allocate purchase and sale orders for portfolio
securities to shareholder organizations, including, in the case of agency
transactions, shareholder organizations which are affiliated with the Adviser,
to take into account the sale of fund shares if the Adviser believes that the
quality of the transaction and the amount of the commission are comparable to
what they would be with other qualified brokerage firms.
FIRMCO is entitled to receive from the Fund a contractual fee calculated daily
and payable monthly, at the annual rate of .75% of the Fund's average daily net
assets.
Prior to December 11, 2000, the Select REIT-Plus Fund was managed by Firstar
Bank, N.A. Firstar Bank, N.A. was solely owned by StarBanc Corporation until
November 20, 1998, when StarBanc Corporation merged with Firstar Corporation.
The new entity retained the "Firstar" name and Firstar Corporation is now the
parent company of Firstar Bank, N.A. and of FIRMCO. Firstar Bank, N.A. was
known as Star Bank, N.A., prior to the merger.
For the fiscal year ended March 31, 2000, the Predecessor Select REIT-Plus Fund
paid its former investment adviser, Firstar Bank, N.A., advisory fees at the
rate of 0.75% of average daily net assets.
Fund Managers
Karen Bowie manages the Fund. She has over 15 years of trust and investment
management experience with five of those years spent at Firstar. Ms. Bowie has
been responsible for the day-to-day management of the Fund's portfolio since
April 1999.
Administrative Services
FMFS, an affiliate of the Adviser, serves as the Fund's Administrator and
receives fees for those services.
Custodian, Transfer and Dividend Disbursing Agent, and Accounting Services
Agent
FMFS also provides transfer agency, dividend disbursing agency and accounting
services for the Fund and receives fees for these services. Inquiries to the
transfer agent may be sent to: Firstar Mutual Fund Services, LLC, P.O. Box
3011, Milwaukee, Wisconsin 53201-3011. Firstar Bank, N.A., an affiliate of the
Adviser, provides custodial services for the Fund and receives fees for those
services.
Net Asset Value and Days of Operation
The price of the Retail A, Retail B, Y and Institutional Shares (each, a
"class") is based on net asset value per share, plus, in the case of Retail A
Shares, a front-end sales charge, if applicable. This amount is calculated
separately for each class of shares by dividing the value of all securities and
other assets attributable to the class, less the liabilities attributable to
that class, by the number of outstanding shares of that class. The price at
which a purchase or redemption is effected is based on the next calculation of
net asset value after the order is accepted.
Net asset value for purposes of pricing purchase and redemption orders is
determined as of the close of regular trading hours on the New York Stock
Exchange (the "Exchange"), normally, 3:00 p.m. Central time, on each day the
Exchange is open for trading. Shares of the Fund are not priced on days when
the Exchange is closed. For a complete list of days the Exchange is closed,
please see the Additional Statement.
The Fund's investments are valued based on market quotations, except that
restricted securities and securities for which market quotations are not
readily available and other assets are valued at fair value by the Adviser
under the supervision of the Board of Directors. Short-term investments having
a maturity of 60 days or less are valued at amortized cost, unless the
amortized cost does not approximate market value.
Portfolio securities which are primarily traded on foreign securities exchanges
are generally valued at the preceding closing values of such securities on
their respective exchanges, except when an occurrence
............................................................................. 23
<PAGE>
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subsequent to the time a value was so established is likely to have changed
such value. In such an event, the fair value of those securities will be
determined through the consideration of other factors by or under the direction
of the Board of Directors. The Fund's foreign securities may trade on weekends
or other days when the Fund does not price its shares. Accordingly, the net
asset value per share of the Fund may change on days when shareholders will not
be able to purchase or redeem the Fund's shares.
The Fund's securities may be valued based on valuations provided by an
independent pricing service. The Adviser reviews these valuations. If the
Adviser believes that a valuation received from the service does not represent
a fair value, it values the security by a method that the Board of Directors
believes will determine a fair value. Any pricing service used may employ
electronic data processing techniques, including a "matrix" system, to
determine valuations. Quotations of foreign securities in foreign currency are
converted to U.S. dollar equivalents using the foreign exchange quotation in
effect at the time net asset value is computed.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Fund's Additional
Statement incorporated herein by reference, in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund
or their Distributor. This Prospectus does not constitute an offering by the
Fund or by their Distributor in any jurisdiction in which such offering may not
lawfully be made.
................................................................................
24
<PAGE>
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--------------------------------------------------------------------------------
Appendix
Financial Highlights
The financial highlights tables set forth on the following pages are based on
the financial history of the Predecessor Select Fund. The financial highlights
tables are intended to help you understand the Fund's financial performance for
the period of the Fund's operations. Certain information reflects financial
results for a single Fund share. The total returns in the tables represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions).
This information has been audited by McCurdy & Associates, CPAs, independent
auditors for the Predecessor Select Fund, whose reports, along with the Fund's
financial statements, are included in the Predecessor Select Fund's Annual
Report and incorporated by reference into the Additional Statement, all of
which are available upon request.
Contact FMFS for a free copy of the Annual and Semi-Annual Reports or
Additional Statement.
............................................................................. 25
<PAGE>
................................................................................
[LOGO OF FIRSTAR]
--------------------------------------------------------------------------------
Institutional Shares
Retail B Shares
<TABLE>
<CAPTION>
Income from Investment Activities Less Distributions
------------------------------------ ------------------------------------------
Distributions
Net Net Realized Dividends from Net
Asset Value, Net and Unrealized Total from from Net Realized
Beginning Investment Gain (Loss) Investment Investment Gains on Total
of Period Income on Investments Activities Income Investments Distributions
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended March 31,
2000 $ 7.96 0.53 (0.21) 0.32 (0.53) 0.00 (0.53)
------------------------------------------------------------------------------------------------------------------
Year ended March 31,
1999 10.59 0.40 (2.55) (2.15) (0.40) (0.08) (0.48)
------------------------------------------------------------------------------------------------------------------
Year ended March 31,
1998/1/ 10.00 0.35 0.86 1.21 (0.35) (0.27) (0.62)
------------------------------------------------------------------------------------------------------------------
</TABLE>
1 For the period June 24, 1997 (commencement of operations) to March
31, 1998.
2 Annualized.
<TABLE>
<CAPTION>
Income from Investment Activities Less Distributions
------------------------------------ --------------------------------------
Distributions
Net Net Realized Dividends from Net
Asset Value, Net and Unrealized Total from from Net Realized
Beginning Investment Gain (Loss) Investment Investment Gains on Total
of Period Income on Investments Activities Income Investments Distributions
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended March 31,
2000 $ 7.99 0.53 (0.22) 0.31 (0.53) 0.00 (0.53)
---------------------------------------------------------------------------------------------------------------
Year ended March 31,
1999 10.59 0.40 (2.54) (2.14) (0.38) (0.08) (0.46)
---------------------------------------------------------------------------------------------------------------
</TABLE>
................................................................................
26
<PAGE>
................................................................................
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Supplemental Data and Ratios
----------------------------------------------------------------------------
Ratio of Net
Ratio of Ratio of Net Investment
Net Assets, Ratio of Expenses to Investment Income to
Net Asset End of Expenses to Average Net Income to Average Net
Value, End Total Period Average Net Assets (After Average Assets (After Portfolio
of Period Return (000s) Assets Reimbursement) Net Assets Reimbursement) Turnover
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 7.75 4.22% 28,813 1.61% 1.61% 6.53% - 18.57%
----------------------------------------------------------------------------------------------------------
7.96 (20.59)% 30,566 1.47% 1.47% 4.35% - 45.48%
----------------------------------------------------------------------------------------------------------
10.59 14.96%/2/ 43,981 1.52%/2/ 1.52% 4.29%/2/ - 29.50%/2/
----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Supplemental Data and Ratios
----------------------------------------------------------------------------
Ratio of Net
Ratio of Ratio of Net Investment
Net Assets, Ratio of Expenses to Investment Income to
Net Asset End of Expenses to Average Net Income to Average Net
Value, End Total Period Average Net Assets (After Average Assets (After Portfolio
of Period Return (000s) Assets Reimbursement) Net Assets Reimbursement) Turnover
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$7.77 3.97% 90 21.55% 1.60% (12.11)% 7.84% 18.57%
--------------------------------------------------------------------------------------------------------
7.99 (20.65)% 91 13.38% 1.45% (7.53)% 4.39% 45.48%
--------------------------------------------------------------------------------------------------------
</TABLE>
............................................................................. 27
<PAGE>
For More Information
Annual/Semiannual Reports
Additional information about the Fund's performance and investments is
available in the Fund's annual and semiannual reports to shareholders. In the
Fund's annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
Statement of Additional Information
Additional information about the Fund and its policies is also available in the
Fund's Statement of Additional Information ("Additional Statement"). The
Additional Statement is incorporated by reference into this Prospectus (and is
legally considered part of this Prospectus).
The Fund's annual and semiannual reports and Additional Statement are available
free upon request by calling Firstar Funds at 1-800-677-FUND or 1-414-287-3808.
To obtain other information and for shareholder inquiries:
By telephone - call 1-800-677-FUND or 1-414-287-3808
By mail - Firstar Funds
615 East Michigan Street
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
By e-mail - [email protected]
On the Internet - Text only version of the Fund's documents are located online
and may be downloaded from: - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's Public
Reference Room in Washington, D.C. You may also obtain copies of Fund documents
by paying a duplicating fee and sending an electronic request at the following
e-mail address at: [email protected]., or by sending your request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C. 20549-
0102. Information on the operation of the public reference room may be obtained
by calling the SEC at 1-202-942-8090.
The Fund's Investment Company Act File Number is 811-5380
www.firstarfunds.com
[LOGO OF FIRSTAR]
<PAGE>
FIRSTAR FUNDS, INC.
Statement of Additional Information
<TABLE>
<S> <C> <C>
Short-Term Bond Fund National Municipal Bond Fund International Value Fund
Intermediate Bond Fund Balanced Income Fund Global Equity Fund
U.S. Government Securities Fund Balanced Growth Fund International Growth Fund
Aggregate Bond Fund Growth & Income Fund MidCap Index Fund
Bond IMMDEX(TM) Fund Equity Income Fund MidCap Core Equity Fund
Strategic Income Fund Relative Value Fund Small Cap Index Fund
Tax-Exempt Intermediate Bond Equity Index Fund Small Cap Core Equity Fund
Fund Large Cap Core Equity Fund Science & Technology Fund
Missouri Tax-Exempt Bond Fund Large Cap Growth Fund MicroCap Fund
</TABLE>
December 11, 2000
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
FIRSTAR FUNDS, INC.............................................................3
DESCRIPTION OF THE FUNDS AND THEIR INVESTMENTS AND RISKS.......................6
INVESTMENT STRATEGIES AND RISKS...............................................11
NET ASSET VALUE...............................................................78
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................80
DESCRIPTION OF SHARES.........................................................87
ADDITIONAL INFORMATION CONCERNING TAXES.......................................91
MANAGEMENT OF THE COMPANY.....................................................93
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES AGENT......................111
EXPENSES.....................................................................113
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS.............................113
COUNSEL......................................................................113
CODE OF ETHICS...............................................................114
PERFORMANCE CALCULATIONS.....................................................114
PERFORMANCE HISTORY..........................................................121
MISCELLANEOUS................................................................127
APPENDIX A...................................................................A-1
APPENDIX B...................................................................B-1
</TABLE>
This Statement of Additional Information ("SAI"), which is not a
prospectus, supplements and should be read in conjunction with Firstar Funds,
Inc.'s prospectuses (the "Prospectuses") dated of even date herewith, for
Institutional, Retail A, Retail B and Y Shares of the Short-Term Bond Fund,
Intermediate Bond Fund, U.S. Government Securities Fund, Aggregate Bond Fund,
Bond IMMDEX(TM)
-1-
<PAGE>
Fund, Strategic Income Fund, Tax-Exempt Intermediate Bond Fund, Missouri Tax-
Exempt Bond Fund, National Municipal Bond Fund, Balanced Income Fund, Balanced
Growth Fund, Growth & Income Fund, Equity Income Fund, Relative Value Fund,
Equity Index Fund, Large Cap Core Equity Fund, Large Cap Growth Fund,
International Value Fund, Global Equity Fund, International Growth Fund, MidCap
Index Fund, MidCap Core Equity Fund, Small Cap Index Fund, Small Cap Core Equity
Fund, Science & Technology Fund and MicroCap Fund (collectively referred to as
the "Funds") and is incorporated by reference in its entirety into the
Prospectuses. The U.S. Government Securities Fund, Aggregate Bond Fund,
Strategic Income Fund, Missouri Tax-Exempt Bond Fund, National Municipal Bond
Fund, Equity Income Fund, Relative Value Fund, Large Cap Growth Fund, Global
Equity Fund, Small Cap Index Fund and Science & Technology Fund commenced
operations as a portfolio of either the Firstar Stellar Funds or Mercantile
Mutual Funds, Inc. (the "Shell Predecessor Funds"), as further explained herein.
On December 11, 2000, each Shell Predecessor Fund was reorganized as a new
portfolio of Firstar Funds, Inc.
On November 27, 2000, the International Equity Portfolio and Small Cap
Equity Portfolio of Mercantile Mutual Funds, Inc. (the "Historical Predecessor
Funds") reorganized into the Firstar International Growth Fund and the Firstar
Small Cap Core Equity Fund, respectively. The financial history of the
Historical Predecessor Funds survived these reorganizations. The Shell
Predecessor Funds and the Historical Predecessor Funds are hereinafter known as
the "Predecessor Funds."
The Prospectuses, as well as the Semi-Annual Report to Shareholders of the
Continuing Funds (as defined below on page 5) dated April 30, 2000, the
Predecessor Funds' Semi-Annual Reports to Shareholders dated May 31, 2000, the
Annual Report to Shareholders of the Continuing Funds dated October 31, 1999 and
the Predecessor Funds' Annual Reports to Shareholders dated November 30, 1999,
may be obtained, without charge, by writing Firstar Mutual Fund Services, LLC at
615 East Michigan Street, P.O. Box 3011, Milwaukee, WI 53201-3011 or by calling
1-800-677-FUND. The audited Financial Statements and the related Reports of
Independent Public Accountants for the year ended November 30, 1999 and the
unaudited financial statements for the semi annual period ended May 31, 2000 for
the Predecessor Funds in this SAI are incorporated by reference from the
Predecessor Funds' respective Annual Reports and Semi-Annual Reports. The
Financial Statements for the remaining Funds and the Independent Accountants
report thereon in this SAI are incorporated by reference from the Annual Report
and Semi-Annual Report of the Continuing Funds. No other parts of the Annual
Reports are incorporated herein by reference.
-2-
<PAGE>
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 four series, a Retail A, Retail B,
Y and Institutional series. This SAI pertains to Retail A Shares, Retail B
Shares, Y Shares and Institutional Shares of twenty-five diversified portfolios,
the Short-Term Bond Fund, Intermediate Bond Fund, U.S. Government Securities
Fund, Aggregate Bond Fund, Bond IMMDEX(TM) Fund, Strategic Income Fund, Tax-
Exempt Intermediate Bond Fund, Missouri Tax-Exempt Bond Fund, National Municipal
Bond Fund, Balanced Income Fund, Balanced Growth Fund, Growth & Income Fund,
Equity Income Fund, Relative Value Fund, Equity Index Fund, Large Cap Core
Equity Fund, Large Cap Growth Fund, International Value Fund, International
Growth Fund, MidCap Index Fund, MidCap Core Equity Fund, Small Cap Index Fund,
Small Cap Core Equity Fund, Science & Technology Fund and MicroCap Fund and to Y
Shares and Institutional Shares of one additional portfolio, the Global Equity
Fund (collectively the "Funds").
Stellar/Mercantile Reorganization
---------------------------------
On November 27, 2000, the Company engaged in a reorganization with
Mercantile Mutual Funds, Inc. and Firstar Stellar Funds. As a result of this
reorganization, certain portfolios offered by Mercantile Mutual Funds, Inc. and
Firstar Stellar Funds reorganized into certain of the Funds that existed prior
to the reorganization as follows:
Portfolio(s) of Firstar Stellar Funds and/or
Mercantile Mutual Funds, Inc. that
Firstar Fund Reorganized into Firstar Fund
------------ -----------------------------
Intermediate Bond Fund Mercantile Intermediate Corporate Bond
Portfolio
U.S. Government Securities Fund Mercantile U.S. Government Securities
Portfolio ("Predecessor U.S. Government
Securities Fund") and Firstar Stellar U.S.
Government Income Fund
Aggregate Bond Fund Mercantile Government & Corporate Bond
Portfolio ("Predecessor Aggregate Bond
Fund") and Mercantile Bond Index Portfolio
Tax-Exempt Intermediate Bond Fund Mercantile Short-Intermediate Municipal
Portfolio
National Municipal Bond Fund Mercantile National Municipal Bond Portfolio
("Predecessor National Municipal Bond
Fund") and Firstar Stellar Insured Tax-Free
Bond Fund
Balanced Income Fund Firstar Stellar Fund
Balance Growth Fund Mercantile Balanced Portfolio
Growth & Income Fund Mercantile Growth & Income Equity Portfolio
Equity Index Fund Mercantile Equity Index Portfolio
Large Gap Core Equity Fund Mercantile Growth Equity Portfolio
International Growth Fund Mercantile International Equity Portfolio
("Predecessor International Growth Fund")
MidCap Index Fund Firstar Stellar Capital Appreciation Fund
Small Cap Core Equity Fund Mercantile Small Cap Equity Portfolio
("Predecessor Small Cap Core Equity Fund")
For the periods prior to November 27, 2000, the performance history,
historical data and certain of the expense information related to the U.S.
Government Securities Fund, Aggregate Bond Fund, National Municipal Bond Fund,
International Growth Fund and Small Cap Core Equity Fund that is set forth in
this SAI is that of the Predecessor U.S. Government Securities Fund, Predecessor
Aggregate Bond Fund, Predecessor National
-3-
<PAGE>
Municipal Bond Fund, Predecessor International Growth Fund and Predecessor Small
Cap Core Equity Fund, respectively.
Additionally, the following Funds were originally organized as
investment portfolios of the following investment companies under the following
names:
<TABLE>
<CAPTION>
Formerly an Investment Portfolio
Portfolio of the Following Name at Predecessor
Firstar Fund Name Investment Company Investment Company
----------------- ------------------ ------------------
<S> <C> <C>
Strategic Income Fund Firstar Stellar Funds Firstar Stellar Strategic
Income Fund ("Predecessor
Strategic Income Fund")
Missouri Tax-Exempt Bond Fund Mercantile Mutual Funds, Mercantile Missouri Tax-Exempt
Inc. Bond Portfolio ("Predecessor
Missouri Tax-Exempt Bond Fund")
Equity Income Fund Mercantile Mutual Funds, Mercantile Equity Income
Inc. Portfolio ("Predecessor Equity
Income Fund")
Relative Value Fund Firstar Stellar Funds Firstar Stellar Relative Value
Fund ("Predecessor Relative
Value Fund")
Large Cap Growth Fund Firstar Stellar Funds Firstar Stellar Growth Equity
Fund ("Predecessor Large Cap
Growth Fund")
Global Equity Fund Firstar Stellar Funds Firstar Stellar International
Equity Fund ("Predecessor
Global Equity Fund")
Small Cap Index Fund Mercantile Mutual Funds, Mercantile Small Cap Equity
Inc. Index Portfolio ("Predecessor
Small Cap Index Fund")
Science & Technology Fund Firstar Stellar Funds Firstar Stellar Science &
Technology Fund ("Predecessor
Science & Technology Fund")
</TABLE>
On December 11, 2000, each of these Funds was reorganized as an investment
portfolio of the Company. For the periods prior to December 11, 2000, the
performance history, historical data and certain of the expense information
related to these Funds that is set forth in this SAI is that of the Predecessor
Funds set forth above.
The Short Term Bond, Intermediate Bond, Bond IMMDEX(TM), Tax-Exempt
Intermediate Bond, Balanced Income, Balanced Growth, Growth & Income, Equity
Index, Large Cap Core Equity, International Value, MidCap Index, MidCap Core
Equity and MicroCap Funds all existed as portfolios of the Company prior to the
reorganization and have maintained their performance histories and investment
policies. These portfolios are referred to herein as the "Continuing Funds."
-4-
<PAGE>
The U.S. Government Securities, Aggregate Bond, Strategic Income, Missouri
Tax-Exempt Bond, National Municipal Bond, Equity Income, Relative Value, Large
Cap Growth, Global Equity, International Growth, Small Cap Index, Small Cap Core
Equity and Science & Technology Funds are referred to herein as the "New Funds."
Name Changes
------------
The Short-Term Bond Fund changed its name from Short-Term Bond Market Fund
on December 11, 2000, and had previously changed its name from Short-
Intermediate Fixed Income Fund effective January 1, 1993. The Intermediate Bond
Fund changed its name from the Intermediate Bond Market Fund on November 27,
2000. The Balanced Growth Fund changed its name from the Balanced Fund effective
February 1, 1998. The Growth & Income Fund changed its name from the Income and
Growth Fund effective August 16, 1993. The Large Cap Core Equity Fund changed
its name from the Growth Fund on November 27, 2000, and had previously changed
its name from the MidCore Growth Fund effective May 30, 1997. The International
Value Fund changed its name from the International Equity Fund on December 11,
2000. The International Growth Fund changed its name from the Core International
Equity Fund on November 27, 2000. The MidCap Core Equity Fund changed its name
from the Special Growth Fund on December 11, 2000. The Small Cap Core Equity
Fund changed its name from the Emerging Growth Fund on November 27, 2000.
Commencement of Operations
--------------------------
The MidCap Core Equity Fund commenced operations on December 28, 1989; the
Short-Term Bond Fund, Bond IMMDEX(TM) Fund, Growth & Income Fund and Equity
Index Fund commenced operations on December 29, 1989; the Balanced Growth Fund
commenced operations on March 30, 1992; the Large Cap Core Equity Fund commenced
operations on December 29, 1992; the Intermediate Bond Fund commenced operations
on January 5, 1993; the Tax-Exempt Intermediate Bond Fund commenced operations
on February 8, 1993; the International Value Fund commenced operations on April
28, 1994; the MicroCap Fund commenced operations on August 1, 1995; the Small
Cap Core Equity Fund commenced operations on August 15, 1997 and adopted the
investment policies and performance and financial history of the Mercantile
Small Cap Equity Portfolio (which commenced operations on May 6, 1992) on
November 27, 2000; the Balanced Income Fund commenced operations on December 1,
1997; and the International Growth Fund and MidCap Index Fund commenced
operations on November 4, 1999, with the International Growth Fund adopting the
investment policies and performance and financial history of the Mercantile
International Equity Portfolio (which commenced operations on April 4, 1994) on
November 27, 2000.
The Funds listed below commenced operations as portfolios of the Company on
December 11, 2000. These funds continued the investment policies and
performance and financial history of their respective Predecessor Funds, each of
which commenced operations on the date set forth after the name of each Fund:
U.S. Government Securities Fund (February 1, 1991); Aggregate Bond Fund
(February 1, 1991); Strategic Income Fund (December 12, 1994); Missouri Tax-
Exempt Bond Fund (July 15, 1988); National Municipal Bond Fund (November 18,
1996); Equity Income Fund (February 27, 1997); Relative Value Fund (June 5,
1991); Large Cap Growth Fund (December 12, 1994); Global Equity Fund (December
3, 1997); Small Cap Index Fund (December 30, 1998); and Science & Technology
Fund (August 9, 1999).
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
-5-
<PAGE>
Services, LLC at 1-800-677-FUND or write to 615 East Michigan Street, P.O. Box
3011, Milwaukee, Wisconsin 53201-3011.
DESCRIPTION OF THE FUNDS AND THEIR INVESTMENTS AND RISKS
The Company is a diversified, open-end management investment company. The
following policies supplement the Funds' respective investment objectives and
policies as set forth in the Prospectuses.
Portfolio Transactions
----------------------
Subject to the general supervision of the Board of Directors, Firstar
Investment Research & Management Company, LLC ("FIRMCO" or 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 Value Fund and International Growth Fund. Subject to the general
supervision of the Board of Directors, the Adviser is responsible for the
portfolio management of the International Value Fund and International Growth
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 Clay Finlay, Inc. ("Clay Finlay") (HGI and Clay
Finlay 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 Clay Finlay each is
responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for the International Value Fund and
International Growth 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
International Value 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%. Although the Strategic Income Fund does not intend to invest for
short-term profits, securities in the Fund's portfolio will be sold whenever the
Adviser believes it is appropriate to do so in light of its investment
objective. The Adviser disregards the length of time a particular security may
have been held by the Fund.
The 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
-6-
<PAGE>
income for federal income tax purposes. The Strategic Income Fund's turnover
rates for the past two fiscal years are shown below.
November 30, 1999 November 30, 1998
----------------- -----------------
73% 146%
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 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:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Short-Term Bond $ 0 $ 0 $ 0
Intermediate Bond 0 0 0
Bond IMMDEX(TM) 0 0 0
Tax-Exempt Intermediate Bond 0 0 0
Balanced Income 35,386 17,012 N/A
Balanced Growth 269,930 183,767 178,114
Growth & Income 944,299 521,009 403,426
Equity Index 103,834 100,414 101,524
Large Cap Core Equity 347,203 187,935 263,875
International Value 125,280 183,485 161,449
MidCap Index N/A N/A N/A
MidCap Core Equity 1,732,758 912,455 965,454
</TABLE>
-7-
<PAGE>
<TABLE>
<S> <C> <C> <C>
MicroCap 171,579 151,906 132,772*
</TABLE>
*For the fiscal period from August 15, 1997 through October 31, 1997.
For the fiscal years ended November 30, 1999, 1998 and 1997, brokerage
commissions were paid for the Predecessor Funds as follows:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
U.S. Government Securities $ 0 $ 0 $ 0
Aggregate Bond 0 0 0
Strategic Income 334,889 395,862 406,396
Missouri Tax-Exempt Bond 0 0 0
National Municipal Bond 0 0 0
Equity Income 275,891 361,966 151,046
Relative Value 219,478 315,245 218,211
Large Cap Growth 305,414 286,979 274,875
Global Equity 70,829 50,105 N/A
International Growth 387,288 293,093 248,564
Small Cap Index 98,519 N/A N/A
Small Cap Core Equity 319,318 550,114 428,191
Science & Technology 21,635 N/A N/A
</TABLE>
None of the brokerage commissions were paid to affiliates of the Company, the
Adviser, Sub-Advisers or the Administrator.
The Advisory Agreement between the Company and the Adviser, and with
respect to the International Value Fund, the Sub-Advisory Agreement among the
Company, the Adviser and HGI, and with respect to the International Growth Fund,
the Sub-Advisory Agreement among the Company, the Adviser and Clay Finlay,
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-Advisers 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,
-8-
<PAGE>
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, each Firstar Fund held securities of its regular brokers
or dealers (as defined under the 1940 Act) or their parents as follows:
<TABLE>
<CAPTION>
Fund Broker/Dealer Total Holdings
---- ------------- --------------
<S> <C> <C>
Short-Term Bond 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 Goldman Sachs 4,868,790
Merrill Lynch 6,828,738
Donaldson Lufkin and Jenrette 2,927,700
Lehman Brothers 10,177,970
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Fund Broker/Dealer Total Holdings
---- ------------- --------------
<S> <C> <C>
Salomon 1,953,249
Paine Webber 5,588,483
Prudential 4,921,624
Bear Stearns 2,217,476
Bond IMMDEX(TM) 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 & 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
Large Cap Core Equity Morgan Stanley 4,930,969
</TABLE>
As of October 31, 1999, the International Value, MidCap Index, MidCap Core
Equity and MicroCap Funds did not hold any securities of their respective
regular brokers or dealers (as defined under the 1940 Act) or their parents.
-10-
<PAGE>
As of November 30, 1999, each Predecessor Fund held securities of its regular
brokers or dealers (as defined under the 1940 Act) or their parents as follows:
<TABLE>
<CAPTION>
Fund Broker/Dealer Total Holdings
---- ------------- --------------
<S> <C> <C>
Aggregate Bond Merrill Lynch 2,985,000
Strategic Income Lehman Brothers 5,551,000
Large Cap Growth Merrill Lynch 1,650,000
Morgan Stanley 2,093,000
</TABLE>
As of November 30, 1999, the Predecessor Equity Income, Predecessor Relative
Value, Predecessor Global Equity, Predecessor International Growth, Predecessor
Small Cap Index, Predecessor Small Cap Core Equity and Predecessor Science &
Technology Funds did not hold any securities of their respective regular brokers
or dealers (as defined under the 1940 Act) or their parents
INVESTMENT STRATEGIES AND RISKS
Temporary Defensive Positions. The Missouri Tax-Exempt Bond Fund may hold
-----------------------------
uninvested cash reserves pending investment during temporary defensive periods
or if, in the opinion of the Adviser, suitable municipal securities are
unavailable. There is no percentage limitation on the amount of assets that may
be held uninvested during temporary defensive periods. In addition, during
temporary defensive periods or if, in the opinion of the Adviser, suitable
municipal securities are unavailable and subject to the Fund's quality
standards, the Fund may invest up to 20% of its assets in money market
instruments, the income from which is subject to federal income tax. Such
instruments may include obligations of the U.S. Government, its agencies or
instrumentalities; debt securities (including commercial paper) of issuers
having, at the time of purchase, a quality rating within the highest rating
category by a rating agency; certificates of deposit or bankers' acceptances of
domestic branches of U.S. banks with total assets at the time of purchase of $1
billion or more; or repurchase agreements with respect to such obligations.
The Equity Income Fund reserves the right to hold, as a temporary defensive
measure during abnormal market or economic conditions, up to 100% of its total
assets in cash and short-term obligations (having remaining maturities of 13
months or less) at such times and in such proportions as, in the opinion of the
Adviser, such abnormal market or economic conditions warrant. Short-term
obligations in which the Fund may invest include (i) money market instruments,
such as commercial paper, including variable and floating rate instruments,
rated at the time of purchase in one of the two highest rating categories
assigned by a rating agency or, if unrated, deemed to be of comparable quality
by the Adviser at the time of purchase, and bank obligations, including bankers'
acceptances, negotiable certificates of deposit and non-negotiable time deposits
of U.S. and foreign banks having total assets at the time of purchase in excess
of $1 billion, (ii) obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and (iii) repurchase agreements.
The Relative Value Fund may invest in temporary investments from time to
time for defensive purposes. The Fund may invest in securities issued and/or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies or instrumentalities, repurchase agreements and short-term money market
instruments such as:
-11-
<PAGE>
. instruments of domestic and foreign banks and savings associations if
they have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is
federally insured; or
. commercial paper rated A-1 by S&P, Prime-1 by Moody's, or F-1 by
Fitch.
For temporary defensive purposes (up to 100% of total assets) and to
maintain liquidity (up to 35% of total assets), the Global Equity Fund may
invest in U.S. and foreign short-term money market instruments including:
. commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's or F-1 or F-2 by Fitch. In the case where commercial paper has
received different ratings from different rating services, such
commercial paper is acceptable so long as at least one rating is in
the two highest categories of the NRSROs described above;
. instruments of domestic and foreign banks and savings associations
(such as certificates of deposit, demand and time deposits and
bankers' acceptances) if they have capital, surplus, and undivided
profits of over $100,000,000, or if BIF or SAIF insures the principal
amount of the instrument. These instruments may include Eurodollar
Certificates of Deposit, Yankee Certificates of Deposit, and
Eurodollar Time Deposits;
. obligations of the U.S. government or its agencies or
instrumentalities;
. repurchase agreements; and
. other short-term instruments that are not rated but are determined by
the Adviser to be of comparable quality to the other obligations in
which the Fund may invest.
During temporary defensive periods, when deemed necessary by the Adviser or
Sub-Adviser, the International Growth Fund may invest up to 100% of its assets
in U.S. government obligations, debt obligations of companies incorporated and
having their principal business activities in the United States, or cash and
short-term obligations (having remaining maturities of 13 months or less). The
Fund does not intend to invest in such securities for the purpose of meeting its
investment objective.
The Small Cap Core Equity Fund reserves the right to hold, as a temporary
defensive measure, up to 100% of its total assets in cash and short-term
obligations (having remaining maturities of 13 months or less) at such times and
in such proportions as, in the opinion of the Adviser, prevailing market or
economic conditions warrant.
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
-12-
<PAGE>
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 (other than the Missouri Tax-Exempt
------------------
Bond Fund and Relative Value Fund) 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 Value Fund or International Growth Fund) to be of good standing
and when, in the Adviser's (and Sub-Adviser's in the case of the International
Value Fund or International Growth 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. In accordance with current SEC policies, each Fund is
currently limiting its securities lending to 33-1/3% of the value of its total
assets (including the value of the collateral for the loans) at the time of the
loan.
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 International Value 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. The International Growth
Fund may invest a portion of its assets in the obligations of foreign banks and
foreign branches of domestic banks. Such obligations may include: Eurodollar
Certificates of Deposit, which are U.S. dollar-denominated certificates of
deposit issued by offices of foreign and domestic banks located outside the
United States; Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-
denominated
-13-
<PAGE>
deposits in a foreign branch of a U.S. bank or a foreign bank; Canadian Time
Deposits, which are essentially the same as ETDs except they are issued by
Canadian offices of major Canadian banks; Schedule Bs, which are obligations
issued by Canadian branches of foreign or domestic banks; Yankee Certificates of
Deposit, which are U.S. dollar-denominated certificates of deposit issued by a
U.S. branch of a foreign bank and held in the United States; and Yankee Bankers'
Acceptances, which are U.S. dollar-denominated bankers' acceptances issued by a
U.S. branch of a foreign bank and held in the United States. 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.
Subject to their respective investment policies, the Missouri Tax-Exempt
Bond, Equity Income and Small Cap Index Funds may invest in the following
taxable investments for temporary defensive or other purposes: commercial paper,
bankers' acceptances, certificates of deposit, time deposits and floating rate
notes.
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 Value Fund or International Growth
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 Continuing 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. Investments by a New Fund in
commercial paper will consist of issues rated at the time A-1 or A-2 by Standard
& Poor's, or P-1 or P-2 by 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 underlying funds of the Global Equity Fund and each of the Funds,
except the Strategic Income, Equity Income, Relative Value, Large Cap Growth,
Small Cap Index and Science & Technology 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 Value
Fund or International Growth Fund) deem the investment to involve minimal credit
risk.
-14-
<PAGE>
The Missouri Tax-Exempt Bond, International Growth and Small Cap Core
Equity Funds may also invest in variable and floating rate demand instruments,
including participations in municipal securities purchased from and owned by
financial institutions, primarily banks. Participation interests provide a 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.
Repurchase Agreements. The underlying funds of the Global Equity Fund and
---------------------
each Fund, except the National Municipal Bond 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 Growth Fund or International Value Fund) will continue to
monitor the creditworthiness of the seller and will require the seller to
maintain the value of the securities subject to the agreement at not less than
102% of the repurchase price. Default or bankruptcy of the seller would,
however, expose the Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying securities. The
securities held subject to a repurchase agreement may have stated maturities
exceeding one year, provided the repurchase agreement itself matures in less
than one year.
The repurchase price under the repurchase agreements described in the
Prospectuses generally equals the price paid by a Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement). Securities subject
to repurchase agreements will be held by the Funds' custodian (or sub-custodian)
or in the Federal Reserve/Treasury book-entry system or other authorized
securities depository. Repurchase agreements are considered to be loans under
the 1940 Act.
Investment Companies. 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,
their 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. In addition, investment companies in which a Fund may
invest may impose a sales or distribution charge in connection with the purchase
or redemption of their shares as well as other types of commissions or charges
(no sales charge will be paid by the Missouri Tax-Exempt Bond Fund in connection
with such investments). These expenses would be in addition to the advisory and
other expenses that the Funds bear directly in connection with their own
operations. The income on securities of other investment companies may be
taxable to investors at the state or local level. See "Additional Information
Concerning Taxes" below.
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.
-15-
<PAGE>
Each of the Missouri Tax-Exempt Bond, Equity Income and Small Cap Index
Funds may invest in securities issued by other investment companies, limited,
except as described below, with respect to each Fund to investment companies
which determine their net asset value per share based on the amortized cost or
penny-rounding method and which invest in securities in which the Fund is
permitted to invest. In addition to the limitations described above, each of the
Missouri Tax-Exempt Bond, Equity Income and Small Cap Index Funds currently
intends to limit its investments so that, as determined immediately after a
securities purchase is made, not more than 10% of the outstanding voting stock
of any one investment company will be owned in the aggregate by the Funds and
other investment companies advised by the Adviser.
U.S. Government Obligations. Each of the Funds, except the Science &
---------------------------
Technology Fund, 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.
Obligations of certain agencies and instrumentalities of the U.S.
Government, such as GNMA, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the Export-Import Bank of the United States,
are supported by the right of the issuer to borrow from the Treasury; others,
such as those of the FNMA, are supported by the discretionary authority of the
U.S. Government to purchase the agency's obligations; still others, such as
those of the FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
Bank Obligations. For purposes of a 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.
The Relative Value Fund may invest in domestic bank obligations, including:
. certificates of deposit,
. demand and time deposits,
. bankers' acceptances,
. notes,
. bonds, and
. discount notes of the following U.S. Government agencies or
instrumentalities:
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(a) Federal Home Loan Banks,
(b) FNMA,
(c) GNMA,
(d) National Bank for Cooperatives,
(e) Banks for Cooperatives,
(f) Tennessee Valley Authority,
(g) Export-Import Bank of the United States,
(h) Commodity Credit Corporation,
(i) Federal Financing Bank,
(j) The Student Loan Marketing Association,
(k) FHLMC, or
(l) National Credit Union Administration.
In addition to domestic bank obligations, the Fund may invest in:
. Eurodollar Certificates of Deposit issued by foreign branches of U.S. or
foreign banks;
. Eurodollar Time Deposits, which are U.S. dollar-denominated deposits in
foreign branches of U.S. or foreign banks;
. Canadian Time Deposits, which are U.S. dollar-denominated certificates
of deposit issued by U.S. branches of foreign banks and held in the
United States; and
. Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
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.
The underlying funds of the Global Equity Fund and each New Fund, except
the Missouri Tax-Exempt Bond, Equity Income and Small Cap Index Funds, may also
invest in Section 4(2) commercial paper, subject to the applicable limit, unless
the Adviser determines that a liquid market exists. The Funds may invest in
commercial paper issued in reliance on the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933. Section 4(2) commercial paper is
restricted as to disposition under federal securities law and is generally sold
to institutional investors, such as the Funds, who agree that they are
purchasing the paper for investment purposes and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) commercial paper is
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normally resold to other institutional investors like the Funds through or with
the assistance of the issuer or investment dealers who make a market in Section
4(2) commercial paper, thus providing liquidity.
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.
The Equity Income Fund does not normally invest in securities of issuers having
a record, together with their predecessors, of less than three years of
continuous operations. Such securities may be more difficult to sell than larger
or more established securities.
Borrowings and Reverse Repurchase Agreements. Each Fund (or underlying fund
--------------------------------------------
of the Global Equity 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. 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. 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. The National Municipal Bond Fund may not enter into reverse repurchase
agreements. At the time a Fund enters into a reverse repurchase agreement, 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 Short-Term Bond Fund, Intermediate Bond Fund, Bond
----------------
IMMDEX(TM) Fund, Balanced Income Fund, Balanced Growth Fund, Growth & Income
Fund, Large Cap Core Equity Fund, International Value Fund, International Growth
Fund, MidCap Core Equity Fund, Small Cap Core Equity Fund and MicroCap 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
Fund, Intermediate Bond Fund and Bond IMMDEX(TM) Fund will limit its investments
in preferred stock to no more than 5% of its respective net assets.
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When-Issued Purchases, Delayed Delivery and Forward Commitments. Each Fund
---------------------------------------------------------------
(or underlying fund of the Global Equity Fund) 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 Strategic Income, Relative Value, Large Cap Growth, Global Equity,
Science & Technology and MicroCap Funds, which are not expected to exceed 20%)
of the value of its total assets absent unusual market conditions. The National
Municipal Bond Fund expects that its commitments to purchase when-issued
securities will not exceed 5% of its total assets under normal market
conditions. The Strategic Income, Relative Value, Global Equity, Large Cap
Growth and Science & Technology Funds do not currently intend to engage in
forward commitments. The Missouri Tax-Exempt Bond, Equity Income and Small Cap
Index Funds do not currently intend to engage in delayed delivery transactions.
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 (or 20% for the Strategic Income,
Relative Value, Large Cap Growth, Global Equity and Science & Technology Funds).
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.
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Short Sales. The Strategic Income Fund, Global Equity Fund and MicroCap
-----------
Fund may make 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.
Until the Fund replaces a borrowed security in connection with a short
sale, the Fund will be required to maintain daily a segregated account,
containing cash or U.S. government securities, at such a level that:
. the amount deposited in the account plus the amount deposited with the
broker as collateral will at all times equal at least 100% of the
current value of the security sold short and
. the amount deposited in the segregated account plus the amount
deposited with the broker as collateral will not be less than the
market value of the security at the time it was sold short.
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.
The Strategic Income Fund and Global Equity Fund may purchase call options
to provide a hedge against an increase in the price of a security sold short by
the Funds. When a Fund purchases call options, it has to pay a premium to the
person writing the option and a commission to the broker selling the options. If
the options are exercised by the Fund, the premium and the commission paid may
be more than the amount of the brokerage commission charged if the securities
were to be purchased directly.
As for the Strategic Income Fund, the Adviser anticipates that the
frequency of short sales will vary substantially under different market
conditions, and it does not intend that any specified portion of its assets, as
a matter of practice, will be in short sales. However, as an operating policy
which may be changed without shareholder approval, no securities will be sold
short if, after effect is given to any such short sale, the total market value
of all securities sold short would exceed 25% of the value of the Fund's net
assets. The Fund may not sell short the securities of any single issuer listed
on a national securities exchange to the extent of more than 2% of the value of
the Fund's net assets. The Fund may not sell short the securities of any class
of an issuer to the extent, at the time of the transaction, of more than 2% of
the outstanding securities of that class.
In addition to the short sales discussed above, the Strategic Income Fund
and Global Equity Fund may also make short sales "against the box," a
transaction in which a Fund enters into a short sale of a security that the Fund
owns. A broker holds the proceeds of the short sale until the settlement date,
at which time the Fund delivers the security to close the short position. The
Fund receives the net proceeds from the short sale. The Strategic Income Fund at
no time will have more than 15% of the value of its net assets in deposits on
short sales against the box.
A Fund will incur losses as a result of a short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. Conversely, the
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Fund will realize a gain if the security declines in price between those dates.
This result is the opposite of what one would expect from a cash purchase of a
long position in a security. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium or amounts in lieu of
interest the Fund may be required to pay in connection with a short sale.
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.
Foreign Securities. The Funds' (except the U.S. Government Securities,
------------------
Missouri Tax-Exempt Bond, National Municipal Bond, and Small Cap Index 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.
The types of international securities in which the Large Cap Growth Fund
may invest include other investment companies that invest primarily in
international securities. The Strategic Income Fund, Relative Value Fund, Large
Cap Growth Fund, Global Equity Fund (via its underlying funds) and Science &
Technology Fund, may invest in equity securities of non-U.S. companies and
corporate and government fixed-income securities denominated in currencies other
than U.S. dollars. The international equity securities may be traded
domestically or abroad through various stock exchanges, American Depositary
Receipts or International Depositary Receipts (ADRs or IDRs). The international
fixed-income securities include ADRs, IDRs, and government securities of other
nations and must be rated Baa or better by Moody's or BBB or better by S&P. If
the securities are unrated, the Adviser must determine that they are of similar
quality to the rated securities before a Fund may invest in them.
Investments in foreign securities, whether made directly or through ADRs or
EDRs, 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
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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 Value Fund and
International Growth 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 Value Fund and International Growth 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 Value Fund and International Growth 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
Value Fund and International Growth Fund is expected to be volatile. The
Aggregate Bond Fund and Large Cap Growth Fund do not intend to invest more than
10% of their net assets in foreign securities. The Small Cap Core Equity Fund
may invest up to 25% of its total assets in securities of foreign issuers.
American Depository Receipts ("ADRs") and European Depository Receipts
----------------------------------------------------------------------
("EDRs"). The Short-Term Bond, Intermediate Bond, Bond IMMDEX(TM), Balanced
--------
Income, Balanced Growth, Growth & Income, Equity Income, Large Cap Core Equity,
International Value, MidCap Core Equity and MicroCap Funds may invest in
sponsored ADRs. The Aggregate Bond, International Growth and Small Cap Core
Equity Funds may invest in sponsored ADRs and EDRs. The International Value,
International Growth and Small Cap Core Equity Funds may also invest in
unsponsored ADRs. The Equity Income, International Growth and Small Cap Core
Equity Funds may also invest in EDRs. ADRs are receipts issued by an American
bank or trust company evidencing ownership of underlying securities issued by a
foreign issuer. EDRs are receipts issued by a European financial institution
evidencing ownership of underlying foreign securities. ADRs and EDRs may be
listed on a national securities exchange or may trade in the over-the-counter
market. ADR and EDR 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, ADRs and EDRs 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. It is sometimes difficult to vote proxies for unsponsored
ADRs.
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
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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.
Foreign Futures and Options on Futures. The Adviser and Sub-Adviser may
--------------------------------------
determine that it would be in the interest of the International Value Fund to
purchase or sell futures contracts, including interest rate, index, and currency
futures, for the purpose of remaining fully invested and reducing transactions
costs. A stock index futures contract is a bilateral agreement pursuant to
which parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the index value (which
assigns relative values to the securities included in the index) at the close of
the last trading day of the contract and the price at which the futures contract
is originally struck. No physical delivery of the underlying securities in the
index is made.
The International Value 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 Value Fund intends to limit its transactions in futures
contracts and related options so that not more than 25% of its net assets are at
risk. In connection with a futures transaction, unless the transaction is
covered in accordance with SEC positions, the Fund will maintain a segregated
account with its custodian or sub-custodian consisting of cash or liquid high
grade debt securities equal to the entire amount at risk (less margin deposits)
on a continuous basis.
Futures purchased or sold by the International Value 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
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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 Value 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.
Forward Currency Contracts. The Strategic Income Fund, International Value
--------------------------
Fund and International Growth Fund, as well as underlying funds of the Global
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. These Funds 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). The Funds may also use forward
contracts to protect against fluctuating exchange rates and exchange control
regulations.
The Funds and the underlying funds of the Global 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
and the underlying funds of the Global Equity Fund 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 Funds and the underlying funds of the Global 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.
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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 Funds 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 Funds 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.
The International Growth Fund may also purchase unlisted currency options.
A number of major investment firms trade unlisted options which are more
flexible than exchange listed options with respect to strike price and maturity
date. These unlisted options generally are available on a wider range of
currencies. Unlisted foreign currency options are generally less liquid than
listed options and involve credit risk associated with the individual issuer.
They will be deemed to be illiquid for purposes of the limitation on investments
in illiquid securities.
The Strategic Income Fund will not enter into a forward contract with a
term of more than one year. The Fund will generally enter into a forward
contract to provide the proper currency to settle a securities transaction at
the time the transaction occurs ("trade date"). The period between the trade
date and settlement date will vary between 24 hours and 30 days, depending upon
local custom.
Foreign Currency Transactions. Although the International Value Fund and
-----------------------------
International Growth 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. Additionally, the Strategic Income Fund and the
underlying funds of the Global Equity Fund may use foreign currency transactions
to settle securities transactions. Foreign transactions may be conducted either
on a spot or cash basis at prevailing rates or through forward foreign currency
exchange contracts (see above). 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 (the underlying funds in the case of the Global Equity Fund) could suffer
a loss of some or all of the amounts deposited. The Funds (the underlying funds
in the case of the Global Equity Fund) may convert foreign currency to U.S.
dollars from time to time. Although foreign exchange dealers generally do not
charge a stated commission or fee for conversion, the prices posted generally
include a "spread," which is the difference between the prices at which the
dealers are buying and selling foreign currencies.
Except where segregated accounts are not required under the 1940 Act, when
these Funds enter into a forward contract or currency futures, the Custodian
will place cash, U.S. government securities, or
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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. While these contracts are not
presently regulated by the Commodities Futures Trading Commission ("CFTC"), the
CFTC may in the future assert authority to regulate forward contracts. In such
event, the underlying Fund's ability to utilize forward contracts in the manner
set forth above may be restricted. Forward contracts may limit potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the underlying fund than if it had not engaged in such
contracts.
The International Growth Fund may purchase foreign currency put options on
U.S. exchanges or U.S. over-the-counter markets. (See "Options Trading," below,
for a discussion of options trading). A put option gives the Fund, upon payment
of a premium, the right to sell a currency at the exercise price until the
expiration of the option and serves to insure against adverse currency price
movements in the underlying portfolio assets denominated in that currency.
Exchange listed options markets in the United States include seven major
currencies, and trading may be thin and illiquid. The seven major currencies
are Australian dollars, British Pounds, Canadian dollars, German marks, French
francs, Japanese yen and Swiss francs.
A call option written by the International Growth Fund gives the purchaser,
upon payment of a premium, the right to purchase from the International Growth
Fund a currency at the exercise price until the expiration of the option.
Foreign Currency Futures Contracts. The International Value Fund may also
----------------------------------
hedge its 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.
Derivatives Risk. The Science & Technology 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 be substantially offset by gains on the hedged investment, and vice
versa. While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains. Hedging also involves correlation risk - the risk that changes
in the value of a hedging instrument may not match those of the asset being
hedged.
To the extent that a derivative is not used as a hedge, the Fund is
directly exposed to the risks of that derivative. Gains or losses from
speculative positions in a derivative may be substantially greater than the
derivative's original cost.
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Subject to their investment limitations, the Missouri Tax-Exempt Bond Fund
and National Municipal Bond Fund may hold tax-exempt derivatives which may be in
the form of tender option bonds, participations, beneficial interests in a
trust, partnership interests or other forms. The Adviser expects that less than
5% of the Funds' assets will be invested in such securities during the current
year. A number of different structures have been used. For example, interests in
long-term fixed-rate municipal securities, held by a bank as trustee or
custodian, are coupled with tender option, demand and other features when the
tax-exempt derivatives are created. Together, these features entitle the holder
of the interest to tender (or put), the underlying municipal securities to a
third party at periodic intervals and to receive the principal amount thereof.
In some cases, municipal securities are represented by custodial receipts
evidencing rights to receive specific future interest payments, principal
payments, or both, on the underlying municipal securities held by the custodian.
Under such arrangements, the holder of the custodial receipt has the option to
tender the underlying municipal security at its face value to the sponsor
(usually a bank or broker dealer or other financial institution), which is paid
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate that would cause the bond, coupled with the tender option, to trade at
par on the date of a rate adjustment. The Funds may hold tax-exempt derivatives,
such as participation interests and custodial receipts, for municipal securities
which give the holder the right to receive payment of principal subject to the
conditions described above. The Internal Revenue Service has not ruled on
whether the interest received on tax-exempt derivatives in the form of
participation interests or custodial receipts is tax-exempt, and accordingly,
purchases of any such interests or receipts are based on the opinion of counsel
to the sponsors of such derivative securities. Neither the Company nor the
Adviser will review the proceedings related to the creation of any tax-exempt
derivatives or the basis for such opinions.
Mortgage-Backed and Asset-Backed Securities. The Short-Term Bond,
-------------------------------------------
Intermediate Bond, U.S. Government Securities, Aggregate Bond, Bond IMMDEX(TM),
Strategic Income, Balanced Income, Balanced Growth, Large Cap Growth and Science
& Technology 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.
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There are a number of important differences among the agencies and
instrumentalities of the U.S. government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly owned U.S. government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-backed securities issued by FNMA include FNMA Guaranteed
Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are
solely the obligations of FNMA and are not backed by or entitled to the full
faith and credit of the United States, but are supported by the right of the
issuer to borrow from the Treasury. FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-backed securities issued
by the FHLMC include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress. Freddie Macs are not guaranteed
by the United States or by any Federal Home Loan Bank and do not constitute a
debt or obligation of the United States or of any Federal Home Loan Bank.
Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
As stated in the Prospectuses for the 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.
The Short-Term Bond, Intermediate Bond and Bond IMMDEX(TM) Funds will invest
less than 50% of their respective total assets in CMOs. The Strategic Income,
Large Cap Growth and Science & Technology Funds will only purchase CMOs rated
AAA by an NRSRO.
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
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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.
The Strategic Income Fund, Large Cap Growth Fund and Science & Technology
Fund may also invest in adjustable rate mortgage securities ("ARMs"). ARMs are
actively traded, mortgage-backed securities representing interests in adjustable
rather than fixed interest rate mortgages. These Funds invest in ARMs issued by
GNMA, FNMA, and FHLMC.
Unlike conventional bonds, ARMs pay back principal over the life of the
ARMs rather than at maturity. Thus, holders of the ARMs would receive monthly
scheduled payments of principal and interest, and may receive unscheduled
principal payments representing payments on the underlying mortgages. At the
time that a holder of the ARMs reinvests the payment and any unscheduled
prepayments of principal that it receives, the holder may receive a rate of
interest which is actually lower than the rate of interest paid on the existing
ARMs. As a consequence, ARMs may be a less effective means of "locking in" long-
term interest rates than other types of U.S. government securities.
Not unlike other U.S. government securities, the market value of ARMs will
generally vary inversely with changes in market interest rates. Thus, the market
value of ARMs generally declines when interest rates rise and generally rises
when interest rates decline.
While ARMs generally entail less risk of a decline during periods of
rapidly rising rates, ARMs may also have less potential for capital appreciation
than other similar investments (e.g., investments
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<PAGE>
with comparable maturities) because as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMs are purchased at
a premium, mortgage foreclosures and unscheduled principal payments may result
in some loss of a holder's principal investment to the extent of the premium
paid. Conversely, if ARMs are purchased at a discount, both a scheduled payment
of principal and an unscheduled prepayment of principal would increase current
and total returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders.
Variable Rate Medium Term Notes. The Short-Term Bond, Intermediate Bond,
-------------------------------
U.S. Government Securities, Aggregate Bond, Bond IMMDEX(TM), National Municipal
Bond, Balanced Income, Balanced Growth and Growth & Income 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/Credit Bond Index, the
Lehman Brothers Intermediate Government/Credit Bond Index or the Lehman Brothers
Government/Credit Bond Index).
Stripped U.S. Government Obligations. The U.S. Government Securities Fund,
------------------------------------
Aggregate Bond Fund, National Municipal Bond Fund, Equity Income Fund, Large
Cap Growth Fund, International Growth Fund, Small Cap Core Equity Fund and
Science & Technology Fund may hold stripped U.S. Treasury securities, including:
(1) coupons that have been stripped from U.S. Treasury bonds, which are held
through the Federal Reserve Bank's book-entry system called "Separate Trading of
Registered Interest and Principal of Securities" ("STRIPS"); (2) through a
program entitled "Coupon Under Book-Entry Safekeeping" ("CUBES"); or (3) other
stripped securities issued directly by agencies or instrumentalities of the U.S.
Government. STRIPS and CUBES represent either future interest or principal
payments and are direct obligations of the U.S. Government that clear through
the Federal Reserve System. The Aggregate Bond, Large Cap Growth, International
Growth, Small Cap Core Equity and Science & Technology Fund may also purchase
U.S. Treasury and agency securities that are stripped by brokerage firms and
custodian banks and resold in custodial receipt programs with a number of
different names, including "Treasury Income Growth Receipts" ("TIGRS") and
"Certificates of Accrual on Treasury Securities" ("CATS"). Such securities may
not be as liquid as STRIPS and CUBES and are not viewed by the staff of the SEC
as U.S. Government securities for purposes of the 1940 Act.
Additionally, each Continuing 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.
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 principal-only
securities acquire, in effect, discount obligations that are economically
identical to the zero coupon securities that the Treasury Department sells
itself. In the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder), the underlying U.S. Treasury
bonds and notes themselves are held 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
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beneficial holders of the underlying U.S. Government obligations for federal tax
and securities law purposes.
The U.S. Government does not issue stripped Treasury securities directly.
The STRIPS program, which is ongoing, is designed to facilitate the secondary
market in the stripping of selected U.S. Treasury notes and bonds into separate
interest and principal components. Under the program, the U.S. Treasury
continues to sell its notes and bonds through its customary auction process. A
purchaser of those specified notes and bonds who has access to a book-entry
account at a Federal Reserve bank, however, may separate the Treasury notes and
bonds into interest and principal components. The selected Treasury securities
thereafter may be maintained in the book-entry system operated by the Federal
Reserve in a manner that permits the separate trading and ownership of the
interest and principal payments.
For custodial receipts, the underlying debt obligations are held separate
from the general assets of the custodian and nominal holder of such securities,
and are not subject to any right, charge, security interest, lien or claim of
any kind in favor of or against the custodian or any person claiming through the
custodian. The custodian is also responsible for applying all payments received
on those underlying debt obligations to the related receipts or certificates
without making any deductions other than applicable tax withholding. The
custodian is required to maintain insurance for the protection of holders of
receipts or certificates in customary amounts against losses resulting from the
custody arrangement due to dishonest or fraudulent action by the custodian's
employees. The holders of receipts or certificates, as the real parties in
interest, are entitled to the rights and privileges of the underlying debt
obligations, including the right, in the event of default in payment of
principal or interest, to proceed individually against the issuer without acting
in concert with other holders of those receipts or certificates or the
custodian.
Stripped securities 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 principal and interest is returned to investors. The Adviser
will consider the liquidity needs of the Fund when any investments in zero
coupon obligations or other principal-only obligations are made.
Variable and Floating Rate Instruments. Subject to their respective
--------------------------------------
investment limitations, each of the Tax-Exempt Intermediate Bond, Missouri Tax-
Exempt Bond, National Municipal Bond, International Growth and Small Cap Core
Equity Funds may purchase variable and floating rate obligations. If such
instruments are unrated, they 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 investment grade. While there may be no active secondary market
with respect to a particular variable or floating rate demand instrument
purchased by a 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 a 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. The International Growth Fund will invest in
such instruments only when the Adviser (or Sub-Adviser) believes any risk of
loss due to issuer default is minimal.
With respect to the variable and floating rate instruments that may be
acquired by the 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
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<PAGE>
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 Funds, 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 National
Municipal Bond Fund may purchase include participations in municipal securities
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.
Options Trading. As stated in the Prospectuses, the Funds (with the
---------------
exception of the Missouri Tax-Exempt Bond Fund, National Municipal Bond Fund and
Relative Value Fund) and the underlying funds of the Global Equity Fund may
purchase put and (with the exception of the Tax-Exempt Intermediate Bond Fund)
call options. Each of the Funds (or the underlying funds, as the case may be)
except the Tax-Exempt Intermediate Bond Fund and National Municipal Bond Fund
may also write covered call options. The International Growth Fund may also
write secured put options. Option purchases by each of the Short-Term Bond,
Intermediate Bond, Bond IMMDEX(TM), Strategic Income, Tax-Exempt Intermediate
Bond, Balanced Income, Balanced Growth, Growth & Income, Equity Index, Large Cap
Core Equity, Large Cap Growth, MidCap Index, MidCap Core Equity Science &
Technology and MicroCap Funds will not exceed 5% of the respective Fund's net
assets. Option purchases by each of the U.S. Government Securities, Aggregate
Bond, International Growth and Small Cap Core Equity Funds will not exceed 10%
of the respective Fund's net assets. The International Value Fund may purchase
put and call options without limit. The International Growth Fund will not
invest more than 5% of its total assets in initial margin deposits and premiums
(including without limitation, puts, calls, straddles and spreads) and any
combination thereof. 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 U.S. Government Securities, Aggregate Bond, International Growth
and Small Cap Core Equity Funds will enter into such transactions only as a
hedge against fluctuations in the value of securities which the Funds hold or
intend to purchase.
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 Short-Term Bond, Intermediate Bond, Bond
IMMDEX(TM), Strategic Income, Large Cap Growth, International Value,
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Global Equity (via the underlying funds), International Growth, Small Cap Core
Equity and Science & Technology Funds will engage in unlisted over-the-counter
options only with broker-dealers deemed creditworthy by the Adviser (or the Sub-
Adviser). Closing transactions in certain options are usually effected directly
with the same broker-dealer that effected the original option transaction. A
Fund bears the risk that the broker-dealer will fail to meet its obligations.
There is no assurance that a liquid secondary trading market exists for closing
out an unlisted option position. Furthermore, unlisted options are not subject
to the protections afforded purchasers of listed options by the Options Clearing
Corporation, which performs the obligations of its members who fail to perform
in connection with the purchase or sale of options. The Equity Income Fund and
Small Cap Index Fund will invest only in options listed on a national securities
exchange and issued by the Options Clearing Corporation in an amount not
exceeding 10% of each Fund's net assets.
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 and MidCap Index Funds, such options
will relate only to stock indices and in the case of the U.S. Government
Securities, Aggregate Bond, International Growth and Small Cap Core Equity
Funds, such options will only relate to particular securities owned by a Fund or
which it has the right to acquire.) All options written by the Strategic Income
Fund, Large Cap Growth Fund and Science & Technology Fund must be covered
options. (In the case of the Small Cap 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)
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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 Fund assets subject to covered options
written by each of the following Funds will not exceed the percentage of the
value of the respective Fund's net assets during the current year set forth
below.
Maximum percentage
of net assets which may
Fund be subject to covered options
---- -----------------------------
Short-Term Bond 5%
Intermediate Bond 5%
U.S. Government Securities 25%
Aggregate Bond 25%
Bond IMMDEX(TM) 5%
Strategic Income 20%
Balanced Income 5%
Balanced Growth 25%
Growth & Income 5%
Equity Income 25%
Equity Index 5%
International Growth 25%
MidCap Index 5%
Small Cap Index 25%
Small Cap Core Equity 25%
MicroCap 5%
The International Value 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.
Investments in put and call options may not exceed 5% of assets of each of
the Strategic Income Fund, Large Cap Growth Fund, Global Equity Fund and Science
& Technology Fund, represented by the premium paid, and will only relate to
specific securities (or groups of specific securities) in which the respective
Fund may invest.
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 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
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<PAGE>
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 Value 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
purchaser of the put 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 Global Equity Fund (via the underlying
funds) and each of the other Funds (except the Tax-Exempt Intermediate Bond,
Missouri Tax-Exempt Bond, National Municipal Bond and Relative Value Funds) to
purchase or sell futures contracts, or options thereon, as a hedge against
changes
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<PAGE>
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. 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. The International Value Fund may engage in
foreign futures and options (see "Foreign Futures and Options on Futures"). In
addition, the Equity Index Fund, MidCap Index Fund and Small Cap Index Fund may
purchase and sell futures and related options (based only on the S&P 500 Index,
S&P MidCap 400 Index and S&P SmallCap 600 Index, respectively) to maintain cash
reserves while simulating full investment in the stocks underlying the S&P 500
Index, S&P MidCap 400 Index and S&P SmallCap 600 Index, respectively, to keep
substantially all of their assets exposed to the market (as represented by the
S&P 500 Index, S&P MidCap 400 Index and S&P SmallCap 600 Index, respectively),
and to reduce transaction costs. The International Value 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 Value 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.
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<PAGE>
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. Neither the Equity Income nor the Small Cap Index Funds will
purchase or sell futures contracts (or related options thereon) for hedging
purposes if, immediately after purchase, the aggregate initial margin deposits
and premiums paid by a Fund on its open futures and options positions exceeds 5%
of the liquidation value of the Fund, after taking into account any unrealized
profits and unrealized losses on any such futures or related options contracts
into which it has entered.
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."
To minimize risks, the Strategic Income Fund, Large Cap Growth Fund, Global
Equity Fund and Science & Technology Fund may not purchase or sell futures
contracts or related options if immediately
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<PAGE>
thereafter the sum of the amount of margin deposits on the Fund's existing
futures position and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets after taking into account the unrealized
profits and losses on those contracts it has entered into. 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 computing such 5%. The Short-Term Bond, Intermediate Bond, Bond
IMMDEX(TM), Growth & Income, International Growth and Small Cap Core Equity
Funds each intends to limit its transactions in futures contracts and related
options so that not more than 5% of such Fund's respective net assets are at
risk. The Equity Index Fund, International Value Fund and MidCap Index 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.
Zero Coupon Bonds. Each Fund (except the Strategic Income, Missouri Tax-
-----------------
Exempt Bond, Equity Income, Relative Value, Global Equity and Small Cap Index
Funds) may invest in zero coupon obligations. 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.
Zero coupon securities may include U.S. Treasury bills issued directly by
the U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. See the
discussion under "Stripped Securities" below for more information.
Convertible Securities. The Aggregate Bond, Strategic Income, Balanced
----------------------
Income, Balanced Growth, Growth & Income, Equity Income, Relative Value, Large
Cap Core Equity, Large Cap Growth, International Value, International Growth,
MidCap Core Equity, Small Cap Index, Small Cap Core Equity, Science & Technology
and MicroCap Funds may hold convertible securities subject to their respective
investment limitations. 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.
With respect to the Balanced Income, Balanced Growth, Growth & Income,
Large Cap Core Equity, International Value, MidCap Core Equity and MicroCap
Funds, 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 investment grade at the time of purchase by S&P, Moody's or other
nationally recognized rating agencies; (2) are unrated and have not been
determined by the Adviser (or
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<PAGE>
Adviser and Sub-Adviser with regard to the International Value Fund) to be of
comparable quality to a security rated investment grade; or (3) in the case of
the International Value 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. With
respect to the Aggregate Bond Fund, the Fund may not purchase convertible or
other securities that: (1) are not rated investment grade at the time of
purchase by S&P, Moody's or other nationally recognized rating agencies; or (2)
are unrated and have not been determined by the Adviser to be of comparable
quality to a security rated investment grade.
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 Value and International Growth Funds) will
consider such an event in determining whether a Fund should continue to hold the
security. With respect to the Aggregate Bond, Balanced Income, Balanced Growth,
Growth & Income, Large Cap Core Equity, International Value, MidCap Core Equity
and MicroCap Funds, the Adviser (and Sub-Adviser for the International Value
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 Prospectuses, the Funds may invest a portion of their
assets in convertible securities that are rated below investment grade.
Rights and Warrants. The Strategic Income, Balanced Income, Balanced
-------------------
Growth, Growth & Income, Equity Income, Large Cap Core Equity, Large Cap Growth,
International Value, Global Equity (via the underlying funds), International
Growth, MidCap Core Equity, Small Cap Index, Small Cap Core Equity, Science &
Technology, and MicroCap 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 Equity Income, International Value and Small Cap Index
Funds' net assets. Warrants acquired by the Equity Income, International Value
and Small Cap Index Funds in units or attached to securities are not subject to
these limits.
Guaranteed Investment Contracts. The Short-Term Bond, Intermediate Bond
-------------------------------
and Bond IMMDEX(TM) Funds may make limited investments in guaranteed investment
contracts ("GICs") issued
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<PAGE>
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.
Standard and Poor's Depository Receipts, Standard and Poor's MidCap 400
-----------------------------------------------------------------------
Depository Receipts and the Dow Industrial DIAMONDS. The Equity Income,
---------------------------------------------------
International Growth, Small Cap Index and Small Cap Core Equity Funds may invest
in Standard & Poor's Depository Receipts ("SPDRs"), Standard & Poor's MidCap 400
Depository receipts ("MidCap SPDRs") and the Dow Industrials DIAMONDS
("DIAMONDS"). SPDRs represent ownership in the SPDR trust, a long-term unit
investment trust which holds a portfolio of common stocks that is intended to
track the performance and dividend yield of the S&P 500. MidCap SPDRs represent
ownership in the MidCap SPDR trust, a long-term unit investment trust which
holds a portfolio of common stocks that is intended to track the performance and
dividend yield of the Standard & Poor's MidCap 400 Index. DIAMONDS represent
ownership in the DIAMONDS trust, a long-term unit investment trust which holds a
portfolio of common stocks that is intended to track the performance and yield
of the Dow Jones Industrial Average. Because investments in SPDRs, MidCap SPDRs
and DIAMONDS represent investments in unit investment trusts, such investments
are subject to the 1940 Act's limitations on investments in other investment
companies.
The Small Cap Index Fund may invest in any index-based depository receipt
in lieu of investment in the actual securities that are listed in its index.
Derivatives Risk. The Science & Technology 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.
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<PAGE>
Subject to its investment limitations, the Missouri Tax-Exempt Bond Fund
may hold tax-exempt derivatives which may be in the form of tender option bonds,
participations, beneficial interests in a trust, partnership interests or other
forms. The Adviser expects that less than 5% of the Fund's assets will be
invested in such securities during the current year. A number of different
structures have been used. For example, interests in long-term fixed-rate
municipal securities, held by a bank as trustee or custodian, are coupled with
tender option, demand and other features when the tax-exempt derivatives are
created. Together, these features entitle the holder of the interest to tender
(or put), the underlying municipal securities to a third party at periodic
intervals and to receive the principal amount thereof. In some cases, municipal
securities are represented by custodial receipts evidencing rights to receive
specific future interest payments, principal payments, or both, on the
underlying municipal securities held by the custodian. Under such arrangements,
the holder of the custodial receipt has the option to tender the underlying
municipal security at its face value to the sponsor (usually a bank or broker
dealer or other financial institution), which is paid periodic fees equal to the
difference between the bond's fixed coupon rate and the rate that would cause
the bond, coupled with the tender option, to trade at par on the date of a rate
adjustment. The Fund may hold tax-exempt derivatives, such as participation
interests and custodial receipts, for municipal securities which give the holder
the right to receive payment of principal subject to the conditions described
above. The Internal Revenue Service has not ruled on whether the interest
received on tax-exempt derivatives in the form of participation interests or
custodial receipts is tax-exempt, and accordingly, purchases of any such
interests or receipts are based on the opinion of counsel to the sponsors of
such derivative securities. Neither the Company nor the Adviser will review the
proceedings related to the creation of any tax-exempt derivatives or the basis
for such opinions.
Synthetics. The Science & Technology Fund may invest in synthetic
----------
securities. Synthetic securities are a form of securities where fixed rate
bonds of a single state or municipal issuer are deposited in a trust by a
sponsor and interests in the trust are sold to investors. The use of synthetic
securities exposes the Fund to additional risks and transaction losses.
Furthermore, synthetic securities are subject to the greater risks inherent in
bond investing (i.e., varying interest rates and credit quality rating).
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 Fund primarily invests will include those
that have limited product lines, markets, or financial resources, or are
dependent upon a small management group. In addition, because these stocks are
not well known to the investing public, do not have significant institutional
ownership, and are followed by relatively few securities analysts, there will
normally be less publicly available information concerning these securities
compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, can decrease the value and liquidity of securities held by the 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
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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 MidCap Core Equity Fund and MicroCap Fund when the Adviser believes such
investments offer possibilities of attractive capital appreciation.
Real Estate Investment Trusts. The Strategic Income Fund, Large Cap Growth
-----------------------------
Fund and Science & Technology Fund may invest in equity or mortgage real estate
investment trusts (REITs) that together produce income. A real estate
investment trust is a managed portfolio of real estate investments. Regarding
the Funds' asset allocation policy, real estate of domestic issuers will not be
considered domestic equity securities. REITs will be diversified by geographic
location and by sector (such as shopping malls, apartment building complexes and
health care facilities). An equity REIT holds equity positions in real estate
and provides its shareholders with income from the leasing of its properties and
capital gains from any sales of properties. A mortgage REIT specializes in
lending money to developers of properties and passes any interest income earned
to its shareholders.
Risks associated with real estate investments include the fact that equity
and mortgage real estate investment trusts are dependent upon management skill
and are not diversified, and are, therefore, subject to the risk of financing
single projects or unlimited number of projects. They are also subject to heavy
cash flow dependency, defaults by borrowers, and self-liquidation.
Additionally, equity real estate investment trusts may be affected by any
changes in the value of the underlying property owned by the trusts, and
mortgage real estate investment trusts may be affected by the quality of any
credit extended. The investment adviser seeks to mitigate these risks by
selecting real estate investment trusts diversified by sector (shopping malls,
apartment building complexes and health care facilities) and geographic
location.
Other Investment Considerations - International Value Fund
----------------------------------------------------------
High Risk Debt Securities ("Junk Bonds"). As stated in the International
----------------------------------------
Value Fund's Prospectuses, 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, Inc.
("Fitch"); (ii) commercial paper rated as low as C (or D if in default) by S&P
or Fitch, or Not Prime by Moody's; and (iii) unrated debt securities of
comparable quality. The Fund may also buy debt in default (rated D by S&P or
Fitch, or of comparable quality) and commercial paper in default (rated D by S&P
or Fitch, Not Prime by Moody's, 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.
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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 Value 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.
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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 Value 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 Value 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
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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 - Global Equity Fund
----------------------------------------------------
Investing in mutual funds involves risk. This risk may be increased when
investing in the Global Equity Fund because the Fund invests in a number of
underlying mutual funds. Moreover, investing through the Fund in an underlying
portfolio of mutual funds involves certain additional expenses and certain tax
results that would not be present in a direct investment in the underlying
funds.
The Fund's investment strategy of investing in the shares of other
international equity funds is designed (but not guaranteed) to reduce the risk
associated with investing in a single underlying fund with a single manager.
Holding a diversified portfolio of international equity funds also may provide
access to a wider range of management talent, companies, industries, countries
and markets than would be available through any one underlying fund.
International securities and markets are subject to currency rate fluctuations
and potentially greater price volatility and liquidity considerations than U.S.
securities. Investors have historically sought to reduce these risks through
multi-country diversification. The Fund is designed to give shareholders a
single investment that offers broad international diversification.
The 1940 Act provides that the Fund may not purchase the securities of an
underlying fund, if, as a result, the Fund, together with any of its affiliates,
would own more than 3% of the total outstanding securities of that underlying
fund. For this purpose, shares of underlying funds held by private
discretionary investment advisory accounts managed by the adviser will be
aggregated with those held by the Fund. Thus, the Fund's ability to invest in
shares of certain underlying funds could be restricted and the adviser may have
to select alternative investments. Accordingly, when affiliated persons and
other accounts managed by the adviser hold shares of any of the underlying
funds, the Fund's ability to invest fully in shares of those Funds is
restricted. The Adviser must then, in some instances, select alternative
investments that would not have been its first preference. By investing in the
Fund, shareholders would bear not only the Fund's total operating expenses, but
the operating expenses of the underlying funds as well.
The 1940 Act also provides that, when the Fund invests in shares of an
underlying fund, the underlying fund will be obligated to redeem shares held by
the Fund only in an amount up to 1% of the underlying fund's outstanding
securities during any period of less than 30 days. Therefore, if the Fund owns
more than 1% of an underlying fund's outstanding securities, the portion of the
investment exceeding 1% may be considered illiquid and, when added together with
other such illiquid securities,
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cannot exceed 15% of the Fund's net assets. These limitations are not
fundamental investment policies and may be changed by the Board of Directors
without shareholder approval.
Under certain circumstances, an underlying fund may decide to make a
redemption payment by the Fund wholly or partly by an in-kind distribution of
securities from its portfolio, in lieu of cash, in conformity with the rules of
the SEC. In such cases, the Fund may hold portfolio securities distributed by
an underlying fund until the adviser determines that it is appropriate to
dispose of such securities.
Investment decisions by the investment advisers of the underlying funds are
made independently of each other and of the Fund and the Adviser. Therefore,
the investment adviser of one underlying fund may be purchasing shares of the
same issuer whose shares are being sold by the investment adviser of another
such fund. The result of this would be an indirect expense to the Fund without
accomplishing any investment purpose.
The Fund may purchase shares of both load and no-load underlying funds
(including those with a contingent deferred sales charge). However, in most
cases, the Fund anticipates purchasing fund shares without a sales load or
qualifying for a reduction or waiver of any sales load because of the amount it
intends to invest in the underlying fund.
Although the Fund will normally invest in open-end management investment
companies, it also may invest in closed-end management investment companies
and/or unit investment trusts. Unlike open-end funds that offer and sell their
shares at net asset value plus any applicable sales charge, the shares of
closed-end funds and unit investment trusts may trade at a market value that
represents a premium, discount or spread to net asset value.
Under the 1940 Act, a mutual fund must sell its shares at the price
(including sales load, if any) described in its prospectus, and current rules
under the 1940 Act do not permit negotiation of sales charges. Therefore, the
Fund currently is not able to negotiate the level of the sales charges at which
it will purchase shares of load funds. In some cases, the sales load may be as
great as 8.5% of the public offering price (or 9.29% of the net amount
invested). Nevertheless, when appropriate, the Fund will purchase such shares
pursuant to
(a) letters of intent, permitting it to obtain reduced or no sales charges
by aggregating its intended purchases over time (generally 13 months
from the initial purchase under the letter);
(b) rights of accumulation, permitting it to obtain reduced or no sales
charges as it purchases additional shares of an underlying fund; and
(c) the right to obtain reduced or no sales charges by aggregating its
purchases of several funds within a family of mutual funds.
As an operational policy, the Fund invests substantially all of its assets
in international funds. To the extent that the Fund's assets are invested in
underlying funds, its investment experience will correspond directly with that
of its proportionate investment in those funds. This strategy also involves
certain additional expenses and certain tax results that would not be present in
a direct investment in mutual funds. Federal law imposes certain limits on the
purchases of mutual fund shares by the Fund. The Fund may purchase shares of
no-load funds available without a transaction fee and shares of mutual funds
that charge sales loads and/or pay their own distribution expenses. Each
underlying fund provides a prospectus and other disclosure documents to the
Fund. These documents are also available to Fund shareholders directly from the
underlying fund.
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<PAGE>
The Adviser will attempt to identify and select a varied portfolio of
international equity funds which represents the greatest long-term capital
growth potential based on the Adviser's analysis of many factors. The selection
of international equity funds may include international equity funds that invest
primarily in emerging markets or focus their investments on geographic regions
(provided they invest in at least three countries other than the United States).
Underlying funds may also concentrate their investments in a single industry.
If an underlying fund maintains its assets abroad, its board of directors
must consider at least annually whether maintaining the underlying fund's assets
with custodians in foreign countries is consistent with the best interests of
the underlying fund and its shareholders. The underlying fund's board of
directors also must consider the degree of risk involved through the holding of
portfolio securities in domestic and foreign securities depositories. However,
in the absence of willful misfeasance, bad faith or gross negligence, any losses
resulting from the holding of an underlying fund's portfolio securities in
foreign countries and/or with foreign custodians or securities depositories will
be at the risk of shareholders, unless the losses are insured. No assurance can
be given that the underlying fund's board of directors' appraisal of the risks
will always be correct or that such exchange control restrictions or political
acts of foreign governments might not occur.
Securities that are acquired by an underlying fund outside the United
States and that are publicly traded in the United States on a foreign securities
exchange or in a foreign securities market are not considered by the underlying
fund to be illiquid assets provided that:
(i) the underlying fund acquires and holds the securities with the
intention of reselling the securities in the foreign trading market,
(ii) the underlying fund reasonably believes it can readily dispose of the
securities in the foreign trading market or for cash in the United
States, or
(iii) foreign market and current market quotations are readily available.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries. Investments in foreign securities where
delivery takes place outside the United States will have to be made in
compliance with any applicable U.S. and foreign currency restrictions and tax
laws (including laws imposing withholding taxes on any dividend or interest
income) and laws limiting the amount and types of foreign investments. Changes
of government administrations or economic or monetary policies in the United
States or abroad, or changed circumstances regarding convertibility or exchange
rates, could result in investment losses for the underlying fund.
The following is a description of the securities in which the underlying
funds may invest. Although many of the underlying funds may have the same or
similar investment policies as the Fund, they are not required to do so.
Securities of Foreign Issuers
-----------------------------
An underlying fund may invest up to 100% of its total assets in the equity
securities of foreign issuers, including international stocks. Foreign
companies around the world (excluding the United States) issue
international stocks. Investing in non-U.S. securities carries substantial
risks in addition to those associated with domestic investments.
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An underlying fund may also invest in equity or debt securities of foreign
issuers traded on the New York or American Stock Exchanges or in the over-
the-counter market in the form of sponsored or unsponsored American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), and
European Depositary Receipts ("EDRs") (collectively, "Depositary
Receipts").
The Fund's investment approach of investing, through underlying funds, in
foreign securities is based on the premise that investing in non-U.S.
securities provides three potential benefits over investing solely in U.S.
securities:
1. the opportunity to invest in foreign issuers believed to have superior
growth potential;
2. the opportunity to invest in foreign countries with economic policies
or business cycles different from those of the U.S.; and
3. the opportunity to reduce portfolio volatility to the extent that
securities markets inside and outside the U.S. do not move in harmony.
The underlying funds in which the Fund invests may also take advantage of
the unusual opportunities for higher returns available from investing in
developing or emerging market countries. Underlying funds may invest
without limit in emerging market countries. A developing or emerging
market country generally is considered to be in the initial stages of
industrialization. Furthermore, the Adviser considers emerging market
countries to be all countries considered by the International Bank for
Reconstruction and Development (more commonly known as the World Bank) and
the International Finance Corporation, as well as countries that are
classified by the United Nations or otherwise regarded by their
authorities, as developing. Investments in developing countries are more
volatile and risky than investments in developed countries.
To the extent that the Fund invests in underlying funds that invest
primarily in the securities of a single country, any political, economic or
regulatory developments affecting the value of the securities in the
underlying fund's portfolio will have a greater impact on the total value
of the portfolio than would be the case if the portfolio were diversified
among the securities of more countries.
The economies of foreign countries may differ from the U.S. economy in such
respects as growth of gross domestic product, rate of inflation, currency
depreciation, capital reinvestment, resource self-sufficiency and balance
of payments position. Further, the economies of developing countries
generally are heavily dependent on international trade and, accordingly,
have been, and may continue to be, adversely affected by trade barriers,
exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with
which they trade. These economies also have been, and may continue to be,
adversely affected by economic conditions in the countries with which they
trade.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, or in issuers or industries deemed
sensitive to national interests, and the extent of foreign investment in
certain debt securities and domestic companies may be subject to
limitation. The charters of individual companies may also impose foreign
ownership to prevent, among other concerns, violation of foreign investment
limitations.
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Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in
some countries. Delays in, or a refusal to grant, any required
governmental registration or approval for such repatriation could adversely
affect an underlying fund. Any investment subject to such repatriation
controls will be considered illiquid if it appears reasonably likely that
this process will take more than seven days.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
governmental regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such
countries or the value of the investments in those countries.
Brokerage commissions, custodial services and other costs relating to
foreign investment may be more expensive than in the United States.
Foreign markets may have different clearance and settlement procedures and
in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. The inability of an underlying
fund to make intended security purchases due to settlement problems could
cause an underlying fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems
could result either in losses due to subsequent declines in value of the
portfolio security or, if an underlying fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
Other differences between foreign and U.S. companies include:
. less publicly available information about foreign companies;
. the lack of uniform accounting, auditing and financial reporting
standards and practices or regulatory requirements comparable to those
applicable to U.S. companies;
. less readily available market quotations on foreign companies;
. differences in government regulation and supervision of foreign stock
exchanges, brokers, listed companies, and banks;
. differences in legal systems which may affect the ability to enforce
contractual obligations or obtain court judgments;
. the limited size of many foreign securities markets and limited
trading volume in issuers compared to the volume of trading in U.S.
securities, which could cause prices to be erratic for reasons apart
from factors that affect the quality of securities;
. the likelihood that foreign securities may be less liquid or more
volatile;
. unreliable mail service between countries;
. political or financial changes which adversely affect investments in
some countries;
. the possibility that certain markets may require payment for
securities before delivery; and
. religious and ethnic instability.
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In the past, U.S. government policies have discouraged or restricted
certain investments abroad by investors. Investors are advised that when
such policies are instituted, the Fund will abide by them, and the Fund
anticipates compliance by the underlying funds.
(a) Depository Receipts
ADRs are receipts typically issued by an American bank or trust company
that evidences ownership of underlying securities issued by a foreign
issuer. ADRs may not necessarily be denominated in the same currency as
the securities into which they may be converted. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets. Foreign
banks or trust companies typically issue EDRs and GDRs, although U.S. banks
or trust companies also may issue them, and evidence ownership of
underlying securities issued by either a foreign or a U.S. corporation.
Generally, Depository Receipts in registered form are designed for use in
the U.S. securities market and Depository Receipts in bearer form are
designed for use in securities markets outside the United States.
Depository Receipts may not necessarily be denominated in the same currency
as the underlying securities into which they may be converted.
Depository Receipts may be available for investment through "sponsored"
or "unsponsored" facilities. A sponsored facility is established jointly
by the issuer of the security underlying the receipt and a depository,
whereas an unsponsored facility may be established by a depository without
participation by the issuer of the receipt's underlying security. Holders
of an unsponsored Depository Receipt generally bear all the costs of the
unsponsored facility. The depository of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received
from the issuer of the deposited security or to pass through to the holders
of the receipts voting rights with respect to the deposited securities.
Ownership of unsponsored Depository Receipts may not entitle the underlying
funds to financial or other reports from the issuer of the underlying
security, to which they would be entitled as the owner of sponsored
Depository Receipts.
(b) Emerging Markets
Generally included in emerging markets are all countries in the world
except Australia, Canada, Japan, New Zealand, the United States and most
western European countries. The risks of investing in developing or
emerging markets are similar to, but greater than, the risks of investing
in the securities of developed international markets since emerging or
developing markets tend to have economic structures that are less diverse
and mature, and political systems that are less stable, than developed
countries.
In certain emerging market countries, there is less government supervision
and regulation of business and industry practices, stock exchanges, brokers
and listed companies than in the United States. The economies of emerging
market countries may be predominantly based on a few industries and may be
highly vulnerable to change in local or global trade conditions. The
securities markets of many of these countries also may be smaller, less
liquid and subject to greater price volatility than those in the United
States. Some emerging market countries also may have fixed or managed
currencies which are not free-floating against the U.S. dollar. Further,
certain emerging market country currencies may not be internationally
traded. Certain of these currencies have experienced a steady devaluation
relative to the U.S. dollar. Any devaluation in the currencies in which
portfolio securities are denominated may have an adverse impact on the
underlying funds. Finally, many emerging market countries have experienced
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substantial, and in some periods, extremely high, rates of inflation for
many years. Inflation and rapid fluctuations in inflation rates have had,
and may continue to have, negative effects on the economies for individual
emerging market countries. Moreover, the economies of individual emerging
market countries may differ favorably or unfavorably from the U.S. economy
in such respects as the rate of growth of domestic product, inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Foreign Currency Transactions
-----------------------------
Foreign currency transactions may be used by underlying funds to obtain the
necessary currencies to settle securities transactions. Currency
transactions may be conducted either on a spot or cash basis at prevailing
rates or through forward foreign currency exchange contracts.
Foreign currency transactions also may be used to protect assets against
adverse changes in foreign currency exchange rates or exchange control
regulations. Such changes could unfavorably affect the value of assets
that are denominated in foreign currencies, such as foreign securities or
Funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency exchanges may be used to protect against a decline in the
value of one or more currencies, such efforts may also limit any potential
gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses. Further, an
underlying fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations. Cross-hedging transactions involve the risk of
imperfect correlation between changes in the values of the currencies to
which such transactions relate and changes in the value of the currency or
other asset or liability that is the subject of the hedge.
In order to hedge against foreign currency exchange rate risks, an
underlying fund may enter into forward foreign currency exchange contracts
and foreign currency futures contracts, as well as purchase put or call
options on foreign currencies, as described below. The underlying fund may
also conduct its foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market.
An underlying fund may enter into forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the
underlying fund from adverse changes in the relationship between the U.S.
dollar and foreign currencies. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date,
which is individually negotiated and privately traded by currency traders
and their customers. An underlying fund may enter into a forward contract,
for example, when it enters into a contract for the purchase or sale of a
security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when the
underlying fund believes that a foreign currency may suffer a substantial
decline against the U.S. dollar, it may enter into a forward contract to
sell an amount of that foreign currency approximating the value of some or
all of the underlying fund's portfolio securities denominated in such
foreign currency, or when the underlying fund believes that the U.S. dollar
may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that foreign currency for a fixed dollar
amount.
This second investment practice is generally referred to as "cross-
hedging." Because in connection with the underlying fund's forward foreign
currency transactions an amount of the underlying fund's assets equal to
the amount of the purchase will be held aside or segregated to be used to
pay for the commitment, the underlying fund will always have cash, cash
equivalents
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or high quality debt securities available sufficient to cover any
commitments under these contracts or to limit any potential risk. The
segregated account will be marked to market on a daily basis.
An underlying fund may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the dollar
value of foreign portfolio securities and against increases in the dollar
cost of foreign securities to be acquired. As is the case with other kinds
of options, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received,
and the underlying fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on foreign currency may constitute an effective
hedge against fluctuation in exchange rates, although, in the event of rate
movements adverse to the underlying fund's position, the underlying fund
may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies to be written or purchased by the
underlying fund will be traded on U.S. and foreign exchanges or over-the-
counter.
An underlying fund may enter into exchange-traded contracts for the
purchase or sale for future delivery of foreign currencies ("foreign
currency futures"). This investment technique will be used only to hedge
against anticipated future changes in exchange rates which otherwise might
adversely affect the value of the underlying fund's portfolio securities or
adversely affect the prices of securities that the underlying fund intends
to purchase at a later date. The successful use of foreign currency
futures will usually depend on the ability of the underlying fund's
investment adviser to forecast currency exchange rate movements correctly.
Should exchange rates move in an unexpected manner, the underlying fund may
not achieve the anticipated benefits of foreign currency futures or may
realize losses.
(c) Forward Commitments
Forward commitments are contracts to purchase securities for a fixed price
at a date beyond customary settlement time. An underlying fund may enter
into these contracts if liquid securities in amounts sufficient to meet the
purchase price are segregated on the underlying fund's records at the trade
date and maintained until the transaction has been settled. Risk is
involved if the value of the security declines before settlement. Although
an underlying fund may enter into forward commitments with the intention of
acquiring the security, it may dispose of the commitment prior to
settlement and realize a short-term profit or loss.
(d) Forward Foreign Currency Exchange Contracts and
Options on Foreign Currencies
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a
specific price and on a future date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time an
underlying fund enters into a forward contract, the underlying fund assets
with a value equal to the underlying fund's obligation under the forward
contract are segregated on the underlying fund's records and are maintained
until the contract has been settled. An underlying fund will not enter
into a forward contract with a term of more than one year. An underlying
fund will generally enter into a forward contract to provide the proper
currency to settle a securities transaction at the time the
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transaction occurs ("trade date"). The period between the trade date and
settlement date will vary between 24 hours and 30 days, depending upon
local custom.
An underlying fund may also protect against the decline of a particular
foreign currency by entering into a forward contract to sell an amount of
that currency approximating the value of all or a portion of the assets
denominated in that currency ("hedging"). The success of this type of
short-term hedging strategy is highly uncertain due to the difficulties of
predicting short-term currency market movements and of precisely matching
forward contract amounts and the constantly changing value of the
securities involved. The adviser believes, however, that it is important
that an underlying fund be able to enter into forward contracts when the
best interests of the underlying fund will be served.
(e) Currency Risks
Because an underlying fund may purchase securities denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates could affect such underlying fund's net asset value, the value of
interest earned, gains and losses realized on the sale of securities, and
net investment income and capital gain, if any, to be distributed to
shareholders by such underlying fund. If the value of a foreign currency
rises against the U.S. dollar, the value of an underlying fund's assets
denominated in that currency will increase; correspondingly, if the value
of a foreign currency declines against the U.S. dollar, the value of
underlying fund assets denominated in that currency will decrease.
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental interpretation,
speculation and other economic and political conditions. Although the
underlying funds value their assets daily in U.S. dollars, the underlying
funds will not convert their holdings of foreign currencies to U.S. dollars
daily. When an underlying fund converts its holdings to another currency,
it may incur conversion costs. Foreign exchange dealers may realize a
profit on the difference between the price at which they buy and sell
currencies.
Swap Agreements
---------------
As one way of managing its exposure to different types of investments, the
underlying funds may enter into interest rate swaps, currency swaps and
other types of swap agreements such as caps, collars and floors. Depending
on how they are used, swap agreements may increase or decrease the overall
volatility of an underlying fund's investments, its share price and yield.
Swap agreements are sophisticated instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on
an underlying fund's performance. Swap agreements are subject to risks
related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. An underlying fund
may also suffer losses if it is unable to terminate outstanding swap
agreements to reduce its exposure through offsetting transactions. When an
underlying fund enters into a swap agreement, assets of the underlying fund
equal to the value of the swap agreement will be segregated by the
underlying fund.
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Among the hedging strategies into which an underlying fund may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars. The underlying fund expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the underlying fund anticipates
purchasing at a later date. The underlying fund intends to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the underlying fund may be
obligated to pay. Interest rate swaps involve the exchange by the
underlying fund with another party of their respective commitments to pay
or receive interest, e.g., an exchange of floating rate payments for fixed
rate payments with respect to a notional amount of principal. A currency
swap is an agreement to exchange cash flows on a notional amount of two or
more currencies based on the relative value differential among them and an
index swap is an agreement to swap cash flows on a notional amount based on
changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount
from the party selling such cap to the extent that a specified index
exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount
from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
An underlying fund will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date
or dates specified in the instrument, with the underlying fund receiving or
paying, as the case may be, only the net amount of the two payments.
Inasmuch as these swaps, caps, floors, and collars are entered into for
good faith hedging purposes, the underlying fund's investment adviser and
the underlying fund believe such obligations do not constitute senior
securities under the 1940 Act, and, accordingly, will not treat them as
being subject to its borrowing restrictions. There is no minimal
acceptable rating for a swap, cap, floor or collar to be purchased or held
in an underlying fund's portfolio. If there is a default by the
counterparty, the underlying fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and agents utilizing standardized
swap documentation. As a result, the swap market has become relatively
liquid. Caps, floors and collars are more recent innovations for which
standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
High Yield Securities
---------------------
The underlying funds may invest 35% or more of their respective assets in
debt securities which are not considered investment grade bonds (commonly
referred to as "junk bonds") by an NRSRO, such as Moody's Investor's
Service, Inc. or Standard & Poor's. There is no minimal acceptable rating
for a security to be purchased or held in the underlying funds, and the
underlying funds may, from time to time, purchase or hold securities in the
lowest rating category. Debt obligations that are not determined to be
investment grade are high-yield, high-risk bonds, typically subject to
greater market fluctuations and greater risk of loss of income and
principal due to an issuer's default. To a greater extent than investment
grade bonds, lower rated bonds tend to reflect short-term corporate,
economic, and market developments, as well as
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investor perceptions of the issuer's credit quality. In addition, lower
rated bonds may be more difficult to dispose of or to value than higher
rated, lower-yielding bonds. (Underlying funds that invest 35% or more of
their respective assets in junk bonds are not considered international
equity funds.)
(f) Variable Rate Demand Notes
The underlying funds may purchase variable rate demand notes. Variable
rate demand notes are long-term debt instruments that have variable or
floating interest rates and provide an underlying fund with the right to
tender the security for repurchase at its stated principal amount plus
accrued interest. Such securities typically bear interest at a rate that
is intended to cause the securities to trade at par. The interest rate may
float or be adjusted at regular intervals (ranging from daily to annually),
and is normally based on a published interest rate or interest rate index.
Many variable rate demand notes allow an underlying fund to demand the
repurchase of the security on not more than seven days' prior notice.
Other notes only permit an underlying fund to tender the security at the
time of each interest rate adjustment or at other fixed intervals. The
underlying funds treat variable rate demand notes as maturing on the later
of the date of the next interest rate adjustment or the date on which the
underlying fund may next tender the security for repurchase.
Credit Facilities
-----------------
An underlying fund may purchase demand notes, which are borrowing
arrangements between a corporation and an institutional lender (such as an
underlying fund) payable upon demand by either party. The notice period
for demand typically ranges from one to seven days, and the party may
demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower
during a specified term. As the borrower repays the loan, an amount equal
to the repayment may be borrowed again during the term of the facility. An
underlying fund generally acquires a participation interest in a revolving
credit facility from a bank or other financial institution. The terms of
the participation require the underlying fund to make a pro rata share of
all loans extended to the borrower and entitles the underlying fund to a
pro rata share of all payments made by the borrower. Demand notes and
revolving credit facilities usually provide for floating or variable rates
of interest.
(g) Diversification
With respect to 75% of the value of total assets, the Fund will not invest
more than 5% in securities of any one issuer, other than cash, cash items,
or securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements
collateralized by U.S. government securities and securities of other
investment companies, or acquire more than 10% of the outstanding voting
securities of any one issuer (for which purposes all indebtedness of an
issuer shall be deemed a single class and all preferred stock of an issuer
shall be deemed a single class, except that futures or option contracts and
securities of mutual funds shall not be subject to this restriction).
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(h) Non-Diversification
Some of the underlying funds in which the Fund invests may be non-
diversified investment companies. As such, there is no 1940 Act limit on
the percentage of assets that can be invested in any single issuer. An
investment in such underlying funds, therefore, will entail greater risks
than would exist in diversified investment companies because the higher
percentage of investments among fewer issuers may result in greater
fluctuation in the total market value of the underlying fund's portfolio.
Any economic, political, or regulatory developments affecting the value of
the securities of such issuer held by the underlying fund will have a
greater impact on the total value of the underlying fund's portfolio than
would be the case if the Fund were diversified among more issuers.
However, it is anticipated that the underlying funds will comply with
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
This requires that at the end of each quarter of the taxable year, the
aggregate value of all investments in any one issuer (except U.S.
government obligations, cash, cash items and other investment companies)
which exceed 5% of an underlying fund's total assets shall not exceed 50%
of the value of its total assets, and, with respect to the remaining
assets, no more than 25% of an underlying fund's assets shall be invested
in a single issuer.
(i) Industry Concentration
Underlying funds may concentrate their investments in one industry.
Because the scope of investment alternatives within an industry is limited,
the value of the shares of such an underlying fund may be subject to
greater market fluctuation than an investment in a Fund that invests in a
broader range of securities.
(j) Derivative Contracts and Securities
The term "derivative" has traditionally been applied to certain contracts
(including futures, forward, option and swap contracts) that "derive"
their value from changes in the value of an underlying security, currency,
commodity or index. Certain types of securities that incorporate the
performance characteristics of these contracts are also referred to as
"derivatives." The term has also been applied to securities "derived"
from the cash flows from underlying securities, mortgages or other
obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the
response of certain derivative contracts and securities to market changes
may differ from traditional investments, such as stock and bonds,
derivatives do not necessarily present greater market risks than
traditional investments.
Other Investment Considerations-- Tax-Exempt Intermediate Bond Fund, Missouri
-----------------------------------------------------------------------------
Tax Exempt Bond Fund and National Municipal Bond Fund
-----------------------------------------------------
The Funds' 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 Funds' portfolios can be expected to vary inversely to changes
in prevailing interest rates.
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From time to time, on a temporary defensive basis due to market conditions,
the Funds 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 Tax-Exempt Intermediate Bond Fund will not
exceed under normal conditions 20% of the Fund's net assets at the time of
purchase.
The National Municipal Bond Fund may only invest in investment grade
municipal securities, which are those rated in one of the four highest rating
categories assigned by one or more rating agencies. Municipal securities rated
in the lowest of the four highest rating categories are considered to have
speculative characteristics, even though they are of investment grade quality,
and will be purchased (and retained) only if the Adviser believes that the
issuers have an adequate capacity to pay interest and repay principal.
Municipal securities purchased by the National Municipal Bond Fund whose ratings
are subsequently downgraded below the four highest rating categories assigned by
a rating agency will be disposed of in an orderly manner, normally within 30 to
60 days. The applicable ratings issued by rating agencies are described in
Appendix A to this Statement of Additional Information.
Although the National Municipal Bond Fund may invest 25% or more of its
respective net assets in: (i) municipal securities whose issuers are in the
same state; (ii) municipal securities the interest on which is paid solely from
revenues of similar projects; and (iii) private activity bonds, it presently
does not intend to do so unless in the opinion of the Adviser the investment is
warranted. To the extent that the National Municipal Bond Fund's assets are
invested in municipal securities, the issuers of which are in the same state or
that are payable from the revenues of similar projects or in private activity
bonds, the National Municipal Bond Fund will be subject to the peculiar risks
presented by the laws and economic conditions relating to such projects and
bonds to a greater extent than it would be if its assets were not so invested.
Municipal Obligations. Municipal obligations which may be acquired by the
---------------------
Funds 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.
There are no restrictions on the maturity of municipal securities in which
the Missouri Tax-Exempt Fund may invest. The Fund will seek to invest in
municipal securities of such maturities as the Adviser believes will produce
current income consistent with prudent investment. The Adviser will also
consider current market conditions and the cost of the insurance obtainable on
such securities.
The two principal classifications of municipal securities consist of
"general obligation" and "revenue" issues. General obligation securities are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue securities are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source such as the user of the facility being financed. Revenue securities
include private activity bonds which are not payable from the unrestricted
revenues of the issuer. Consequently, the credit quality of private activity
bonds is usually directly related to the credit standing of the corporate user
of the facility involved. Municipal securities may also include "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
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There are, of course, variations in the quality of municipal securities
both within a particular classification and between classifications, and the
yields on municipal securities depend upon a variety of factors, including
general conditions of the money market and/or the municipal bond market, the
financial condition of the issuer, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The ratings of rating
agencies, such as Moody's and S&P, represent their opinions as to the quality of
municipal securities. It should be emphasized, however, that ratings are
general and are not absolute standards of quality, and municipal securities with
the same maturity, interest rate and rating may have different yields while
municipal securities of the same maturity and interest rate with different
ratings may have the same yield.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from federal income tax (and, with respect to
Missouri municipal securities, to the exemption from Missouri income tax) may be
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 Funds 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 Funds may,
from time to time, invest more than 25% of its assets in municipal obligations
covered by insurance policies.
The Missouri Tax-Exempt Bond Fund may enhance the credit of its investments
by a guaranty, letter of credit or insurance. Any bankruptcy, receivership,
default or change in the credit quality if the credit enhancer will adversely
effect the quality and marketability of the underlying security and could cause
losses to the Fund and affect its share price. The Fund typically evaluates the
credit quality and ratings of credit-enhanced securities based upon the
financial condition and ratings of the party providing the credit enhancement,
rather than the issuer.
The payment of principal and interest on most securities purchased by the
Funds 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
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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.
Furthermore, payment of principal and interest on municipal securities of
certain projects may be secured by mortgages or deeds of trust. In the event of
a default, enforcement of the mortgages or deeds of trust will be subject to
statutory enforcement procedures and limitations, including rights of redemption
and limitations on obtaining deficiency judgments. In the event of a
foreclosure, collection of the proceeds of the foreclosure may be delayed, and
the amount of proceeds from the foreclosure may not be sufficient to pay the
principal of and accrued interest on the defaulted municipal securities.
Interest on private activity bonds, although free from regular federal income
taxation, may be an item of tax preference for purposes of the federal
alternative minimum tax.
Municipal obligations purchased by the Funds 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 Funds' 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 Missouri Tax-Exempt Bond Fund may also purchase general obligation
notes, tax anticipation notes, bond anticipation notes, revenue anticipation
notes, tax-exempt commercial paper, construction loan notes and other tax-exempt
loans. Such instruments are issued in anticipation of the receipt of tax funds,
the proceeds of bond placements, or other revenues.
The Tax-Exempt Intermediate Bond Fund and Missouri Tax-Exempt Bond Fund may
purchase put options on municipal obligations. A put gives a 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 Funds will acquire puts only to enhance liquidity,
shorten the maturity of the related municipal security or permit the Funds to
invest their 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 Funds and the
liquidity and value of the Funds' portfolios. In such an event, the Company
would reevaluate the Funds' investment objectives and policies and consider
possible changes in their structure or possible dissolution.
With respect to Missouri municipal securities, the Missouri Tax-Exempt Bond
Fund cannot predict what legislation, if any, may be proposed in the Missouri
Legislature relating to the status of the Missouri income tax on interest on
such obligations, or which proposals, if any, might be enacted. Such proposals,
while pending or if enacted, might adversely affect the availability of
municipal securities generally, or Missouri municipal securities specifically,
for investment by a Fund and the liquidity and
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value of the Fund's assets. In such an event, the Fund would reevaluate its
investment objective and policies and consider possible changes in its structure
or possible dissolution.
Although the Missouri Tax-Exempt Bond Portfolio does not presently intend
to do so on a regular basis, it may invest more than 25% of its assets in
industrial development bonds issued before August 7, 1986, the interest on which
is not treated as a specific tax preference item under the federal alternative
minimum tax, and in municipal securities, the interest on which is paid solely
from revenues of similar projects, if such investments are deemed necessary or
appropriate by the Adviser.
To the extent that a Fund's assets are invested in municipal securities the
issuers of which are in the same state or that are payable from the revenues of
similar projects or in private activity bonds, a Fund will be subject to the
peculiar risks presented by the laws and economic conditions relating to such
projects and bonds to a greater extent than it would be if its assets were not
so invested.
Municipal Lease Obligations. As stated in the Prospectuses, the Tax-Exempt
---------------------------
Bond Funds 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 respective 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. In the acquisition of participation interests, the Adviser will consider
the following quality factors:
. a high quality underlying municipal security (of which the Fund takes
possession);
. a high quality issuer of the participation interest; or
. a guarantee or letter of credit from a high-quality financial
institution supporting the participation interest.
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 Bond Funds may acquire "stand-by
--------------------
commitments" with respect to municipal obligations held in their portfolios.
Under a "stand-by commitment" a dealer agrees to buy from a Fund, at the Fund's
option, specified municipal obligations at a specified price. "Stand-by
commitment" acquired by the Funds may also be referred to in this Statement of
Additional Information as "put" options. The Missouri Tax-Exempt Bond Fund
expects that its investments in stand-by commitments will not exceed 5% of the
value of its total assets under normal market conditions.
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The amount payable to a 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 a Fund
only with the instrument involved.
The Funds expect that "stand-by commitments" will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Funds 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 either the Tax-
Exempt Intermediate Bond Fund or National Municipal Bond 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 Funds intend 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 Funds' 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 Funds would acquire "stand-by commitments" solely to facilitate
portfolio liquidity and do not intend to exercise their 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 Funds. "Stand-by commitments" which would be acquired by the
Funds would be valued at zero in determining net asset value. Where a 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.
Missouri Municipal Securities. The Missouri Tax-Exempt Bond Fund invests
-----------------------------
in municipal securities of Missouri. The following highlights some of the more
important economic and financial trends and considerations and is based on
information from official statements, prospectuses and other publicly available
documents relating to securities offerings of the State of Missouri, its
agencies and instrumentalities, as available on the date of this Statement of
Additional Information. The Fund has not independently verified any of the
information contained in such statements or other documents.
Missouri's population was approximately 5.5 million as of June 2000. Based
on 1998 U.S. Census Bureau estimates, Missouri constituted the 16th most
populous state and its two largest cities, St. Louis and Kansas City and their
surrounding metropolitan areas, constituted the 18th and 24th largest
metropolitan areas in the nation, respectively. [Source: U.S. Department of
Commerce, Bureau of the Census.] St. Louis is a distribution center and an
important site for banking and manufacturing activity. Kansas City is a major
agri-business center for the United States and an important center for finance
and industry. During 1999, per capita personal income in Missouri was
approximately $26,187, which ranks Missouri 30th among states in per capita
income. Personal income in Missouri grew by 4.7% from 1998 to 1999, which is
below the national growth rate for this period of 5.8%. [Source: Missouri Dept.
Of Economic Development.]
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The major sectors of the State's economy include services, manufacturing,
trade, and state and local government. Although farming traditionally has
played a dominant role in the State's economy, with increasing urbanization,
significant income-generating activity has shifted from agriculture to the
services, manufacturing, trade and government sectors. Earnings and employment
are distributed among the manufacturing, trade and service sectors in a close
approximation of the average national distribution, thus lessening the State's
cyclical sensitivity to impact by any single activity. Manufacturing
represented the single most important economic activity, followed by wholesale
and retail trade. Manufacturing is concentrated in defense, transportation and
other durable goods. The State's top five largest manufacturers in 1999 were
The Boeing Co., Anheuser-Busch Co., Hallmark Cards, Ford Motor Co. and Chrysler
Corp. [Source: Missouri Dept. of Economic Development.]
Defense-related business plays an important role in Missouri's economy.
Over the past decade, aircraft production and defense-related businesses have
received sizable annual defense contract awards. Declining defense
appropriation, military base closings in Missouri and federal downsizing may
continue to have an impact on the State. The State's top five largest employers
are Wal-Mart, The Boeing Co., U.S. Post Office and Trans World Airlines Inc.
[Source: Missouri Dept. of Economic Development.] Missouri's unemployment rate
was 3.1% in September 2000, compared to the 3.9% national unemployment rate
during this period. [Source Bureau of Labor Statistics Data.]
Revenue collection for the fiscal year ended June 30, 2000 ("Fiscal Year
2000") is estimated to be $6.6 billion, an increase of 3% over fiscal year 1999.
Expenditures for Fiscal Year 2000 are estimated at $7.2 billion, including $53.5
million for the St. Louis school desegregation case. For the fiscal year ending
June 30, 2001 ("Fiscal Year 2001"), revenues are projected to be $6.9 billion.
Expenditures are projected at $7.7 billion and do include $50 million for the
St. Louis school desegregation case. [Source Missouri Department of Revenue.]
There are additional risks associated with investment in the Missouri Tax-
Exempt Bond Fund because it invests its assets predominantly in Missouri
municipal securities. The Missouri Constitution imposes a limit on the amount of
taxes that may be imposed by the General Assembly during any fiscal year. No
assurances can be given that the amount of revenue derived from taxes will
remain at its current level or that the amount of federal grants previously
provided to the State will continue. The State of Missouri is barred by its
constitution from issuing debt instruments to fund government operations,
although it is authorized to issue bonds to finance or refinance the cost of
capital projects upon approval by the voters. In the past, the State has issued
two types of bonds to raise capital: general obligation bonds and revenue bonds.
Payments on general obligation bonds are made from the General Revenue Fund.
Therefore, if the State is unable to increase its tax revenues, the State's
ability to make the payments on the existing obligations may be adversely
affected. The State also is authorized to issue revenue bonds, which generally
provide funds for a specific project, and payments are generally limited to the
revenue from that project. The State may, however, enact a tax specifically to
repay the State's revenue bonds. Therefore, a reduction of revenues on a project
financed by revenue bonds may adversely affect the State's ability to make
payments on such bonds.
Other Investment Considerations - MicroCap Fund
-----------------------------------------------
Small Cap Volatility. Companies in which the MicroCap 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
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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.
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 MicroCap Fund when the Adviser believes such investments offer
possibilities of attractive capital appreciation.
Equity Swaps. The MicroCap 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.
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Other Investment Considerations - Equity Index, MidCap Index and Small Cap Index
--------------------------------------------------------------------------------
Funds
-----
The inclusion of a security in a Fund's index in no way implies an opinion
by S&P as to its attractiveness as an investment. S&P is not a sponsor of, or
in any way affiliated with, the Funds.
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).
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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.
Small Cap Index Fund Management Techniques. The Small Cap Index Fund will
------------------------------------------
invest substantially all but no less than 80% of its total assets in securities
listed in the S&P SmallCap 600 Index (the "S&P SmallCap 600"). The Adviser
generally selects securities for the Fund on the basis of their weightings in
the S&P SmallCap 600. The Fund will only purchase a common stock that is
included in the S&P SmallCap 600 at the time of such purchase. The Fund should
exhibit price volatility similar to that of the S&P SmallCap 600. For further
information, see "The Indexing Approach" below.
With respect to the remaining portion of its total assets, the Fund has the
ability to hold temporary cash balances which may be invested in U.S. Government
obligations and money market instruments, including variable and floating rate
obligations such as variable rate master demand notes. If appropriate, the Fund
may use options, futures contracts and depository receipts to hedge its
positions or for other permissible purposes. The Fund also may enter into
repurchase and reverse repurchase agreements and lend its portfolio securities.
The S&P SmallCap 600 is composed of approximately 600 common stocks. These
companies are chosen to be part of the S&P SmallCap 600 based upon their market
size, liquidity and industry group representation. As of December 1, 2000,
stocks in the S&P SmallCap 600 had a market capitalization of $562 million. To
be included in the S&P SmallCap 600, stock selections are also screened by S&P
for trading volume, ownership concentration, share price and bid/ask spreads.
Normally, the Fund will hold all 600 stocks in the S&P SmallCap 600 and will
hold each stock in approximately the same percentage as that stock represents in
the S&P SmallCap 600. Under certain circumstances, the Fund may not hold all
600 stocks in the S&P SmallCap 600, for example because of changes in the S&P
SmallCap 600, or as a result of shareholder activity in the Fund. The Fund will
rebalance its holdings periodically as dictated by changes in shareholder
purchase and redemption activity and the composition of the S&P SmallCap 600.
The Adviser believes that the S&P SmallCap 600 is an appropriate benchmark for
the Fund because it represents a diversified array of small capitalization
companies, it is familiar to many investors and it is widely accepted as a
reference for small capitalization common stock investments.
The S&P SmallCap 600 has above-average risk and may fluctuate more than the
S&P 500 Index, which lists stocks of larger, more established companies. Small
capitalization companies may be subject to more abrupt or erratic price
movements than the stocks of larger, established companies or the stock market
as a whole. Among the reasons for this greater price volatility are the less
than certain growth prospects of smaller companies, the lower degree of
liquidity in the markets for such stocks and the greater exposure of small
capitalization companies to changing economic conditions. In addition, such
companies often have limited product lines, smaller markets or fewer financial
resources. Because of the risks associated with investing in the small
companies that comprise the S&P SmallCap 600, shareholders should consider an
investment in the Small Cap Index Fund to be long-term. The Fund is not
designed to provide investors with a means to speculate on short-term movements
in the stock market.
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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
Small Cap Index Fund matches the performance of the S&P SmallCap 600.
The Small Cap Index Fund seeks to approximate the investment performance of
its market segments, as represented by the S&P SmallCap 600. While there can be
no guarantee that the Fund's investment results will precisely match the results
of its corresponding index, the Adviser believes that, before deduction of
operating expenses, there will be a very high correlation between the returns
generated by the Fund and its index. The Fund will attempt to achieve a
correlation between its performance and its index of at least 0.95 before
deduction of operating expenses. A correlation of 1.00 would indicate a perfect
correlation, which would be achieved when the Fund's net asset value, including
the value of its dividend and capital gains distributions, increases or
decreases in exact proportion to changes in its respective index. The Fund's
ability to correlate its performance with its index, however, may be affected
by, among other things, transaction costs, changes in securities markets, the
manner in which S&P calculates its index, and the timing of purchases and
redemptions. The Adviser monitors the correlation of the performance of the
Small Cap Index Fund in relation to its index under the supervision of the Board
of Directors. In the unlikely event that a high correlation is not achieved,
the Board of Directors will take appropriate steps to correct the reason for the
lower correlation.
The Adviser believes that the indexing approach should involve less
portfolio turnover, and thus lower brokerage costs, transfer taxes and operating
expenses, than in more traditionally managed funds, although there is no
assurance that this will be the case. Ordinarily, the Fund will buy or sell
securities only to reflect changes in an index (including mergers or changes in
the composition of an index) or to accommodate cash flows into and out of the
Fund. The costs and other expenses incurred in securities transactions, apart
from any difference between the investment results of the Fund and that of its
index, may cause the return of the Fund to be lower than the return of its
index. The Fund may invest in less than all of the securities included in its
index, which may result in a return that does not correspond with that of the
index, after taking expenses into account.
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/Credit 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 Prospectuses 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/Credit Bond
Index.
Other Investment Considerations - Balanced Growth and Balanced Income Funds
---------------------------------------------------------------------------
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.
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Other Investment Considerations - Short-Term Bond, Intermediate Bond, U.S.
--------------------------------------------------------------------------
Government Securities, Aggregate Bond and Bond IMMDEX(TM) 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 Prospectuses. 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 - Balanced Income Fund, Balanced Growth Fund,
-----------------------------------------------------------------------------
Growth & Income Fund, Large Cap Core Equity Fund, International Value Fund,
---------------------------------------------------------------------------
MidCap Core Equity Fund and MicroCap Funds
------------------------------------------
The Balanced Income, Balanced Growth, Growth & Income, Large Cap Core
Equity, International Value, MidCap Core Equity and MicroCap 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 Large
Cap Core Equity Fund's and MidCap Core Equity Fund's total assets and at least
65% of the value of the MicroCap Fund's and the International Value 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.
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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).
None of the Short-Term Bond, Intermediate Bond, Bond IMMDEX(TM), Tax-Exempt
Intermediate Bond, Balanced Growth, Balanced Income, Growth & Income, Equity
Index, Large Cap Core Equity, International Value, International Growth, MidCap
Index, MidCap Core Equity, Small Cap Core Equity or MicroCap Funds 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
Value Fund or International Growth 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
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the value of the Fund's total assets would be invested in the securities of such
issuer, or more than 10% of the issuer's outstanding voting securities would be
owned by the Fund or the Company, except that up to 25% of the value of the
Fund's total assets may be invested without regard to these limitations. For
purposes of this limitation, a security is considered to be issued by the entity
(or entities) whose assets and revenues back the security. A guarantee of a
security shall not be deemed to be a security issued by the guarantor when the
value of all securities issued and guaranteed by the guarantor, and owned by the
Fund, does not exceed 10% of the value of the Fund's total assets.
10. Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry; provided that: (a) with regard to all Funds except the Tax-Exempt
Intermediate Bond Fund, there is no limitation with respect to instruments
issued or guaranteed by the United States, its agencies or instrumentalities and
repurchase agreements secured by such instruments; (b) with regard to the Tax-
Exempt Intermediate Bond Fund, there is no limitation with respect to
instruments issued or guaranteed by the United States, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments; (c) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; and
(d) utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry.
11. Borrow money or issue senior securities, except that each Fund may
borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to 10% of the value of the total assets (one-third of the
value of the total assets, with respect to the MicroCap Fund) at the time of
such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed or 10% of the value of the Fund's total assets (one-
third of the value of the total assets, with respect to the MicroCap Fund) at
the time of such borrowing. A Fund will not purchase securities while its
borrowings (including reverse repurchase agreements) in excess of 5% of its
total assets are outstanding. The MicroCap Fund may not enter into reverse
repurchase agreements exceeding in the aggregate one-third of its total assets.
Securities held in escrow or separate accounts in connection with the Fund's
investment practices described in this SAI or in the Prospectuses are not deemed
to be pledged for purposes of this limitation.
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
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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 Value Fund and
International Growth 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 Prospectuses) 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 Prospectuses 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.
None of the U.S. Government Securities, Aggregate Bond or National
Municipal Bond Funds may:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, provided that each Fund may invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein; provided
further that: (a) the Aggregate Bond Fund may invest in first mortgage loans,
income participation loans and participation certificates in pools of mortgages,
including mortgages issued or guaranteed by the U.S. Government, its agencies or
its instrumentalities and CMOs; and (b) the U.S. Government Securities Fund may
invest in certain mortgage-backed securities, including CMOs, and certain other
securities.
3. 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 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
a Fund's investment objective, policies and limitations may be deemed to be
underwriting.
4. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that the National Municipal Bond
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.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that: (a) with the exception of the National
Municipal Bond Fund, this investment limitation shall not apply to a Fund's
transactions in options, and futures contracts and related options; and (b) a
Fund may obtain short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities.
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6. Purchase securities of any one issuer (other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after and as a result of such investments, more than 5% 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
Company or the Fund, except that up to 25% of the Fund's total assets may be
invested without regard to such limitations.
7. Purchase any securities which would cause 25% or more 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 however, that: (a) with respect to the U.S. Government
Securities Fund and the Aggregate Bond Fund (i) there is no limitation with
respect to obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities, and repurchase agreements secured by obligations of the
U.S. government or its agencies or instrumentalities, (ii) 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 their parents,
and (iii) utilities will be divided according to their services (for example,
gas, gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry); and (b) with respect to the National Municipal
Bond Fund, there is no limitation with respect to obligations issued or
guaranteed by the U.S. government, any state, territory or possession of the
U.S. government, the District of Columbia, or any of their authorities,
agencies, instrumentalities or political subdivisions.
8. Borrow money or issue senior securities, except that each Fund may
borrow from banks and the Aggregate Bond Fund and U.S. Government Securities
Fund may enter into reverse repurchase agreements for temporary defensive
purposes in amounts not in excess of 10% of the Fund's 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 Fund's total assets at the time of
such borrowing; or purchase securities while its borrowings exceed 5% of its
total assets. A Fund's transactions in futures and related options (including
the margin posted by a Fund in connection with such transactions), and
securities held in escrow or separate accounts in connection with a Fund's
investment practices described in the Prospectuses or this Statement of
Additional Information are not subject to this limitation.
9. Make loans, except that: (a) each Fund may purchase or hold debt
instruments, lend portfolio securities and make other investments in accordance
with its investment objective and policies; and (b) the Aggregate Bond Fund may
enter into repurchase agreements.
The Equity Income Fund and Small Cap Index Fund may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, provided that each Fund may invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein.
3. 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 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
a Fund's investment objective, policies and limitations may be deemed to be
underwriting.
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4. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that the Small Cap Index Fund may,
to the extent appropriate to its investment objectives, purchase publicly traded
securities of companies engaging in whole or in part in such activities; and
provided further, that the Equity Income and Small Cap Index Funds may invest in
futures contracts and related options in accordance with their respective
investment obligations and policies.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that this investment limitation shall not
apply to a Fund's transactions in options, futures contracts and related options
and a Fund may obtain short-term credits as may be necessary for the clearance
of purchases and sales of portfolio securities.
6. Purchase securities of any one issuer (other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after and as a result of such investments, more than 5% 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 Fund's total assets may be
invested without regard to such limitations.
7. Purchase any securities which would cause 25% or more 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 however, that with respect to each Fund: (i) there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, and repurchase agreements secured
by obligations of the U.S. Government or its agencies or instrumentalities; (ii)
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 their parents; and (iii) 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).
8. Borrow money or issue senior securities, except that each Fund may
borrow from banks and each Fund may enter into reverse repurchase agreements for
temporary defensive purposes in amounts not in excess of 10% of the Fund's 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 Fund's total
assets at the time of such borrowing; or purchase securities while its
borrowings exceed 5% of its total assets. A Fund's transactions in futures and
related options (including the margin posted by a Fund in connection with such
transactions), and securities held in escrow or separate accounts in connection
with a Fund's investment practices described in the Prospectuses or this
Statement of Additional Information are not subject to this limitation.
9. Make loans, except that: (a) each Fund may purchase or hold debt
instruments, lend portfolio securities and make other investments in accordance
with its investment objective and policies; and (b) each Fund may enter into
repurchase agreements.
The Missouri Tax-Exempt Bond Fund may not:
1. Purchase or sell real estate, except that the Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.
2. Purchase securities of companies for the purpose of exercising
control.
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3. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets or as otherwise permitted by the 1940 Act.
4. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as it might be deemed to be an underwriter
upon 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.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that the Fund may obtain short-term credit as
may be necessary for the clearance of purchases and sales of portfolio
securities.
6. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that the Fund may, to the extent
appropriate to its investment objective, purchase publicly traded securities of
companies engaging in whole or in part in such activities.
7. Write or sell put options, call options, straddles, spreads, or any
combination thereof.
8. Purchase any securities, except securities 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, which would cause 25% or more of the Fund's net assets
at the time of purchase to be invested in the securities of issuers conducting
their principal business activities in the same industry. For purposes of this
limitation, a security is considered to be issued by the governmental entity (or
entities) whose assets and revenues back the security, or, with respect to an
industrial development bond that is backed only by the assets and revenues of a
non-governmental user, a security is considered to be issued by such non-
governmental user. In certain circumstances, the guarantor of a guaranteed
security may also be considered to be an issuer in connection with such
guarantee, except that 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
Fund's total assets.
9. Make loans except that the Fund may purchase and hold debt instruments
and enter into repurchase agreements in accordance with its investment objective
and policies.
10. Purchase securities of any one issuer if, immediately after and as a
result of such purchase, more than 5% of the Fund's total assets would be
invested in the securities of such issuer, except that: (a) up to 50% of the
Fund's total assets may be invested without regard to this 5% limitation
provided that no more than 25% of the Fund's total assets are invested in the
securities of any one issuer; and (b) this 5% limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. For purposes of this limitation, a security is considered to
be issued by the governmental entity (or entities) whose assets and revenues
back the security, or, with respect to a private activity bond that is backed
only by the assets and revenues of a non-governmental user, a security is
considered to be issued by such non-governmental user. In certain circumstances,
the guarantor of a guaranteed security may also be considered to be an issuer in
connection with such guarantee, except that 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 Fund's total assets.
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11. Borrow money or issue senior securities, except that the Fund may
borrow from banks and enter into reverse repurchase agreements for temporary
defensive purposes in amounts not in excess of 10% 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 its total assets at the time of such
borrowing (including any reverse repurchase agreements); or purchase securities
while borrowings exceed 5% of the Fund's total assets. Securities held in escrow
or separate accounts in connection with the Fund's investment practices
described in the Prospectuses or this Statement of Additional Information are
not subject to this limitation.
The following additional investment policy with respect to the Missouri
Tax-Exempt Bond Fund is not fundamental and may be changed by the Board of
---------------
Directors without shareholder approval:
The Fund may not purchase securities which are not readily marketable,
enter into repurchase agreements providing for settlement in more than seven
days after notice, or purchase other illiquid securities if, as a result of such
purchase, illiquid securities would exceed 15% of the Fund's net assets.
With respect to the investment limitations for each of the Missouri Tax-
Exempt Bond, Equity Income and Small Cap Index Funds, if a percentage limitation
is satisfied at the time of investment, a later increase or decrease in such
percentage resulting from a change in value in the Fund's securities will not
constitute a violation of such limitation.
The Strategic Income, Relative Value, Large Cap Growth, Global Equity and
Science & Technology Funds are each 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).
1. None of the Funds, except the Strategic Income Fund will sell any
securities short. The Strategic Income Fund will not sell securities short
unless: (a) it owns, or has a right to acquire, an equal amount of such
securities; or (b) if it does not own the securities, it has segregated an
amount of its other assets equal to the lesser of the market value of the
securities sold short or the amount required to acquire such securities. While
in a short position, the Strategic Income Fund will retain the securities,
rights, or segregated assets. The underlying funds of the Global Equity Fund may
engage in short selling transactions.
2. None of the Funds will purchase any securities on margin, but they may
obtain such short-term credits as may be necessary for clearance of purchases
and sales of portfolio securities. Regarding the Strategic Income Fund, Large
Cap Growth Fund and Science & Technology Fund, the deposit or payment by the
Funds of initial or variation margin in connection with futures contracts or
related options transactions is not considered the purchase of a security on
margin.
3. None of the Funds will issue senior securities, except that each Fund
may borrow money directly or through reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amount borrowed.
The Science & Technology Fund and Large Cap Growth Fund will issue senior
securities to the extent that the Funds may enter into futures contracts.
4. Except as described in the Prospectuses, none of the Funds, except the
Strategic Income Fund, will borrow money or engage in reverse repurchase
agreements for investment leverage. However, each Fund may borrow money up to
one-third of the value of its total assets as a temporary,
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extraordinary, or emergency measure or to facilitate management of the Fund by
enabling the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. Interest paid on
borrowed funds will serve to reduce the Fund's income. A Fund will not purchase
any securities while borrowings and reverse repurchase agreements in excess of
5% of its total assets are outstanding. During the period any reverse repurchase
agreements are outstanding, the Funds will restrict the purchase of portfolio
securities to money market instruments maturing on or before the expiration date
of the reverse repurchase agreements, but only to the extent necessary to assure
completion of the reverse repurchase agreements. The underlying funds of the
Global Equity Fund may borrow money.
The Strategic Income Fund may borrow money directly or through reverse
repurchase agreements in amounts up to one-third of the value of its total
assets, including the amount borrowed, either as a temporary, extraordinary, or
emergency measure or to facilitate management of the Strategic Income Fund by
enabling the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous, or for investment
purposes. The Strategic Income Fund will not purchase any securities for the
purpose stated under clause (i) above while any borrowings in excess of 5% of
its total assets are outstanding.
5. The Funds will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, they may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value of total
assets at the time of the pledge. Regarding the Strategic Income Fund and Large
Cap Growth Fund, the following will not be deemed to be pledges of the Funds'
assets: the deposit of assets in escrow in connection with the writing of
covered put or call options and the purchase of securities on a when-issued
basis; and collateral arrangements with respect to: (i) the purchase and sale of
stock options (and options on stock indices); and (ii) initial or variation
margin for futures contracts. Margin deposits for the purchase and sale of
futures contracts and related options are not deemed to be a pledge.
6. With respect to securities comprising 75% of the value of their
respective total assets, the Strategic Income Fund, Large Cap Growth Fund and
Global Equity Fund will not purchase securities issued by any one issuer (other
than cash, cash items, or securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase agreements
collateralized by such securities and securities of other investment companies)
if, as a result, more than 5% of the value of their respective total assets
would be invested in the securities of that issuer. The Funds will not acquire
more than 10% of the outstanding voting securities of any one issuer.
The Relative Value Fund will not invest more than 5% of its total
assets in the securities of any one issuer, except in cash or cash investments,
securities guaranteed by the U.S. government, its agencies or instrumentalities
and repurchase agreements collateralized by such securities.
7. The Strategic Income Fund, Relative Value Fund, Large Cap Growth Fund
and Global Equity Fund will not invest 25% or more of the value of their
respective total assets in any one industry (other than investment companies and
securities issued by the U.S. government, its agencies or instrumentalities).
The Science & Technology Fund will not invest 25% or more of the value
of its respective total assets in any one industry, except in the science and
technology areas as set forth under the "Objective" and "Principal Investment
Strategies" sections in the Prospectuses, provided also that there shall be no
limitation on the Fund to purchase obligations issued or guaranteed by the
United States Government, its agencies or instrumentalities. When the assets and
revenues of an agency, authority,
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instrumentality or other political subdivision are separate from those of the
government creating the issuing entity and a security is backed only by the
assets and revenues of the entity, the entity would be deemed to be the sole
issuer of the security. Similarly, in the case of an industrial revenue bond, if
that bond is backed only by the assets and revenues of the non-governmental
issuer, then such non-governmental issuer would be deemed to be the sole issuer.
If, however, in either case, the creating government guarantees a security, such
a guarantee would be considered a separate security and would be treated as an
issue of such government.
8. The Funds will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
9. The Funds will not purchase or sell real estate, including limited
partnership interests. However, they may invest in the securities of companies
whose business involves the purchase or sale of real estate or in securities
that are secured by real estate or interests in real estate.
10. The Funds will not purchase or sell commodities, commodity contracts,
or commodity futures contracts. However the Strategic Income Fund, Large Cap
Growth Fund, Global Equity Fund and Science & Technology Fund may engage in
transactions involving futures contracts or options on futures contracts.
11. The Relative Value Fund will not purchase or sell oil, gas, or other
mineral exploration or development programs or leases.
12. The Strategic Income Fund, Large Cap Growth Fund and Global Equity
Fund will not lend any of their respective assets, except portfolio securities
up to one-third of the value of their respective total assets. This shall not
prevent the Funds from purchasing or holding U.S. government obligations, money
market instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by a Fund's
investment objectives, policies, and limitations.
The Relative Value Fund will not lend any of its assets, except that
it may purchase or hold corporate or government bonds, debentures, notes,
certificates of indebtedness or other debt securities permitted by its
investment objective and policies.
13. The Relative Value Fund will not invest more than 10% of the value of
its net assets in securities subject to restrictions on resale under the
Securities Act of 1933 except for certain other restricted securities which meet
the criteria for liquidity as established by the Company's Board of Directors.
The Relative Value Fund may invest in commercial paper issued under Section 4(2)
of the Securities Act of 1933.
14. The Relative Value Fund will not purchase or sell puts, calls, spreads
or any combination of them except as permitted by its investment policies.
15. The Relative Value Fund will not purchase securities of a company for
the purpose of exercising control or management. However, the Fund may acquire
up to 10% of the voting securities of an issuer and may exercise its voting
power in the Fund's best interest. From time to time, the Fund, together with
other investment companies advised by affiliates or subsidiaries of Firstar
Bank, N.A., may together buy and hold substantial amounts of a company's voting
stock. All such stock may be voted together. In some cases, the Funds and the
other investment companies may collectively be considered
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to be in control of the company in which they have invested. Officers or
affiliates of the Fund may possibly become directors of companies in which the
Fund holds stock.
16. The Relative Value Fund will not invest more than 5% of the value of
its total assets in securities of issuers with records of less than three years
of continuous operations, including the operation of any predecessor.
17. The Relative Value Fund will not purchase or retain the securities of
any issuer if the officers and Directors of the Company or the Adviser together
own more than 5% of the issuer's securities.
18. The Relative Value Fund will not purchase securities of other
investment companies, except: by purchase in the open market involving only
customary brokerage commissions; or as part of a merger, consolidation,
reorganization, or other acquisition.
With respect to the Strategic Income, Relative Value, Large Cap Growth,
Global Equity and Science & Technology Funds, the Directors may change the
following investment limitations without shareholder approval. Shareholders will
be notified before any material change in these limitations becomes effective.
1. The Strategic Income Fund, Relative Value Fund, Large Cap Growth Fund,
Global Equity Fund and Science & Technology Fund will not invest more than 15%
of the value of their respective net assets in illiquid securities, including
repurchase agreements providing for settlement in more than seven days after
notice, non-negotiable fixed time deposits with maturities over seven days,
over-the-counter options and certain restricted securities not determined by the
Directors to be liquid.
Under criteria established by the Board of Directors, certain
restricted securities are considered to be liquid. The Funds will limit their
purchases of illiquid securities to 15% of their respective net assets which
include restricted securities not determined by the Directors to be liquid, non-
negotiable time deposits, over-the-counter options, and repurchase agreements
providing for settlement in more than 7 days after notice.
2. The Strategic Income Fund, Large Cap Growth Fund and Science &
Technology Fund will limit their investment in other investment companies to: no
more than 3% of the total outstanding voting stock of any investment company; no
more than 5% of their respective total assets in any one investment company; and
no more than 10% of their respective total assets in investment companies in
general.
The Strategic Income Fund and Large Cap Growth Fund will purchase
securities of investment companies only in open-market transactions involving
customary broker's commissions. The Adviser will waive its investment advisory
fee on assets invested in securities of open-end investment companies.
These limitations are not applicable if the securities are acquired in
a merger, consolidation, reorganization or acquisition of assets. It should be
noted that investment companies may incur certain expenses that may be
duplicative of certain fees incurred by the Fund.
3. The Strategic Income Fund, Large Cap Growth Fund and Science &
Technology Fund will not purchase securities of a company for the purpose of
exercising control or management.
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4. The Strategic Income Fund, Large Cap Growth Fund and Science &
Technology Fund will not write call options on securities unless the securities
are held in the specific Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in the
amount of any further payment.
5. The Relative Value Fund will not invest more than 10% of its total
assets in securities of foreign issuers.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Funds do not expect to borrow money or pledge securities in excess of
5% of the value of their respective total assets in the coming fiscal year.
For purposes of their policies and limitations, the Funds consider
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings association having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items."
As a matter of operating policy, which may be changed without shareholder
approval, the Large Cap Growth Fund will limit the margin deposits on futures
contract and options entered into by the Fund to 5% of its net assets.
As operating policies of the Strategic Income Fund which may be changed
without shareholder approval: no securities will be sold short if, after effect
is given to any such short sale, the total market value of all securities sold
short would exceed 25% of the value of the Fund's net assets; the Fund may not
sell short the securities of any single issuer listed on a national securities
exchange to the extent of more than 5% of the value of the Fund's net assets;
the Fund may not sell short the securities of any class of an issuer to the
extent, at the time of the transaction, of more than 5% of the outstanding
securities of that class; and the Fund at no time will have more than 15% of the
value of its net assets in deposits on short sales against the box.
NET ASSET VALUE
The net asset value per share of each Fund is calculated separately for the
Institutional Shares, Retail A Shares, Retail B Shares and Y 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, Retail B Shares and Y 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.
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Net asset value for purposes of pricing purchase and redemption orders is
determined as of the close of regular trading hours on the New York Stock
Exchange (the "Exchange"), normally, 3:00 p.m. Central Time, on each day the
Exchange is open for trading. Currently, the Exchange observes the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day (observed), Independence Day (observed), Labor Day,
Thanksgiving and Christmas.
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 Value 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 Value Fund and
International Growth Fund, is not calculated. The calculation of the net asset
value of a Fund, including the International Value Fund and International Growth
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.
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Computation of Offering Price of the Funds. The following illustration of
------------------------------------------
the computation of the initial offering price per share of the Retail A Shares
is based on the value of each Continuing Fund's net assets and number of
outstanding securities at April 30, 2000, and the net assets and number of
outstanding securities of the Predecessor Fund to each New Fund at May 31, 2000,
as follows:
<TABLE>
<CAPTION>
Short-Term Bond Intermediate Bond U.S. Government Aggregate Bond
Fund Fund Securities Fund Fund
---- ---- --------------- ----
<S> <C> <C> <C> <C>
Net Assets (000s) $ 54,738 $ 29,633 $3,778,614 $3,096,351
Number of Shares
Outstanding (000s) 5,458 2,992 372,572 319,934
Net Asset Value
Per Share 10.03 9.92 10.14 9.68
Sales Charge, 4.00%
of offering price
(4.16% of net asset value
per share) 0.42 0.41 0.42 0.40
Public Offering Price 10.45 10.33 10.56 10.08
<CAPTION>
Bond IMMDEX(TM) Strategic Income Tax-Exempt Intermediate Missouri Tax-Exempt
Fund Fund Bond Fund Bond Fund
---- ---- --------- ---------
<S> <C> <C> <C> <C>
Net Assets (000s) $ 83,806 $ 0 $ 14,798 $ 19,487
Number of Shares
Outstanding (000s) 3,104 0 1,481 1,753
Net Asset Value
Per Share 27.00 8.32 9.99 11.12
Sales Charge, 4.00%
of offering price
(4.16% of net asset value
per share) 1.13 0.35 0.42 0.46
Public Offering Price 28.13 8.67 10.41 11.58
<CAPTION>
National Municipal
Bond Fund
---------
<S> <C>
Net Assets (000s) $1,437,564
Number of Shares
Outstanding (000s) 155,603
Net Asset Value
Per Share 9.24
Sales Charge, 4.00%
of offering price
(4.16% of net asset value
per share) 0.39
Public Offering Price 9.63
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Balanced Income Balanced Growth Growth & Income Equity
Fund Fund Fund Income Fund
---- ---- ---- -----------
<S> <C> <C> <C> <C>
Net Assets (000s) $ 11,413 $ 53,470 $ 181,142 $ 843
Number of Shares
Outstanding (000s) 1,040 1,640 4,036 128
Net Asset Value
Per Share 10.96 32.60 44.90 6.59
Sales Charge, 5.50%
of offering price
(5.82% of net asset
value per share) 0.64 1.90 2.61 0.38
Public Offering Price 11.60 34.50 47.51 6.97
<CAPTION>
Relative Equity Index Large Cap Core Large Cap
Value Fund Fund Equity Fund Growth Fund
---------- ---- ----------- -----------
<S> <C> <C> <C> <C>
Net Assets (000s) $ 49,126 $146,680 $ 51,718 $ 195
Number of Shares
Outstanding (000s) 1,700 1,536 1,204 8
Net Asset Value
Per Share 28.90 95.48 42.94 25.69
Sales Charge, 5.50%
of offering price
(5.82% of net asset
value per share) 1.68 5.56 2.52 1.50
Public Offering Price 30.58 101.04 45.26 27.19
<CAPTION>
International Global Equity International MidCap Index
Value Fund Fund Growth Fund Fund
---------- ---- ----------- ----
<S> <C> <C> <C> <C>
Net Assets (000s) $ 30 $ 72,196 $ 131,572 1,391
Number of Shares
Outstanding (000s) 3 5,436 7,945 119
Net Asset Value
Per Share 9.43 13.28 16.56 11.65
Sales Charge, 5.50%
of offering price
(5.82% of net asset
value per share) 0.58 0.20 0.96 0.68
Public Offering Price 10.51 13.48 17.52 12.33
<CAPTION>
MidCap Core Small Cap Small Cap Core Science & Technology
Equity Fund Index Fund Equity Fund Fund
----------- ---------- ----------- ----
<S> <C> <C> <C> <C>
Net Assets (000s) $ 100,515 $ 159 $ 146,117 $ 533
Number of Shares
Outstanding (000s) 2,076 14 8,695 31
Net Asset Value
Per Share 48.42 11.00 16.80 17.35
Sales Charge, 5.50%
of offering price
(5.82% of net asset
value per share) 2.82 0.64 0.98 1.01
Public Offering Price 51.24 11.64 17.78 18.36
</TABLE>
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MicroCap
Fund
----
Net Assets (000s) $ 40,097
Number of Shares
Outstanding (000s) 1,324
Net Asset Value
Per Share 30.28
Sales Charge, 5.50%
of offering price
(5.82% of net asset
value per share) 1.76
Public Offering Price 32.04
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.
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.
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' Prospectuses 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 Prospectuses from time to time.
Reducing Your Sales Charge on Retail A Shares
---------------------------------------------
A. Rights of Accumulation
----------------------
As stated in the Prospectuses, a reduced sales charge applies to any
purchase of Retail A Shares of any Firstar Fund that is sold with a sales charge
(an "Eligible Fund") where an investor's then current aggregate investment is
$100,000 or more. "Aggregate investment" means the total of: (a) the dollar
amount of the then current purchase of shares of an Eligible Fund; and (b) the
value (based on current net asset value) of previously purchased and
beneficially owned shares of any Eligible Fund on which a sales
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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 of 3.50% 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 4.50% of the
offering price. Similarly, each subsequent investment in Eligible Fund shares
may be added to an investor's aggregate investment at the time of purchase to
determine the applicable sales charge.
B. Letter of Intent
----------------
As discussed in the Prospectuses, Retail A Shares of the Company purchased
over a 13-month period through a Letter of Intent qualify for the same reduced
sales charge as if all purchased at once. During the term of the Letter of
Intent, the transfer agent will hold in escrow shares equal to 5% of the amount
indicated in the Letter of Intent for payment of a higher sales charge if an
investor does not purchase the full amount indicated in the Letter of Intent.
The escrow will be released when an investor fulfills the terms of the Letter of
Intent by purchasing the specified amount. Any redemptions made during the 13-
month period will be subtracted from the amount of purchases in determining
whether the Letter of Intent has been completed. If total purchases qualify for
a further sales charge reduction, the sales charge will be adjusted to reflect
an investor's total purchases. If total purchases are less than the amount
specified in the Letter of Intent, an investor will be requested to remit an
amount equal to the difference between the sales charge actually paid and the
sales charge applicable to the total purchases. If such remittance is not
received within 20 days, the transfer agent, as attorney-in-fact pursuant to the
terms of the Letter of Intent and at the Distributor's direction, will redeem an
appropriate number of shares held in escrow to realize the difference. Signing a
Letter of Intent does not bind an investor to purchase the full amount indicated
at 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, F and G 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.
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<PAGE>
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 Firstar Fund that are offered without a sales load.
F. Institutional Shares of any Fund may be exchanged for Institutional
Shares of any other Firstar Fund.
G. Y Shares of any Fund may be exchanged for Y Shares of any other
Firstar Fund. Y Shares of the Fund may be exchanged for shares of the
Institutional Money Market Fund or Institutional Shares of any other Firstar
Money Market 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 tax-qualified
retirement plan administered by Firstar pursuant to a formal administrative
services agreement and with assets equal to or exceeding $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.
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
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<PAGE>
privilege should request and review the appropriate prospectus for the shares to
be acquired in the exchange prior to making an exchange.
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
Prospectuses 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 tax-qualified retirement or Keogh plan, individual
retirement account ("IRA") or custodial account maintained pursuant to Section
403(b)(7) of 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
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 any Roth IRA of the account owner 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,
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<PAGE>
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
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<PAGE>
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 Prospectuses. 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 an indefinite number of full and fractional shares of common stock, $.0001
par value per share, which is divided into two hundred classes (each, a "class"
or "fund"). Each class below is divided into four series designated as
Institutional Shares, Retail A Shares, Retail B Shares and Y Shares (each, a
"Series") as set forth below:
Class and Series of Common Stock
--------------------------------
6-MidCap Core Equity Institutional
6-MidCap Core Equity Y
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Class and Series of Common Stock
--------------------------------
6-MidCap Core Equity A
6-MidCap Core Equity B
7-Bond IMMDEX(TM) Institutional
7-Bond IMMDEX(TM) Y
7-Bond IMMDEX(TM) A
7-Bond IMMDEX(TM) B
8-Equity Index Institutional
8-Equity Index Y
8-Equity Index A
8-Equity Index B
9-Growth & Income Institutional
9-Growth & Income Y
9-Growth & Income A
9-Growth & Income B
10-Short-Term Bond Institutional
10-Short-Term Bond Y
10-Short-Term Bond A
10-Short-Term Bond B
11-Balanced Growth Institutional
11-Balanced Growth Y
11-Balanced Growth A
11-Balanced Growth B
12-Large Cap Core Equity Institutional
12-Large Cap Core Equity Y
12-Large Cap Core Equity A
12-Large Cap Core Equity B
13-Intermediate Bond Institutional
13-Intermediate Bond Y
13-Intermediate Bond A
13-Intermediate Bond B
14-Tax-Exempt Intermediate Bond Institutional
14-Tax-Exempt Intermediate Bond Y
14-Tax-Exempt Intermediate Bond A
14-Tax-Exempt Intermediate Bond B
15-International Value Institutional
15-International Value Y
15-International Value A
15-International Value B
16-MicroCap Institutional
16-MicroCap Y
16-MicroCap A
16-MicroCap B
17-Balanced Income Institutional
17-Balanced Income Y
17-Balanced Income A
17-Balanced Income B
18-Small Cap Core Equity Institutional
18-Small Cap Core Equity Y
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Class and Series of Common Stock
--------------------------------
18-Small Cap Core Equity A
18-Small Cap Core Equity B
19-International Growth Institutional
19-International Growth Y
19-International Growth A
19-International Growth B
20-MidCap Index Institutional
20-MidCap Index Y
20-MidCap Index A
20-MidCap Index B
22-Aggregate Bond Institutional
22-Aggregate Bond Y
22-Aggregate Bond A
22-Aggregate Bond B
23-U.S. Government Securities Institutional
23-U.S. Government Securities Y
23-U.S. Government Securities A
23-U.S. Government Securities B
24-National Municipal Bond Institutional
24-National Municipal Bond Y
24-National Municipal Bond A
24-National Municipal Bond B
28-Missouri Tax-Exempt Bond Institutional
28-Missouri Tax-Exempt Bond Y
28-Missouri Tax-Exempt Bond A
28-Missouri Tax-Exempt Bond B
29-Strategic Income Institutional
29-Strategic Income Y
29-Strategic Income A
29-Strategic Income B
30-Equity Income Institutional
30-Equity Income Y
30-Equity Income A
30-Equity Income B
31-Relative Value Institutional
31-Relative Value Y
31-Relative Value A
31-Relative Value B
32-Large Cap Growth Institutional
32-Large Cap Growth Y
32-Large Cap Growth A
32-Large Cap Growth B
33-Science & Technology Institutional
33-Science & Technology Y
33-Science & Technology A
33-Science & Technology B
35-Small Cap Index Institutional
35-Small Cap Index Y
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Class and Series of Common Stock
--------------------------------
35-Small Cap Index A
35-Small Cap Index B
36-Global Equity Institutional
36-Global Equity Y
36-Global Equity A
36-Global Equity B
The Board of Directors has also authorized the issuance of ten additional
classes of common stock representing interests in ten other separate investment
portfolios which are described in separate statements of additional information.
The remaining authorized shares are classified into one hundred sixty-four
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' Prospectuses,
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 A, Retail B, Y or
Institutional Share of a Fund represents an equal proportionate interest with
other Retail A, Retail B, Y or Institutional Shares in that Fund, respectively.
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.
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When issued for payment as described in the Funds' Prospectuses and this
SAI, shares of the Funds will be fully paid and non-assessable by the Company,
except as provided in Section 180.0622(2)(b) of the Wisconsin Business
Corporation Law, as amended, which in general provides for personal liability on
the part of a corporation's 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 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. Moreover, if a Fund were to fail to make sufficient
distributions in a year, the Fund would be subject to corporate income taxes
and/or excise taxes in respect of the shortfall or, if the shortfall is large
enough, the Fund could be disqualified as a regulated investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of their
ordinary taxable income for the calendar year and capital gain net income
(excess of capital gains over capital losses) for the one year period ending
October 31 of such calendar year and 100% of any such amounts that were not
distributed in the prior year. Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year if such dividends are actually paid during January of the following
year.
Each Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends or gross sale proceeds paid to
any shareholder who: (i) has failed to provide a correct tax identification
number; (ii) is subject to back-up withholding by the Internal Revenue Service
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<PAGE>
for failure to properly include on his or her return payments of taxable
interest or dividends; or (iii) has failed to certify to the Fund that he or she
is not subject to back-up withholding when required to do so or that he or she
is an "exempt recipient."
The Tax Exempt Intermediate Bond, Missouri Tax-Exempt Bond and National
Municipal Bond Funds intend to invest all or substantially all, of their
respective assets in debt obligations, the interest on which is exempt for
federal income tax purposes. For the Funds to pay tax-exempt dividends for any
taxable year, at least 50% of the aggregate value of the Funds' respective
assets at the close of each quarter of the Funds' taxable year must consist of
exempt-interest obligations.
The Tax-Exempt Intermediate Bond, Missouri Tax Exempt Bond and National
Municipal Bond Funds are designed to provide investors with current tax-exempt
interest income. The Funds are not intended to constitute a balanced investment
program and are not designed for investors seeking capital appreciation or
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the Funds may not be suitable for tax-exempt institutions, or for retirement
plans qualified under Section 401 of the Code, H.R. 10 plans and IRAs because
such plans and accounts are generally tax-exempt and, therefore, not only would
not gain any additional benefit from the Funds' dividends being tax-exempt, but
such dividends ultimately would be taxable to the beneficiaries when distributed
to them. In addition, the Funds 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 International Value
Fund and the International Growth Fund, and investments in passive foreign
investment companies ("PFICs") by those funds and the Global Equity Fund and its
underlying funds, are complex and, in some cases, uncertain. Such transactions
and investments may cause these funds 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 International
Value Fund, the International Growth Fund or the Global Equity Fund (or its
underlying funds) 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.
Missouri Tax Considerations. For each year in which a Fund qualifies as a
regulated investment company for federal income tax purposes, shareholders of
such Fund who are Missouri resident individuals, trusts or estates resident in
Missouri, or corporations subject to Missouri taxing jurisdiction (collectively,
"Missouri Taxpayers") will not be subject to Missouri income taxation on
dividends distributed to them to the extent that such dividends: (1) qualify as
exempt-interest dividends of a regulated investment company under Code section
852(b)(5) to the extent that the interest from
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<PAGE>
which they are derived would be exempt from Missouri income tax if held by a
Missouri resident (i.e., generally from obligations of the state of Missouri or
any of its political subdivisions or authorities); or (2)(a) are attributable to
interest on obligations of the United States and its territories and
possessions, or of any authority, commission, or instrumentality of the United
Sates, to the extent exempted from Missouri income taxes under the laws of the
United States; (b) are the subject of the written notice to shareholders
required by 12 C.S.R. section 10-2.155(2); and (c) are properly reported on the
Missouri income tax returns of the shareholder in the respective Fund by the
attaching of a copy of the year end statement or summary document as described
in 12 C.S.R. section 10-2.155(3). In connection with the obligations described
in paragraph (c)(2) above, the amount of State income tax-exempt interest
dividends shall be reduced by the amount of: (a) the federal corporate dividend
received deduction attributable to such dividends; and (b) interest paid or
expense incurred to produce such dividends, to the extent that the interest paid
or expense incurred exceeds five hundred dollars.
To the extent possible, the Missouri Tax-Exempt Bond Fund intends to invest
in obligations which will permit distributions attributable to interest to be
excludable by Missouri Taxpayers. Despite this intention, Missouri Taxpayers
generally will be subject to Missouri income tax on other types of distributions
received from the Missouri Tax-Exempt Bond Fund, including distributions of
interest on obligations of non-Missouri issuers and all long-term and short-term
capital gains.
Except as noted above with respect to Missouri income taxation,
distributions from a Fund may be taxable to shareholders under other state and
local laws imposing taxes on or measured by net income, even though such
distributions were derived, in whole or in part, from interest on obligations
which, if realized directly by the shareholder, or by a shareholder of another
type, would be nontaxable.
The foregoing discussion of Missouri law does not apply to shareholders
that are subject to the Missouri financial institutions tax or other forms of
specialized Missouri taxation.
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:
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<PAGE>
<TABLE>
<CAPTION>
Position(s) held with Principal Occupations During Past 5 Years and
Name, Address & Age the Company Other Affiliations
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Glen R. Bomberger Director Executive Vice President, Chief Financial
One Park Plaza Officer and Director, A.O. Smith Corporation (a
11270 West Park Place diversified manufacturing company) since January
Milwaukee, WI 53224-3690 1987; Director of companies affiliated with A.O.
Age: 62 Smith Corporation; Director, Smith Investment
Company; Director of companies affiliated with
Smith Investment Company.
Bronson J. Haase* Director President and CEO of Wisconsin Gas Company,
6948 Wildwood Point WICOR Energy, FieldTech and Vice President of
Chenequa, WI 53029 WICOR, Inc. from 1998 to October 2000; President
Age: 56 and CEO of Ameritech - Wisconsin (formerly
Wisconsin Bell) from 1993 to 1998; President of
Wisconsin Bell Communications from 1993 to 1998;
Board of Directors, The Marcus Corporation;
Trustee of Roundy Foods; Chairman of the
Wisconsin Utilities Association.
Dawn M. Hornback Trustee of Firstar Stellar Funds from February
c/o Firstar Corporation 1997 to December 2000; Founder, President and
425 Walnut Street Chief Executive Officer of Observatory Group,
Cincinnati, OH 45202 Inc. (brand identity firm) since August 1990.
Age: 36
Joseph J. Hunt Director of Mercantile Mutual Funds, Inc. since
Iron Workers International 1994; Treasurer of the International Association
Union of Bridge, Structural and Ornamental Iron
1750 New York Ave., N.W. Workers (IABSOIW) (international labor union)
Suite 400 since 1998; General Vice-President of IABSOIW
Washington, D.C. 20006 from 1994 to 1998.
Age: 57
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 from 1999 to 2000; Vice-President, FIRMCO from
Milwaukee, WI 53202 1994 to 1999.
Age: 40
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Position(s) held with Principal Occupations During Past 5 Years and
Name, Address & Age the Company Other Affiliations
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Jerry G. Remmel Director Retired; Vice President, Treasurer and Chief
16650A Lake Circle Financial Officer of Wisconsin Energy
Brookfield, WI 53005 Corporation from 1994 to 1996; Treasurer of
Age: 68 Wisconsin Electric Power Company from 1973 to
1996; Director of Wisconsin Electric Power
Company from 1989 to 1996; Senior Vice
President, Wisconsin Electric Power Company from
1988 to 1994; Chief Financial Officer, Wisconsin
Electric Power Company from 1983 to 1996; Vice
President and Treasurer, Wisconsin Electric
Power Company from 1983 to 1989.
Richard K. Riederer Director President and Chief Executive Officer of Weirton
400 Three Springs Drive Steel since 1995; Director of Weirton Steel
Weirton, WV 26062-4989 since 1993; Executive Vice President and Chief
Age: 56 Financial Officer, Weirton Steel January from
1994 to 1995; Vice President of Finance and
Chief Financial Officer, Weirton Steel January
from 1989 to 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.
James M. Wade Chairman of the Board Retired; Vice President and Chief Financial
2802 Wind Bluff Circle Officer, Johnson Controls, Inc. (a controls
Wilmington, NC 28409 manufacturing company) from January 1987 to May
Age: 56 1991.
Jerry V. Woodham N/A Chairman of the Board, President and Director of
St. Louis University Mercantile Mutual Funds, Inc. since 1982;
Fitzgerald Hall Treasurer, St. Louis University since August
3500 Lindell Blvd. 1996; Treasurer, Washington University from 1981
St. Louis, MO 63131 to 1995.
Age: 57
Marian Zentmeyer* Director Chief Equity Investment Officer and Director,
777 E. Wisconsin Ave. FIRMCO, since 1998; Senior Vice President and
Suite 800 Senior Portfolio Manager, FIRMCO from 1995 to
Milwaukee, WI 53202 1998.
Age 43
</TABLE>
-95-
<PAGE>
<TABLE>
<CAPTION>
Position(s) held with Principal Occupations During Past 5 Years and
Name, Address & Age the Company Other Affiliations
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
William H. Zimmer, III Trustee and member of Audit Committee of Firstar
c/o Firstar Corporation Stellar Funds from February 1996 to December
425 Walnut Street 2000, Senior Vice President and Chief Financial
Cincinnati, OH 42502 Officer, ecampus.com since September 1999
Age: 46 (e-commerce); Executive Vice-President and Chief
Financial Officer, Advanced Communications
Group, Inc. since December 1998; Corporate Vice
President, Cincinnati Bell, Inc. from 1997 to
1998; Assistant Treasurer, Cincinnati Bell, Inc.
from 1988 to 1991.
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th & Cherry Streets
Philadelphia, PA 19103
Age: 57
Laura J. Rauman Vice President Senior Vice President, FIRMCO since 1995; Vice
777 E. Wisconsin Avenue, President of Mercantile Mutual Funds since
Suite 800 April, 2000; Senior Auditor, Price Waterhouse,
Milwaukee, WI 53202 LLP, prior thereto.
Age: 31
Joseph C. Neuberger Assistant Treasurer Senior Vice President, Firstar Mutual Fund
615 E. Michigan Street Services, LLC since 1994; Manager, Arthur
Milwaukee, WI 53202 Andersen LLP, prior thereto.
Age: 38
</TABLE>
* Mr. Haase, Mr. Laning and Ms. Zentmyer 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 of
the Company's Directors for the year ended October 31, 1999.
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<PAGE>
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM COMPANY
PENSION OR RETIREMENT ESTIMATED ANNUAL AND FUND
NAME OF AGGREGATE COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON COMPLEX* PAID
PERSON/POSITION FROM THE COMPANY PART OF FUND EXPENSES RETIREMENT TO 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 $ 15,000
Director
Dawn M. Hornback++ - - - -
Director
Joseph J. Hunt++ - - - -
Director
Jerry V. Woodham++ - - - -
Director
William H. Zimmer++ - - - -
Director
Bruce Laning++ - - - -
Director
Marian Zentmyer++ - - - -
Director
</TABLE>
*The "Fund Complex" includes only the Company. The Company is comprised of
36 separate portfolios.
+Includes $15,000 which Mr. Bomberger elected to defer under the Company's
deferred compensation plan.
++Ms. Hornback and Ms. Zentmyer and Messrs. Hunt, Woodham and Zimmer were
elected as directors on November 8, 2000. Mr. Laning was appointed as
director in February 2000.
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. Zentmyer, Ms. Rauman and Mr. Neuberger receive no fees
from the Company for their services as President, Treasurer and Director;
Director; Vice President; and Assistant Treasurer, respectively, although
FIRMCO, of which Mr. Laning, Ms. Zentmyer and Ms. Rauman are President; Chief
Equity Investment Officer and Director; and Senior Vice President, respectively,
receives fees from the
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<PAGE>
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, a Wisconsin limited liability company and subsidiary of Firstar
Corporation, a bank holding company, serves as investment adviser to the Funds.
FIRMCO became the investment adviser to the Short-Term Bond Fund, MidCap
Core Equity Fund, Bond IMMDEX(TM) Fund and Equity Index Fund as of February 3,
1992 and became the investment adviser to the Growth & Income Fund effective
June 17, 1993. Prior thereto, investment advisory services for these Funds were
provided by Firstar Trust Company, an affiliate of FIRMCO.
On November 27, 2000 and December 11, 2000, certain Predecessor Funds
offered by Mercantile Mutual Funds, Inc. ("Predecessor Mercantile Funds")
reorganized into certain portfolios offered by the Company (including the U.S.
Government Securities Fund, Aggregate Bond Fund, Missouri Tax-Exempt Bond Fund,
National Municipal Bond Fund, Equity Income Fund, International Growth Fund,
Small Cap Index Fund and Small Cap Core Equity Fund), as further explained in
the first part of this Statement of Additional Information. On March 1, 2000,
FIRMCO became the investment adviser to these Predecessor Mercantile Funds.
Prior thereto, investment advisory services for these Predecessor Mercantile
Funds were provided by Mississippi Valley Advisors, Inc. ("MVA"), a subsidiary
of Firstar Corporation. Prior to March 1, 2000, MVA was an indirect wholly-owned
subsidiary of Mercantile Bancorporation, Inc. On September 17, 1999, Mercantile
Bancorporation, Inc. merged into Firstar Corporation.
On November 27, 2000 and December 11, 2000, certain Predecessor Funds
offered by Firstar Stellar Funds ("Predecessor Stellar Funds") reorganized into
certain portfolios of the Company (including the Strategic Income Fund, Relative
Value Fund, Large Cap Growth Fund, Global Equity Fund and Science & Technology
Fund), as further explained in the first part of this Statement of Additional
Information. FIRMCO became investment adviser to these Predecessor Stellar Funds
on April 1, 2000. Prior thereto, investment advisory services for these
Predecessor Stellar Funds were provided by the Capital Management Division of
Firstar Bank, N.A., also a subsidiary of Firstar Corporation.
For periods prior to November 27, 2000 and December 11, 2000, as
applicable, historical data presented below is that of the Predecessor
Mercantile Fund or Predecessor Stellar Fund, as the case may be.
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<PAGE>
In its Investment Advisory Agreement, the Adviser has agreed to pay all
expenses incurred by it in connection with its advisory activities, other than
the cost of securities and other investments, including brokerage commissions
and other transaction charges, if any, purchased or sold for the Funds.
In addition to the compensation stated in the Prospectuses, the Adviser is
entitled to 4/10ths of the gross income earned by each Fund on each loan of its
securities, excluding capital gains or losses, if any. Pursuant to current
policy of the SEC, the Adviser does not intend to receive compensation for such
securities lending activity. The Adviser may voluntarily waive advisory fees
otherwise payable by the Funds.
FIRMCO is entitled to be paid contractual fees computed daily and paid
monthly, at the annual rate (as a percentage of such Fund's average daily net
assets) as follows:
Fund Amount
---- Before Waivers
--------------
-------------------------------------------------------------------------------
Short-Term Bond Fund 0.60
-------------------------------------------------------------------------------
Intermediate Bond Fund 0.50
-------------------------------------------------------------------------------
U.S. Government Securities Fund 0.60
-------------------------------------------------------------------------------
Aggregate Bond Fund 0.50
-------------------------------------------------------------------------------
Bond IMMDEX(TM) Fund 0.30
-------------------------------------------------------------------------------
Strategic Income Fund 0.95
-------------------------------------------------------------------------------
Tax-Exempt Intermediate Bond Fund 0.50
-------------------------------------------------------------------------------
Missouri Tax-Exempt Bond Fund 0.45
-------------------------------------------------------------------------------
National Municipal Bond Fund 0.55
-------------------------------------------------------------------------------
Balanced Income Fund 0.75
-------------------------------------------------------------------------------
Balanced Growth Fund 0.75
-------------------------------------------------------------------------------
Growth & Income Fund 0.75
-------------------------------------------------------------------------------
Equity Income Fund 0.75
-------------------------------------------------------------------------------
Relative Value Fund 0.75
-------------------------------------------------------------------------------
Equity Index Fund 0.25
-------------------------------------------------------------------------------
Large Cap Core Equity Fund 0.75
-------------------------------------------------------------------------------
Large Cap Growth Fund 0.95
-------------------------------------------------------------------------------
International Value Fund 1.34
-------------------------------------------------------------------------------
Global Equity Fund 0.75
-------------------------------------------------------------------------------
International Growth Fund 1.00
-------------------------------------------------------------------------------
MidCap Index Fund 0.25
-------------------------------------------------------------------------------
MidCap Core Equity Fund 0.75
-------------------------------------------------------------------------------
Small Cap Index Fund 0.40
-------------------------------------------------------------------------------
Small Cap Core Equity Fund 0.75
-------------------------------------------------------------------------------
Science & Technology Fund 1.05
-------------------------------------------------------------------------------
MicroCap Fund 1.50
-------------------------------------------------------------------------------
FIRMCO has contractually agreed to waive certain fees and reimburse certain
expenses for Retail A, Retail B, Y and Institutional Shares, as applicable, for
the Short-Term Bond Fund, Intermediate Bond Fund, U.S. Government Securities
Fund, Aggregate Bond Fund, Strategic Income Fund, Tax-Exempt Intermediate Bond
Fund, Balanced Income Fund, Balanced Growth Fund, Equity Income Fund, Equity
Index Fund, Large Cap Growth Fund, International Value Fund, International
Growth Fund,
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<PAGE>
MidCap Index Fund, MidCap Core Equity Fund, Small Cap Index Fund, Small Cap Core
Equity Fund, and MicroCap Fund until October 31, 2001.
For the services provided and expenses assumed by the Adviser under its
Investment Advisory Agreement with respect to the Continuing Funds 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 Fund $ 675,262 (542,291) $ 550,921 (528,964) $ 669,603 (605,038)
Intermediate Bond Fund 1,165,094 (421,858) 1,080,528 (410,430) 778,669 (345,403)
Bond IMMDEX(TM) Fund 1,577,620 (800) 1,551,355 (0) 1,294,766 (0)
Tax-Exempt Intermediate Bond Fund 319,104 (164,330) 217,113 (207,408) 109,101 (176,855)
Balanced Income Fund 230,911 (147,908) 60,206 (177,189) N/A
Balanced Growth Fund 1,796,430 (156,173) 1,345,543 (403,169) 1,056,380 (334,926)
Growth & Income Fund 5,581,009 (5,771) 4,513,188 (0) 3,086,069 (45)
Equity Index Fund 1,248,658 (394,242) 1,076,720 (179,779) 815,050 (0)
Large Cap Core Equity Fund 2,378,404 (3,010) 1,663,048 (72) 1,470,245 (2,052)
International Value Fund 558,117 (142,472) 641,868 (219,464) 422,050 (370,710)
MidCap Core Equity Fund 4,187,456 (31,109) 5,243,173 (24) 5,168,254 (0)
MicroCap Fund 1,941,648 (928) 1,685,137 (2,576) 1,318,931 (33)
</TABLE>
________________
/1/From inception (December 1,1997) to October 1,1998.
The MidCap Index Fund had not commenced operations on October 31, 1999.
For the services provided and expenses assumed by the Adviser under the
respective Investment Advisory Agreements with respect to the Predecessor Funds
in effect for the fiscal years ended November 30, 1999, 1998 and 1997, the
Adviser was paid and waived advisory fees as follows:
<TABLE>
<CAPTION>
Gross Advisory Fees (Waivers)
-----------------------------
Predecessor Fund 1999 1998 1997
---------------- ------------------- --------------------- ------------------
<S> <C> <C> <C>
Predecessor U.S. Government Securities Fund $ 479,599(0) $ 459,829(0) $ 357,824(0)
Predecessor Aggregate Bond Fund 795,816(0) 913,545(0) 743,332(0)
Predecessor Strategic Income Fund 1,783,691(0) 1,865,171(0) 1,343,811(0)
Predecessor Missouri Tax-Exempt Bond Fund 586,025(0) 484,088(0) 414,195(0)
Predecessor National Municipal Bond Fund 2,017,683(0) 1,389,193(663,264) 0(1,812,782)
Predecessor Equity Income Fund 830,725(0) 577,324(280,161) 0(681,294)/1/
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Gross Advisory Fees (Waivers)
-----------------------------
Predecessor Fund 1999 1998 1997
---------------- ------------------- --------------------- ------------------
<S> <C> <C> <C>
Predecessor Relative Value Fund 3,788,262(0) 3,061,795(0) 2,220,214(0)
Predecessor Large Cap Growth Fund 1,781,768(0) 1,269,745(0) 946,601(0)
Predecessor International Growth Fund 785,618(1,033) 731,113(0) 590,822(50,950)
Predecessor Small Cap Index Fund 97,603(22,754)/2/ N/A N/A
Predecessor Small Cap Core Equity Fund 942,833(0) 1,776,373(0) 1,783,322(0)
Predecessor Science & Technology Fund 67,931(0)/3/ N/A N/A
</TABLE>
_________________________
1 For the period from March 7, 1997 (commencement of operations) to November 30,
1997.
2 For the period from December 30, 1998 (commencement of operations) to November
30, 1999.
3 For the period from August 9, 1999 (commencement of operations) to November
30, 1999.
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 Value Fund and International Growth 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 Value Fund and Clay
Finlay, Inc. as Sub-Adviser to the International Growth Fund. The Sub-Advisers
determine the securities to be purchased, retained or sold by the respective
Fund. See "Sub-Advisers" below.
Sub-Advisers. The International Value 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 Value Fund with
respect to its investments. HGI is responsible for decisions to buy and sell
the International Value Fund's investments and all other transactions related to
investment therein. HGI negotiates brokerage commissions and places orders for
purchases and sales of the International Value Fund's portfolio securities.
For the services provided and expenses assumed pursuant to its sub-advisory
agreement with FIRMCO, HGI receives from FIRMCO a fee, computed daily and
payable monthly, at the annual rate of 0.75% of the first $25 million of the
International Value Fund's average daily net assets, 0.50% of the next $75
million of the International Value Fund's average daily net assets, and 0.35% of
the International Value Fund's average daily net assets in excess of $100
million. HGI bears all expenses incurred by it in connection with its services
under the sub-advisory agreement.
Prior to September 2, 1997, State Street Bank and Trust Company served as sub-
adviser to the International Value Fund. For the services provided under the
sub-advisory agreements in effect for the
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<PAGE>
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:
Net Sub-Advisory Fees Paid (Sub-Advisory Fees Waived)
-----------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
International Value Fund $318,983 (0) $381,819 (0) $227,372 (0)
</TABLE>
The International Growth Fund receives sub-advisory services from Clay
Finlay Inc. ("Clay Finlay"). Under the terms of the Sub-Advisory Agreement
between the Adviser and Clay Finlay, Clay Finlay furnishes investment advisory
and portfolio management services to the International Growth Fund with respect
to its investments. Clay Finlay is responsible for decisions to buy and sell
the International Growth fund's investments and all other transactions related
to investment therein. Clay Finlay negotiates brokerage commissions and places
orders for purchases and sales of the International Growth Fund's portfolio
securities.
For the services provided and expenses assumed pursuant to its sub-advisory
agreement with FIRMCO, Clay Finlay receives from FIRMCO a fee, computed daily
and payable monthly, at the annual rate of 0.75% of the first $50 million of the
International Growth Fund's average daily net assets, plus 0.50% of the next $50
million of average daily net assets, plus 0.25% of average daily net assets in
excess of $100 million. Clay Finlay bears all expenses incurred by it in
connection with its services under the sub-advisory agreement.
Prior to November 27, 2000, The Glenmede Trust Company ("Glenmede") served
as sub-adviser to the International Growth Fund. There are no sub-advisory fees
shown for Glenmede because Glenmede became sub-adviser to the Fund after
October 31, 1999.
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 Value Fund, International Growth Fund or the Company, or to
any shareholder of the International Value Fund, International Growth 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.
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.
-102-
<PAGE>
Administration and Distribution Services
----------------------------------------
Firstar Mutual Fund Services, LLC serves as administrator (the
"Administrator") to the Company. 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 Company's operations. The following
administrative services are also provided by Firstar Mutual Fund Services, LLC:
compile data for and prepare, with respect to the Company, 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
Funds' 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 the Funds' 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 Prospectuses 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 Fund 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.
Firstar Trust Company became Co-Administrator to the Company on September
1, 1994, and assigned its rights and obligations to Firstar Mutual Fund
Services, LLC on October 1, 1998. From January 1, 1995 until August 1, 2000,
B.C. Ziegler and Company served as co-administrator to the Company (together the
"Co-Administrators").
For its administrative services related to the Continuing Funds for the
fiscal years ended October 31, 1999, 1998 and 1997, the Co-Administrators were
paid and waived the following administrative fees:
Net Administration Fees Paid (Administration Fees Waived)
---------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- ---------------------------
<S> <C> <C> <C>
Short-Term Bond Fund 196,764 (24,546) 69,432(126,882) 86,550 (149,862)
Intermediate Bond Fund 304,583 (39,645) 115,423 (210,207) 79,413 (171,118)
Bond IMMDEX(TM) Fund 495,763 (70,052) 200,288 (364,601) 167,223 (318,234)
Tax-Exempt Intermediate Bond Fund 93,040 (12,419) 32,957 (59,803) 22,619 (41,122)
</TABLE>
-103-
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- ---------------------------
<S> <C> <C> <C>
Balanced Income Fund 49,835 (5,686) 12,498 (22,106)/1/ N/A
Balanced Growth Fund 250,967 (31,982) 90,542 (164,087) 73,298 (133,271)
Growth & Income Fund 724,594 (87,590) 233,865 (423,689) 171,898 (286,778)
Equity Index Fund 633,693 (72,866) 195,703 (353,692) 134,156 (229,162)
Large Cap Core Equity Fund 312,797 (31,157) 85,845 (156,347) 71,750 (146,715)
International Value Fund 48,844 (6,041) 24,861 (44,829) 20,840 (38,741)
MidCap Core Equity Fund 528,380 (78,076) 269,375 (492,978) 245,929 (521,369)
MicroCap Fund 127,042 (12,611) 43,380 (79,285) 29,709 (68,284)
</TABLE>
The Mid Cap Index Fund had not commenced operations on October 31, 1999.
/1/ From inception (December 1,1997) to October 31, 1998.
Prior to October 1, 1998, Federated Administrative Services ("Federated")
served as administrator to the Predecessor Funds of the Strategic Income Fund,
Relative Value Fund, Large Cap Growth Fund, Global Equity Fund and Science &
Technology Fund. Edgewood Services, Inc. served as sub-administrator to those
Predecessor Stellar Funds. For its services, Edgewood is paid a fee by Firstar
Mutual Fund Services, LLC and is not paid by the Funds. Effective October 1,
1998, Firstar Mutual Fund Services, LLC served as administrator to those
Predecessor Stellar Funds.
With regard to the Predecessor Stellar Funds, for the fiscal years ended
November 30, 1999, 1998 and 1997, administration fees, after waivers, were paid
to Firstar Mutual Fund Services, LLC and Federated as follows:
<TABLE>
<CAPTION>
Net Administration Fees Paid (Waivers)
-------------------------------------------------------------------------
Predecessor Stellar Fund 1999 1998 1997
------------------------ ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Predecessor Strategic Income Fund 206,533 211,546 130,615
Predecessor Relative Value Fund 555,786 480,815 273,396
Predecessor Large Cap Growth Fund 261,326 197,859 116,489
Predecessor Science & Technology Fund 8,303/1/ N/A N/A
</TABLE>
/1/ From inception (August 9, 1999) to November 30, 1999
Prior to January 1, 2000, BISYS Fund Services Ohio, Inc. ("BISYS
Ohio") served as administrator to the Predecessor Funds of the U.S. Government
Securities Fund, Aggregate Bond Fund, Missouri Tax-Exempt Bond Fund, National
Municipal Bond Fund, Equity Income Fund, International Growth Fund, Small Cap
Index Fund and Small Cap Core Equity Fund. From January 1, 2000 to December 11,
2000, BISYS Ohio and Firstar Mutual Fund Services, LLC served as co-
administrators of those Predecessor Mercantile Funds.
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<PAGE>
For the fiscal years ended November 30, 1999, 1998 and 1997,
administration fees, after waivers, were paid to Firstar Mutual Fund Services,
LLC and BISYS Ohio as follows:
<TABLE>
<CAPTION>
Net Administration Fees Paid (Waivers)
-------------------------------------------------------------------------------
Predecessor Mercantile Fund 1999 1998 1997
--------------------------- ------------------------ ------------------------ ---------------------------
<S> <C> <C> <C>
Predecessor U.S. Government Securities $106,581(106,576) $102,187(102,181) $ 79,519(79,515)
Fund
Predecessor Aggregate Bond Fund 176,852(176,846) 203,015(203,004) 165,196(165,189)
Predecessor Missouri Tax-Exempt Bond 130,231(130,226) 107,578(107,574) 92,046(92,042)
Fund
Predecessor National Municipal Bond 366,861(366,848) 318,915(427,432) 181,277(478,060)
Fund
Predecessor Equity Income Fund 110,766(110,763) 97,524(131,138) 49,963(131,717)/2/
Predecessor International Growth Fund 78,667(78,664) 73,113(73,109) 75,322(54,941)
Predecessor Small Cap Index Fund 29,760(29,759)/1/ N/A N/A
Predecessor Small Cap Core Equity Fund 125,715(125,710) 236,856(236,844) 237,783(237,775)
</TABLE>
______________________________
/1/ For the period from December 30, 1998 (commencement of operations) to
November 30, 1999.
/2/ For the period from March 7, 1997 (commencement of operations) to November
30, 1997.
Quasar Distributors, LLC, located at 615 East Michigan Street, Milwaukee,
Wisconsin 53202, provides distribution services for each Fund as described in
the Funds' Prospectuses pursuant to a Distribution Agreement with the Funds
under which the Distributor, as agent, sells shares of each Fund on a continuous
basis. The Distributor has agreed to use its best efforts to solicit orders for
the sale of shares, although it is not obliged to sell any particular amount of
shares. The Distributor causes expenses to be paid for the cost of printing and
distributing prospectuses to persons who are not 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.
Prior to December 11, 2000, Edgewood Services, Inc. ("Edgewood") served as
distributor to the Predecessor Stellar Funds. Prior to April 1, 1999, B.C.
Ziegler & Company ("Ziegler") served as the distributor from October 1, 1998 to
March 31, 1999. Prior to October 1, 1998, Federated Securities Corp.
("Federated") served as distributor.
BISYS Fund Services Limited Partnership ("BISYS") served as the distributor
of the Predecessor Mercantile Funds. With respect to each Predecessor
Mercantile Funds' class of shares corresponding to Institutional and Y Shares,
no compensation was payable by the Funds to BISYS for distribution services.
For the fiscal years ended November 30, 1999, 1998 and 1997, BISYS received
front-end sales charges in connection with Retail A Shares (known as Investor A
Shares with respect to the Predecessor Mercantile Funds) purchases as follows:
Predecessor Missouri Tax-Exempt Bond Fund - $65,564, $75,697 and $46,690,
respectively; Predecessor Aggregate Bond Fund - $7,960, $8,853 and $9,635,
respectively; Predecessor U.S. Government Securities Fund - $10,810, $1,218 and
$2,052,
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<PAGE>
respectively; Predecessor National Municipal Bond Fund - $12,643, $9,641 and
$4,340, respectively; Predecessor Small Cap Core Equity Fund - $9,646, $26,651
and $33,777, respectively; and Predecessor International Growth Fund -$5,610,
$9,765 and $18,258, respectively. For the fiscal years ended November 30, 1999
and 1998 and the period from March 7, 1997 (commencement of operations) through
November 30, 1997, BISYS received front-end sales charges in connection with
purchases of the Predecessor Equity Income Fund Retail A Shares as follows:
$14,545, $25,690 and $829, respectively. For the period from December 30, 1998
(commencement of operations) to November 30, 1999, BISYS received front-end
sales charges in connection with Retail A Shares of the Predecessor Small Cap
Index Fund as follows: $515, $0 and $0, respectively. Of these amounts, BISYS
retained $12,209, $9,050 and $23, respectively, and FIRMCO and affiliates
retained $8,866, $2,814 and $4,700, respectively, with respect to the
Predecessor Missouri Tax-Exempt Bond Fund; BISYS retained $907, $1,210 and $0,
respectively, and FIRMCO and affiliates retained $1,906, $2,025 and $6,721,
respectively, with respect to the Predecessor Aggregate Bond Fund; BISYS
retained $1,786, $227 and $0, respectively, and FIRMCO and affiliates retained
$2,212, $1,206 and $310, respectively, with respect to the Predecessor U.S.
Government Securities Fund; BISYS retained $1,881, $940, and $0 and FIRMCO and
affiliates retained $0, $0 and $0, respectively with respect to the Predecessor
National Municipal Bond Fund; BISYS retained $1,347, $3,284 and $184,
respectively, and FIRMCO and affiliates retained $2,518, $8,880 and $9,915,
respectively, with respect to the Predecessor Small Cap Core Equity Fund; BISYS
retained $682, $1,014 and $0, respectively, and FIRMCO and affiliates retained
$1,662, $2,722 and $7,433, respectively, with respect to the Predecessor
International Growth Fund; BISYS retained $1,669, $3,014 and $45, respectively,
and FIRMCO and affiliates retained $1,440, $3,396 and $466, respectively, with
respect to the Predecessor Equity Income Fund; and BISYS retained $190 and
FIRMCO and affiliates retained $138 with respect to the Predecessor Small Cap
Index Fund.
For the fiscal years ended November 30, 1999, 1998 and 1997, BISYS received
contingent deferred sales charges in connection with Retail B Shares (known as
Investor B Shares with respect to the Predecessor Mercantile Funds) redemptions
of the Predecessor Mercantile Funds as follows: Predecessor Missouri Tax-Exempt
Bond Fund - $56,312, $43,716 and $61,906; Predecessor Aggregate Bond Fund -
$11,981, $7,194 and $4,075; Predecessor U.S. Government Securities Fund -
$6,039, $3,024 and $8,968; Predecessor National Municipal Bond Fund - $16, 367,
$7,014 and $34,256; Predecessor Small Cap Core Equity Fund - $1,123, $9,898 and
$12,870; and Predecessor International Growth Fund - $1,791, $2,848 and $8,191.
For the fiscal years ended November 30, 1999, 1998 and for the period March 7,
1997 (commencement of operations) through November 30, 1997, the Distributor
received $15,296, $15,372 and $10,382 in contingent deferred sales charges in
connection with redemptions of Retail B Shares of the Predecessor Equity Income
Fund.
Shareholder Organizations
-------------------------
Retail A Shares
As stated in the Funds' Prospectuses 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
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<PAGE>
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").
Y Shares
As stated in the Funds' Prospectuses, the Funds intend to enter into
agreements from time to time with Shareholder Organizations providing for
support services to customers of the Shareholder Organizations who are the
beneficial owners of Y 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 Y Shares beneficially owned by their customers.
Support services provided by Shareholder Organizations under their 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. All fees paid under these
agreements are borne exclusively by the Funds' Y Shares.
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, Retail B and Y 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, Retail B or Y Shares. Any material amendment to the arrangements with
Shareholder Organizations under other
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<PAGE>
agreements must be approved by a majority of the Board of Directors (including a
majority of the Disinterested Directors), and any amendment to increase
materially the costs under the Distribution and Service Plan with respect to a
Fund must be approved by the holders of a majority of the outstanding Retail A
or Retail B Shares of the Fund involved. So long as the Plans are in effect, the
selection and nomination of the members of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Funds will be committed
to the discretion of such Disinterested Directors.
Under the terms of their agreement with Firstar, 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 Continuing 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 Fund $123,961
Intermediate Bond Fund 38,438
Bond IMMDEX(TM) Fund 159,669
Tax-Exempt Intermediate Bond Fund 52,199
Balanced Income Fund 23,721
Balanced Growth Fund 98,055
Growth & Income Fund 346,521
Equity Index Fund 227,087
Large Cap Core Equity Fund 78,778
International Value Fund 10,779
MidCap Core Equity Fund 171,223
MicroCap Fund 22,921
The Continuing 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:
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<PAGE>
Fees Paid to Affiliated
Shareholder Organizations
-------------------------
Short-Term Bond Fund $ 59,847
Intermediate Bond Fund 40,088
Bond IMMDEX(TM) Fund 86,123
Tax-Exempt Intermediate Bond Fund 24,755
Balanced Income Fund 8,337
Balanced Growth Fund 49,362
Growth & Income Fund 154,698
Equity Index Fund 101,716
Large Cap Core Equity Fund 35,331
International Value Fund 4,602
MidCap Core Equity Fund 123,426
MicroCap Fund 18,767
The Continuing 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 Fund $ 1,628
Intermediate Bond Fund 610
Bond IMMDEX(TM) Fund 5,589
Tax-Exempt Intermediate Fund 153
Balanced Income Fund 3,177
Balanced Growth Fund 1,711
Growth & Income Fund 4,617
Equity Index Fund 11,170
Large Cap Core Equity Fund 2,238
International Value Fund 92
MidCap Core Equity Fund 462
MicroCap Fund 224
The Predecessor Stellar Funds adopted separate Distribution and Service
Plans with respect to Retail A and B Shares (known as Class A and Class B
Shares, respectively, with respect to the Predecessor Stellar Funds) pursuant to
the 1940 Act and Rule 12b-1 thereunder. The Predecessor Stellar Funds also had
adopted separate Administrative Service Plans with respect to each class of
shares.
For the fiscal year ended November 30, 1999, pursuant to the Distribution
and Services Plan for Retail A Shares, the Predecessor Relative Value Fund was
charged the following amount:
Predecessor Stellar Fund Total Charged
------------------------ -------------
Predecessor Relative Value Fund $136,539
For the fiscal year ended November 30, 1999, pursuant to the Distribution
and Services Plan for Retail B Shares, the Predecessor Stellar Funds were
charged the following amounts:
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<PAGE>
Predecessor Stellar Fund Total Charged
------------------------ -------------
Predecessor Relative Value Fund $ 28,543
Predecessor Large Cap Growth Fund $199,902
Predecessor Science & Technology Fund $ 292
The Predecessor Mercantile Funds had adopted separate Distribution and
Service Plans with respect to Retail A and B Shares (known as Investor A and B
Shares, respectively, with respect to the Predecessor Mercantile Funds) pursuant
to the 1940 Act and Rule 12b-1 thereunder. The Predecessor Mercantile Funds also
had adopted separate Administrative Service Plans with respect to Institutional
and Y Shares (known as Trust and Institutional Shares, respectively, with
respect to the Predecessor Mercantile Funds).
For the fiscal year ended November 30, 1999, pursuant to the Distribution
and Services Plan for Retail A Shares, the Predecessor Mercantile Funds were
charged the following amounts:
Amounts Paid to
Predecessor Fund Total Charged Affiliates of MVA
---------------- ------------- -----------------
Predecessor U.S. Government Securities Fund $14,696 $10,587
Predecessor Aggregate Bond Fund $12,711 $ 9,019
Predecessor Missouri Tax-Exempt Bond Fund $46,205 $17,655
Predecessor National Municipal Bond Fund $ 3,504 $ 1,211
Predecessor Equity Income Fund $ 4,892 $ 1,664
Predecessor International Growth Fund $ 9,815 $ 2,656
Predecessor Small Cap Index Fund $ 239 $ 4
Predecessor Small Cap Core Equity Fund $29,020 $14,535
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<PAGE>
For the fiscal year ended November 30, 1999, pursuant to the Distribution
and Services Plan for Retail B Shares, the Predecessor Mercantile Funds were
charged the following amounts:
Amounts Paid to
Predecessor Mercantile Fund Total Charged MVA
--------------------------- ------------- ---------------
Predecessor U.S. Government Securities Fund $ 2,444 $ 1,788
Predecessor Aggregate Bond Fund $ 7,555 $ 5,337
Predecessor Missouri Tax-Exempt Bond Fund $33,805 $24,147
Predecessor National Municipal Bond Fund $ 7,727 $ 5,615
Predecessor Equity Income Fund $ 7,649 $ 5,406
Predecessor International Growth Fund $ 6,570 $ 4,838
Predecessor Small Cap Index Fund $ 0 $ 0
Predecessor Small Cap Core Equity Fund $11,769 $ 8,455
For the fiscal year ended November 30, 1999, pursuant to the Administrative
Services Plan for the Y Shares, the Predecessor Mercantile Funds paid the
following amounts:
Amounts Paid to
Predecessor Mercantile Fund Total Charged Affiliates of MVA
--------------------------- ------------- -----------------
Predecessor U.S. Government Securities Fund $18,525 $18,149
Predecessor Aggregate Bond Fund $23,382 $20,697
Predecessor Equity Income Fund $ 276 $ 273
Predecessor International Growth Fund $27,419 $27,139
Predecessor Small Cap Index Fund $42,085 $42,752
Predecessor Small Cap Core Equity Fund $25,532 $23,181
For the fiscal year ended November 30, 1999, pursuant to the Administrative
Services Plan for Institutional Shares, no fees were charged to the Predecessor
Mercantile Funds.
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
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<PAGE>
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 Value Fund. Bankers Trust
Company performs certain foreign custodial services related to the International
Growth 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 & Income Fund, Equity Income Fund,
Relative Value Fund, Equity Index Fund, Large Cap Core Equity Fund, Large Cap
Growth Fund, MidCap Index Fund, MidCap Core Equity Fund, Small Cap Index Fund,
Small Cap Core Equity Fund, Science & Technology Fund, and 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 Fund, Intermediate Bond Fund, U.S. Government Securities Fund,
Aggregate Bond Fund, Bond IMMDEX(TM) Fund, Strategic Income Fund, Tax-Exempt
Intermediate Bond Fund, Missouri Tax-Exempt Bond Fund, National Municipal Bond
Fund, International Value Fund, Global Equity Fund and International Growth
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.
Effective March 20, 2000, Firstar Mutual Fund Services, LLC, with principal
offices at 615 East Michigan Street Milwaukee, WI 53202, served as the transfer
agent and dividend disbursing agent to the Predecessor Mercantile Funds. Prior
to March 20, 2000, BISYS Fund Services Ohio, Inc., ("BISYS") located at 3435
Stelzer Road, Columbus, Ohio 43219, served as such Predecessor Mercantile Funds'
transfer agent and dividend disbursing agent.
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<PAGE>
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,
Retail B and Y 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
Continuing 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.
The Company's Annual Report to Shareholders with respect to the Predecessor
Stellar Funds for the fiscal year ended November 30, 1999 has been audited by
Arthur Andersen LLP and has been filed with the SEC and the unaudited Semi-
Annual Report for the Predecessor Stellar Funds has been filed with the SEC. The
audited financial statements and financial highlights incorporated by reference
in this SAI have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing. The financial statements, notes thereto, and Report of
Independent Accountants in such Annual Report, as well as the unaudited
financial statements included in the Semi-Annual Report, are incorporated by
reference into this Statement of Additional Information.
The Company's Annual Report to Shareholders with respect to the Predecessor
Mercantile Funds for the fiscal year ended November 30, 1999 was audited by KPMG
LLP and has been filed with the SEC and the unaudited Semi-Annual Report for the
Predecessor Mercantile Funds has been filed with the SEC. The financial
statements and notes thereto in the Annual Report, and Report of Independent
Accountants in such Annual Report are incorporated by reference in reliance upon
such report given upon the authority of KPMG LLP as experts in accounting and
auditing. The financial statements, notes thereto, and Report of Independent
Accountants in such Annual Report, as well as the unaudited financial statements
included in the Semi-Annual Report, are incorporated by reference into this
Statement of Additional Information.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, is a partner), One Logan Square, 18/th/ 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' Prospectuses.
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<PAGE>
CODE OF ETHICS
The Company, Adviser, Sub-Advisers and Distributor have adopted codes of
ethics that permit personnel subject to the codes to invest in securities,
including securities that may be purchased or held by the Fund.
PERFORMANCE CALCULATIONS
From time to time, the total return of the Retail A Shares, Retail B
Shares, Y Shares and Institutional Shares of each Fund and the yields of such
shares of the Short-Term Bond Fund, Intermediate Bond Fund, Bond IMMDEX(TM)
Fund, Tax-Exempt Intermediate Bond Fund, Aggregate Bond Fund, U.S. Government
Securities Fund, Missouri Tax-Exempt Bond Fund, National Municipal Bond Fund and
Strategic Income 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 semi-annual 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.
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<PAGE>
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, Missouri Tax-Exempt Bond Fund and National Municipal 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, Missouri Tax-Exempt
Bond Fund and National Municipal Bond Fund may each 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".
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<PAGE>
The Fund currently calculates 30-day yields for its Bond Portfolios but not
for its Equity Portfolios. Y Shares of the Continuing Funds are new and have no
performance history. For the 30-day period ended April 30, 2000, the yields on
the Short-Term Bond, Intermediate Bond, Bond IMMDEX(TM), and Tax-Exempt
Intermediate Bond Funds were as follows:
Portfolio 30-Day Yield
--------- ------------
Short-Term Bond Fund
Institutional Shares 6.41%
Retail A - No Load 6.16%
Retail A - Load Adjusted 5.91%
Retail B 5.40%
Intermediate Bond Fund
Institutional Shares 6.75%
Retail A - No Load 6.49%
Retail A - Load Adjusted 6.23%
Retail B 5.72%
Bond IMMDEX(TM) Fund
Institutional Shares 7.12%
Retail A - No Load 6.86%
Retail A - Load Adjusted 6.58%
Retail B 6.10%
Tax-Exempt Intermediate Bond Fund
Institutional Shares 4.59%
Retail A - No Load 4.33%
Retail A - Load Adjusted 4.16%
Retail B 3.58%
Without fees waived by the Advisor, the 30-day yields for the period ended
April 30, 2000, would have been:
Portfolio 30-Day Yield
--------- ------------
Short-Term Bond Fund
Institutional Shares 6.11%
Retail A - No Load 5.86%
Retail A - Load Adjusted 5.61%
Retail B 5.10%
Intermediate Bond Fund
Institutional Shares 6.63%
Retail A - No Load 6.37%
Retail A - Load Adjusted 6.11%
Retail B 5.60%
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<PAGE>
Bond IMMDEX(TM) Fund
Institutional Shares 7.12%
Retail A - No Load 6.86%
Retail A - Load Adjusted 6.58%
Retail B 6.10%
Tax-Exempt Intermediate Bond Fund
Institutional Shares 4.39%
Retail A - No Load 4.13%
Retail A - Load Adjusted 3.96%
Retail B 3.38%
For the 30-day period ended April 30, 2000, 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 7.60%
Retail A - No Load 7.17%
Retail A - Load Adjusted 6.89%
Retail B 5.93%
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
April 30, 2000 would have been:
30-Day Tax-
Portfolio Equivalent Yield
--------- ----------------
Tax-Exempt Intermediate Bond Fund
Institutional Shares 7.27%
Retail A - No Load 6.84%
Retail A - Load Adjusted 6.56%
Retail B 5.60%
The following are the standard yields for the U.S. Government Securities,
Aggregate Bond, Strategic Income and Missouri Tax-Exempt Bond Funds' shares for
the 30-day period ended May 31, 2000. Each of these yields is based on the
yields of corresponding classes of the Predecessor U.S. Government Securities
Fund, Predecessor Aggregate Bond Fund, Predecessor Strategic Income Fund and
Predecessor Missouri Tax-Exempt Bond Fund, respectively. The U.S. Government
Securities, Aggregate Bond and Missouri Tax-Exempt Bond Funds' Retail A, Retail
B, Y and Institutional Shares are the corresponding classes for the Predecessor
U.S. Government Securities, Predecessor Aggregate Bond and Predecessor Missouri
Tax-Exempt Bond Funds' Investor A, Investor B, Institutional and Trust Shares.
The Strategic Income Fund's Retail A and Retail B Shares are the corresponding
classes for the Predecessor Strategic Income Fund's Class A and Class B Shares.
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<PAGE>
30-Day Yield
------------
U.S. Government Securities Fund
Y Shares 5.81%
Institutional Shares 6.09%
Retail A Shares - No Load 5.79%
Retail A Shares - Load Adjusted 5.56%
Retail B Shares 5.07%
Aggregate Bond Fund
Y Shares 6.29%
Institutional Shares 6.59%
Retail A Shares - No Load 6.29%
Retail A Shares - Load Adjusted 6.03%
Retail B Shares 5.55%
Strategic Income Fund
Retail A Shares 7.31%
Retail B Shares 7.57%
Missouri Tax-Exempt Bond Fund
Institutional Shares 4.53%
Retail A Shares 4.33%
Retail B Shares 3.61%
The following are the tax-equivalent yields for the Missouri Tax-Exempt
Bond Fund and National Municipal Bond Fund for the 30-day period ended May 31,
2000. Each of these yields is based on the yields of corresponding classes of
the Predecessor Missouri Tax-Exempt Bond Fund and the Predecessor National
Municipal Bond Fund. As described above, the Missouri Tax-Exempt Bond and
National Municipal Bond Funds' Retail A, Retail B and Institutional Shares are
the corresponding classes for the Predecessor Missouri Tax-Exempt Bond and
Predecessor National Municipal Bond Funds' Investor A, Investor B and Trust
Shares.
Fund 30-Day Tax Equivalent Yield
---- ---------------------------
Missouri Tax-Exempt Bond Fund
Institutional Shares 7.08%
Retail A Shares 6.77%
Retail B Shares 5.64%
National Municipal Bond Fund
Institutional Shares 8.16%
Retail A Shares - No Load 7.80%
Retail A Shares - Load Adjusted 7.48%
Retail B Shares 6.44%
Total Return Calculations.
-------------------------
Each Fund computes "average annual total return" separately for its Retail
A, Retail B, Y and Institutional Shares. Average annual total return reflects
the average annual percentage change in value
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<PAGE>
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, Y 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:
Aggregate Total Return = [(ERV/P) - l]
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/Credit Index;
the Lipper U.S. Government Fund Average; the Merrill Lynch 1-2.99 U.S. Treasury
Bond Index; the Lehman Brothers Intermediate Government/Credit Index; the Lehman
Brothers Municipal Bond Index;
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<PAGE>
the Lehman Brothers 5-Year General Obligation Bond Index; the Lehman Brothers
Government/Credit Index; and the Consumer Price Index. In addition, the total
return of an equity Fund's shares may be compared to the Lehman Brothers
Government/Corporate Total Index; S&P 500 Index; the S&P MidCap 400 Index, the
S&P SmallCap 600 Index, Lipper Growth & Income Average; 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 1000 Value Index; the Russell 2000 Index; the Value Line
Composite Index, an unmanaged index of nearly 1,700 stocks reviewed in Ratings &
Reports; the Russell MidCap Index; 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 Value 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. Y Shares of the Funds are new and have no performance history.
The performance history below is for shares that would have a similar return
history. Because each class of shares will be invested in the same portfolio of
securities, performance will differ only to the extent that classes do not have
the same expenses. You should be aware that Retail A Shares have a .25%
shareholder servicing fee and a front-end sales charge of 4.50% for equity funds
and 3.75% for fixed income funds, while the Institutional Shares have no
shareholder servicing fee or sales charge.
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<PAGE>
The following are the average annual total returns of the Continuing Funds
for the periods ended April 30, 2000:
PERFORMANCE HISTORY
Average Annual Total Return as of April 30, 2000
Institutional Shares
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Since inception
(inception date)
<S> <C> <C> <C> <C>
Short-Term Bond 3.57% 5.88% 6.84% --
Intermediate Bond 1.88% 6.16% -- 5.83% (Jan 5, 1993)
Bond IMMDEX(TM) 1.55% 6.90% 8.29% --
Tax-Exempt Intermediate Bond 0.08% 4.45% -- 4.32% (Feb. 8, 1993)
Balanced Income 2.49% -- -- 9.26% (Dec. 1, 1997)
Balanced Growth 14.44% 14.81% -- 11.85% (Mar. 30, 1992)
Growth & Income 4.74% 21.52% 15.60% --
Equity Index 9.55% 24.79% 18.27% --
Large Cap Core Equity 21.22% 22.11% -- 16.78% (Dec. 29, 1992)
International Value 3.86% 0.44% -- 0.35% (Apr. 28, 1994)
MidCap Core Equity 23.57% 15.24% 15.32% --
MicroCap 153.85% -- -- 43.99% (Aug. 1, 1995)
</TABLE>
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<PAGE>
________________________________________________________________________________
Average Annual Total Return as of April 30, 2000
Retail A Shares
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Since inception
(inception date)
<S> <C> <C> <C> <C>
Short-Term Bond 3.41 5.63 6.71 6.49 (Dec. 29, 1989)
Intermediate Bond 1.63 5.91 N/A 5.64 (Jan. 5, 1993)
Bond IMMDEX(TM) 1.30 6.64 8.15 7.65 (Dec. 29, 1989)
Tax-Exempt Intermediate Bond -0.18 4.20 N/A 4.13 (Feb. 8, 1993)
Balanced Income 2.23 N/A N/A 8.96 (Dec. 1, 1997)
Balanced Growth 14.17 14.54 N/A 11.67 (Mar. 30, 1992)
Growth & Income 4.48 21.24 15.47 14.36 (Dec. 29, 1989)
Equity Index 9.26 24.51 18.13 16.83 (Dec. 29, 1989)
Large Cap Core Equity 20.88 21.83 N/A 16.57 (Dec. 29, 1992)
International Value 3.59 0.19 N/A 0.14 (Apr. 28, 1994)
MidCap Core Equity 23.29 14.97 15.18 14.32 (Dec. 28, 1989)
Small Cap Core Equity 38.86 N/A N/A 9.62 (Aug. 15, 1997)
MicroCap 153.06 N/A N/A 43.57 (Aug. 1, 1995)
</TABLE>
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<PAGE>
________________________________________________________________________________
Average Annual Total Return as of April 30, 2000
Retail B Shares
<TABLE>
<CAPTION>
Since inception
(inception date) Return Since Inception
(including sales loads)
<S> <C> <C>
Short-Term Bond 3.15% (March 1, 1999) -0.20%
Intermediate Bond 1.66% (March 1, 1999) -1.63%
Bond IMMDEX(TM) 1.26% (March 1, 1999) -2.00%
Tax-Exempt Intermediate Bond -0.67% (March 1, 1999) -3.94%
Balanced Income 4.22% (March 1, 1999) 0.81%
Balanced Growth 12.84% (March 1, 1999) 9.48%
Growth & Income 8.03% (March 1, 1999) 4.65%
Equity Index 14.17% (March 1, 1999) 10.82%
Large Cap Core Equity 17.84% (March 1, 1999) 14.51%
International Value 19.00% (March 1, 1999) 15.67%
MidCap Index 16.56% (Nov 4, 1999) 11.56%
MidCap Core Equity 25.32% (March 1, 1999) 22.03%
MicroCap 145.26% (March 1, 1999) 142.32%
</TABLE>
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 Balanced 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 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
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<PAGE>
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 one series of shares, with
neither a sales charge nor a 0.25% service organization fee, to both retail and
institutional investors. Retail Share performance reflects the deduction of the
current maximum sales charge of 5.50% for equity funds and 4.00% for fixed
income funds, but for periods prior to January 10, 1995, Retail Share
performance does not reflect service organization fees. If service organization
fees had been reflected, performance would be reduced.
The following are the average annual total returns for shares of the U.S.
Government Securities Fund, Aggregate Bond Fund, Strategic Income Fund, Missouri
Tax-Exempt Bond Fund, National Municipal Bond Fund, Equity Income Fund, Relative
Value Fund, Large Cap Growth Fund, Global Equity Fund, International Growth
Fund, Small Cap Index Fund, Small Cap Core Equity Fund and Science & Technology
Fund from the date of each Fund's inception through May 31, 2000. These returns
are based on the returns of the Predecessor U.S. Government Securities Fund,
Predecessor Aggregate Bond Fund, Predecessor Strategic Income Fund, Predecessor
Missouri Tax-Exempt Bond Fund, Predecessor National Municipal Bond Fund,
Predecessor Equity Income Fund, Predecessor Relative Value Fund, Predecessor
Large Cap Growth Fund, Predecessor Global Equity Fund, Predecessor International
Growth Fund, Predecessor Small Cap Index Fund, Predecessor Small Cap Core Equity
Fund and Predecessor Science & Technology Fund, respectively. The Company's
Retail A, Retail B, Y and Institutional Shares are the corresponding classes for
the Predecessor Funds' Investor A, Investor B, Institutional and Trust Shares,
respectively. The Company's Retail B and Institutional Shares are the
corresponding classes for the Predecessor Stellar Funds' Class B and Class Y
Shares, respectively. The Company's Retail A Shares correspond to the
Predecessor Stellar Funds' Class A and Class C Shares.
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
Since
For the For the For the Commencement
Year 5 Years 10 Years of Operations
Fund Ended 5/31/00 Ended 5/31/00 Ended 5/31/00 (As of 5/31/00)
---- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund
Institutional Shares/1/ 2.24% 4.81% - 6.20%
Y Shares/2/ 1.82% 4.47% - 5.21%
Retail A Shares/3/ -2.14% 3.64% 6.09% 6.40%
Retail B Shares/4/ -3.51% 3.45% - 3.95%
Aggregate Bond Fund
Institutional Shares/5/ 1.60% 5.25% - 6.63%
Y Shares/6/ 1.31% 4.94% - 4.83%
Retail A Shares/7/ -2.66% 4.06% 6.24% 6.40%
Retail B Shares/8/ -4.09% 3.93% - 5.11%
Strategic Income Fund/9/
Retail B Shares -6.95% 2.53% - 3.94
Missouri Tax-Exempt Bond Fund/10/
Institutional Shares/11/ -1.83% 4.13% 6.22% 6.69%
Retail A Shares/12/ -5.87% 3.08% - 5.68%
Retail B Shares/13/ -7.49% 2.73% - 3.68%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
Since
For the For the For the Commencement
Fund Year 5 Years 10 Years of Operations
Ended 5/31/00 Ended 5/31/00 Ended 5/31/00 (as of 5/31/00)
---- ------------- ------------- ------------- ---------------------------
<S> <C> <C> <C> <C>
National Municipal Bond Fund/14/
Institutional Shares -2.77% - - 3.77%
Retail A Shares -6.55% - - 2.43%
Retail B Shares -8.37% - - 2.04%
Equity Income Fund/15/
Institutional Shares -7.59% - - 8.61%
Y Shares -7.74% - - 8.47%
Retail A Shares -12.84% - - 6.45%
Retail B Shares -12.37% - - 7.04%
Relative Value Fund/16/
Institutional Shares 0.58% - - 11.70%
Retail A Shares -5.30% 17.98% - 14.57%
Retail B Shares -5.02% - - 3.95%
Large Cap Growth Fund/17/
Institutional Shares 20.90% - - 21.26%
Retail B Shares 15.43% 23.18% - 24.23%
Global Equity Fund
Institutional Shares 21.76% - - 13.24%
International Growth Fund
Institutional Shares/18/ 40.15% 15.75% - 12.79%
Y Shares/19/ 39.68% 15.39% - 12.68%
Retail A Shares/20/ 32.02% 14.12% - 11.51%
Retail B Shares/21/ 33.63% 14.34% - 14.83%
Small Cap Index Fund/22/
Institutional Shares 12.18% - - 8.12%
Y Shares 11.86% - - 7.78%
Retail A Shares 5.89% - - 3.79%
Small Cap Core Equity Fund
Institutional Shares/23/ 33.20% 11.15% - 13.78%
Y Shares/24/ 32.85% 10.82% - 13.50%
Retail A Shares/25/ 25.52% 9.56% - 12.74%
Retail B Shares/26/ 26.99% 9.78% - 13.04%
Science & Technology Fund/27/
Institutional Shares/28/ - - - 74.40%
Retail A Shares/29/ - - - -25.25%
Retail B Shares/30/ - - - 68.30%
</TABLE>
-125-
<PAGE>
_________________________________________________________
/1/ Commenced operations on February 1, 1991.
/2/ Commenced operations on June 7, 1994.
/3/ Commenced operations on June 2, 1988.
/4/ Commenced operations on May 11, 1995.
/5/ Commenced operations on February 1, 1991.
/6/ Commenced operations on January 3, 1994.
/7/ Commenced operations on June 15, 1988.
/8/ Date of initial public investment on March 7, 1995.
/9/ Commenced operations on December 12, 1994. Institutional, Y and Retail A
Shares of the Fund did not commence operations until after May 31, 2000.
/10/ Commenced operations on July 15, 1988 as a portfolio of The Arch Tax-Exempt
Trust. On October 2, 1995, the Fund was reorganized as a new portfolio of
Mercantile Mutual Funds, Inc. Y Shares of the Fund did not commence
operations until after May 31, 2000.
/11/ Commenced operations on July 15, 1988.
/12/ Initial public offering commenced on September 28, 1990.
/13/ Date of initial public investment on March 7, 1995.
/14/ Commenced operations on November 18, 1996. Y Shares of the Fund did not
commence operations until after May 31, 2000.
/15/ Commenced operations on February 27, 1997.
/16/ Commenced operations on June 5, 1991. Y Shares of the Fund did not commence
operations until after May 31, 2000.
/17/ Commenced operations on December 12, 1994. Y and Retail A Shares of the
Fund did not commence operations until after May 31, 2000.
/18/ Commenced operations on April 4, 1994.
/19/ Date of initial public investment on April 24, 1994.
/20/ Commenced operations on May 2, 1994.
/21/ Date of initial public investment on March 6, 1995.
/22/ Commenced operations on December 30, 1998. Retail B Shares of the Fund did
not commence operations until after May 31, 2000.
/23/ Commenced operations on May 6, 1992.
/24/ Commenced operations on January 3, 1994.
/25/ Initial public offering commenced on May 6, 1992.
/26/ Date of initial public investment on March 6, 1995.
/27/ Y Shares of the Fund did not commence operations until after May 31, 2000.
/28/ For the period from August 9, 1999 (date of initial public investment) to
May 31, 2000.
/29/ For the period from March 31, 2000 (date of initial offering of
Institutional Shares) to May 31, 2000.
/30/ For the period from August 9, 1999 (date of initial public investment) to
May 31, 2000.
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
-126-
<PAGE>
include a discussion of certain attributes or benefits to be derived by an
investment in a Fund. Such advertisements or communications may include symbols,
headlines or other materials which highlight or summarize the information
discussed in more detail therein.
MISCELLANEOUS
As used in this SAI and in the Funds' Prospectuses, a majority of the
outstanding shares of a Fund or portfolio means, with respect to the approval of
an investment advisory agreement or a charge in a fundamental investment policy,
the lesser of: (1) 67% of the shares of the particular Fund or portfolio
represented at a meeting at which the holders of more than 50% of the
outstanding shares of such Fund or portfolio are present in person or by proxy;
or (2) more than 50% of the outstanding shares of such Fund or portfolio.
As of November 30, 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 41%
Institutional Money Market 71%
Tax-Exempt Money Market 75%
U.S. Treasury Money Market 78%
U.S. Government Money Market 81%
Short-Term Bond 86%
Intermediate Bond 62%
U.S. Government Securities 88%
Aggregate Bond 89%
Bond IMMDEX(TM) 66%
Tax-Exempt Intermediate Bond 70%
National Municipal Bond 96%
Balanced Income 79%
Balanced Growth 74%
Growth & Income 68%
Equity Index 76%
Large Cap Core Equity 82%
MidCap Core Equity 75%
MidCap Index 70%
Small Cap Core Equity 75%
MicroCap 77%
International Value 85%
International Growth 92%
-127-
<PAGE>
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, MidCap Index Fund and Small Cap 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 the SmallCap Index Fund or any member of the public regarding the
advisability of investing in securities generally or in the Equity Index Fund,
MidCap Index Fund or the Small Cap Index Fund particularly or the ability of the
S&P 500 Index, S&P MidCap 400 Index or S&P SmallCap 600 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, the
S&P MidCap 400 Index and S&P SmallCap 600 Index which is determined, composed
and calculated by S&P without regard to the Company, the Equity Index Fund, the
MidCap Index Fund or the Small Cap Index Fund. S&P has no obligation to take the
needs of the Company or shareholders of the Equity Index Fund, MidCap Index Fund
or Small Cap Index Fund into consideration in determining, composing or
calculating the S&P 500 Index, S&P MidCap 400 Index and S&P Small Cap 600 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the Equity Index Fund, the MidCap Index Fund or the Small
Cap Index Fund or the timing of the issuance or sale of the Equity Index Fund,
MidCap Index Fund or the Small Cap Index Fund or in the determination or
calculation of the equation by which the Equity Index Fund, MidCap Index Fund
and Small Cap 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, MidCap Index Fund or the Small Cap 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 S&P SMALLCAP 600 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 S&P SMALLCAP 600
INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES,
AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX, S&P MIDCAP 400
INDEX OR S&P SMALLCAP 600 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.
-128-
<PAGE>
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.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor's capacity to repay foreign obligations may
be lower than its capacity to repay obligations in its local currency due to the
sovereign government's own relatively lower capacity to repay external versus
domestic debt. These sovereign risk considerations are incorporated in the debt
ratings assigned to specific issues. Foreign currency issuer ratings are also
distinguished from local currency issuer ratings to identify those instances
where sovereign risks make them different for the same issuer.
A-1
<PAGE>
Moody's commercial paper ratings are opinions of the ability of issuers to
honor senior financial obligations and contracts. These obligations have an
original maturity not exceeding 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.
Fitch 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 for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest 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.
A-2
<PAGE>
"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 a
capacity for meeting financial commitments which is solely reliant upon a
sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
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-3
<PAGE>
"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" - An obligation rated "C" is currently highly vulnerable to nonpayment.
The "C" rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action taken, but payments on this obligation are being
continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
- PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
- "r" - The 'r' highlights obligations that Standard & Poor's believes have
significant 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
A-4
<PAGE>
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. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
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" - Bonds are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
A-5
<PAGE>
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Con. (...) - Bonds for which the security depends on the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the 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 ratings used by Fitch 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.
A-6
<PAGE>
"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" and "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 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 does not rate the issuer or issue in question.
- `Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
- RatingWatch: Ratings are placed on RatingWatch 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. RatingWatch is typically resolved over a relatively short
period.
A-7
<PAGE>
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.
A-8
<PAGE>
"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 superior credit quality.
Excellent protection afforded by established cash flows, highly reliable
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - This designation denotes strong credit quality. Margins
of protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes acceptable credit. Liquidity
and cash flow protection may be narrow and market access for refinancing is
likely to be less well established.
"SG" - This designation denotes speculative-grade credit quality. Debt
instruments in this category lack sufficient margins of protection.
Fitch uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
A-9
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION CONCERNING FUTURES AND RELATED
OPTIONS
As stated in the Prospectuses, certain of the Funds may enter into futures
contracts and options for hedging or other purposes. Such transactions are
described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures as
a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which they
hope to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Fund, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by a Fund as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by a Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by a Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
B-1
<PAGE>
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.
B-2
<PAGE>
For example, assume that the market price of a long-term bond that the Fund
may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the Adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9 1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund could, for example, assign a pool of investments
in short-term securities that are either maturing in four months or earmarked
for sale in four months, for purchase of the long-term bond at an assumed market
price of 100. Assume these short-term securities are yielding 15%. If the market
price of the long-term bond does indeed rise from 100 to 105, the equivalent
futures market price for Treasury bonds might also rise from 98 to 103. In that
case, the 5-point increase in the price that the Fund pays for the long-term
bond would be offset by the 5-point gain realized by closing out the futures
contract purchase.
The Adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for long-
term bonds. The market price of available long-term bonds would have decreased.
The benefit of this price decrease, and thus yield increase, will be reduced by
the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates, it
is possible that the Fund would discontinue its purchase program for long-term
bonds. The yield on short-term securities in the portfolio, including those
originally in the pool assigned to the particular long-term bond, would remain
higher than yields on long-term bonds. The benefit of this continued incremental
income will be reduced by the loss realized on closing out the futures contract
purchase.
In each transaction, expenses would also be incurred.
II. Index Futures Contracts.
-----------------------
A stock or bond index assigns relative values to the stocks or bonds
included in the index and the index fluctuates with changes in the market values
of the stocks or bonds included. Some stock index futures contracts are based on
broad market indexes, such as the Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures contracts
on narrower market indexes, such as the Standard & Poor's 100 or indexes based
on an industry or market segment, such as oil and gas stocks. Futures contracts
are traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
A Fund may sell index futures contracts as set forth in the Prospectuses. A
Fund may do so either to hedge the value of its portfolio as a whole, or to
protect against declines, occurring prior to sales of securities, in the value
of the securities to be sold. Conversely, a Fund may purchase index futures
contracts. In a substantial majority of these transactions, a Fund will purchase
such securities upon termination of the long futures position, but a long
futures position may be terminated without a corresponding purchase of
securities.
B-3
<PAGE>
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
B-4
<PAGE>
-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
B-5
<PAGE>
-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 Growth 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
B-6
<PAGE>
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
B-7
<PAGE>
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.
B-8
<PAGE>
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.
B-9
<PAGE>
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
Ohio Tax-Exempt Money Market Fund
December 11, 2000
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Firstar Funds, Inc......................................................... 3
Descriptions of the Funds and their Investments and Risks.................. 3
Investment Strategies and Risks............................................ 5
Net Asset Value............................................................ 26
Additional Purchase and Redemption Information............................. 28
Additional Information Regarding Shareholder Services For Retail A Shares.. 32
Description of Shares...................................................... 33
Additional Information Concerning Taxes.................................... 35
Management of the Company.................................................. 37
Custodian, Transfer Agent, Disbursing Agent and Accounting Services Agent.. 48
Expenses................................................................... 49
Independent Accountants and Financial Statements........................... 49
Counsel.................................................................... 50
Yield and Other Performance Information.................................... 50
Miscellaneous.............................................................. 50
Appendix A................................................................. A-1
</TABLE>
This Statement of Additional Information ("SAI"), which is not a prospectus,
supplements and should be read in conjunction with Firstar Funds, Inc.'s
prospectuses dated December 11, 2000 (the "Prospectuses"), for Retail A and
Institutional Shares of the Money Market Fund, Institutional Money Market Fund,
U.S. Treasury Money Market Fund, U.S. Government Money Market Fund , Tax-Exempt
Money Market Fund and Ohio Tax-Exempt Money Market Fund (collectively referred
to as the "Funds"). This SAI is incorporated by reference in its entirety into
each of the Prospectuses. Copies of the Prospectuses for the Funds may be
obtained by writing the Firstar Funds Center at 615 East Michigan Street, P.O.
Box 3011, Milwaukee, WI 53201-3011 or by calling 1-800-677-FUND. The Financial
Statements and the Independent Accountants report thereon for the Money Market
Fund, Institutional Money Market Fund, U. S. Government Money Market Fund and
Tax-Exempt Money Market Fund (together, the "Continuing Funds") are incorporated
by reference into this SAI from the Funds' Annual Report dated October 31, 1999,
which may be obtained by writing the address above or calling the toll-free
number above. The Financial Statements for the Six-month period ended April 30,
2000 for the Continuing Funds are unaudited and are contained in the Funds'
semiannual reports and are incorporated
<PAGE>
by reference into this SAI. The audited Financial Statements and the related
reports of Independent Public Accountants' for the year ended November 30, 1999
for the Firstar Stellar Treasury Fund and the Firstar Stellar Ohio Tax-Free
Money Market Fund (together, the "Predecessor Funds") are incorporated by
reference into this SAI from the Annual Reports to Shareholders for the
Predecessor Funds. The unaudited financial statements for the six-month period
ending May 31, 2000 are contained in the Predecessor Funds' Semi-Annual Reports,
which are also incorporated by reference into this SAI. No other part of the
Annual Report is incorporated herein by reference.
2
<PAGE>
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 Retail A and Institutional Shares of five diversified
portfolios, the Money Market Fund, Institutional Money Market Fund, U.S.
Treasury Money Market Fund, U.S. Government Money Market Fund, Tax-Exempt Money
Market Fund and one non-diversified portfolio, the Ohio Tax-Exempt Money Market
Fund. The Money Market Fund, Institutional Money Market Fund, U.S. Government
Money Market Fund, and Tax-Exempt Money Market Fund commenced operations on
March 16, 1988, April 26, 1991, August 1, 1988 and June 27, 1988, respectively.
The Ohio Tax-Exempt Money Market Fund commenced operations on December 2, 1997
as the Ohio Tax-Free Money Market Fund of Firstar Stellar Funds and was
reorganized as a portfolio of the Company on December 11, 2000. The Mercantile
Treasury Money Market Portfolio and Firstar Stellar Treasury Fund commenced
operations on January 26, 1995 and April 15, 1989, respectively, and were
reorganized into the Firstar U. S. Treasury Money Market Fund on November 27,
2000. For the periods prior to November 27, 2000, the performance history,
historical data and certain of the expense information of the Firstar U. S.
Treasury Money Market Fund is that of the Firstar Stellar Treasury Fund. The
Company also offers other investment portfolios that are described in separate
statements 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 an open-end management company with diversified and non-
diversified investment portfolios. 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, Firstar
Investment Research & Management Company, LLC ("FIRMCO" or 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
3
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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 Funds' 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, Quasar Distributors, LLC (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
4
<PAGE>
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.
The securities in which the Ohio Tax-Exempt Money Market Fund is permitted
to invest are rated in the highest short-term rating category by one or more
nationally recognized statistical rating organizations ("NRSROs"). A NRSRO's
highest rating category is determined without regard for sub-categories and
gradations. For example, securities rated A-1 or A-1+ by "S&P", Prime-1 by
Moody's, or F-1 (+ or -) by Fitch are all considered rated in the highest short-
term rating category. The Fund will follow applicable regulations in
determining whether a security rated by more than one NRSRO can be treated as
being in the highest short-term rating category. Additionally, the Ohio Tax-
Exempt Money Market Fund may purchase unrated securities which are determined to
be of comparable quality to securities rated in the highest short-term rating
category by NRSROs and which are otherwise eligible for purchase by the Fund.
The Fund may also purchase bonds which have no short-term ratings but which
have long-term ratings by NRSROs in the two highest ratings categories. The
Ohio Tax-Exempt Money Market Fund
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has the ability but no present intention of investing in municipal securities
that are rated MIG2 or VMIG2 by Moody's, F-2 by Fitch, or A-2 or SP-2 by S&P and
tax-exempt commercial paper that is rated P-2 by Moody's, A-2 by S&P, or F-2 by
Fitch, or securities which are not rated but are deemed to be of comparable
quality. Shareholders of the Fund will be notified should the Fund decide to
invest in these securities.
Variable and Floating Rate Instruments. The Money Market Fund,
--------------------------------------
Institutional Money Market Fund, Tax-Exempt Money Market Fund and Ohio Tax-
Exempt 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. Variable amount master demand 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 under "Ratings". The Funds invest
in variable amount master demand notes only when the Adviser deems the
investment to involve minimal credit risk. With respect to the variable and
floating rate instruments that may be acquired by the Money Market,
Institutional Money Market, Tax-Exempt Money Market and Ohio Tax-Exempt 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 and Ohio 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 and Institutional Money Market Fund
------------------
may purchase bank obligations, such as certificates of deposit, bankers'
acceptances and time deposits, including U.S. dollar-denominated instruments
issued or supported by the credit of U.S. or foreign banks or savings
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<PAGE>
institutions having total assets at the time of purchase in excess of $1
billion. Investments by the Funds 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 and Institutional Money Market Fund may acquire
certain types of bank instruments issued or supported by the credit of foreign
banks or foreign branches of domestic banks where the Adviser deems the
instrument to present minimal credit risks. 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 (other than the Ohio Tax-Exempt
---------------------------
Money Market Fund) 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
7
<PAGE>
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
8
<PAGE>
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.
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Borrowings and Reverse Repurchase Agreements. Each Fund may borrow money
--------------------------------------------
from banks or through reverse repurchase agreements to the extent allowed (as
described under "Additional Investment Limitations" below) to meet shareholder
redemptions. 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. 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 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 (except the Ohio Tax-Exempt Money
------------------
Market Fund) 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 and Ohio Tax-
---------------------------------------------------------------------------
Exempt Money Market Fund.
------------------------
Municipal Obligations which may be acquired by the Tax-Exempt Money Market
---------------------
Fund and Ohio 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
10
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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 (and, with respect to
Ohio municipal securities, to the exemption from Ohio income tax) are rendered
by bond counsel to the respective issue at the time of issuance. Neither the
Funds 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 securities consist of
"general obligation" and "revenue" issues. General obligation securities are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue securities are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source such as the user of the facility being financed. Revenue securities
include private activity bonds which are not payable from the unrestricted
revenues of the issuer. Consequently, the credit quality of private activity
bonds is usually directly related to the credit standing of the corporate user
of the facility involved. Municipal securities may also include "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
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.
When determining whether a municipal security presents minimal credit risks
for the Ohio Tax-Exempt Money Market Fund, the Adviser considers the
creditworthiness of the issuer of a municipal security, the issuer of a demand
feature if the Fund has the unconditional right to demand payment from the
issuer of the interest, or the credit enhancer of payment by either of those
issuers. The Fund is not required to sell a municipal security if the
security's rating is reduced below the required minimum subsequent to the Fund's
purchase of the security. The directors and the Adviser consider this event,
however, in the determination of whether the Fund should continue to hold the
security in its portfolio. If ratings made by Moody's S&P, or Fitch change
because of changes in those organizations or in their rating systems, the Fund
will try to use comparable ratings as standards in accordance with the
investment policies described in the Fund's prospectus.
There are no restrictions on the maturity of municipal securities in which
the Fund may invest. The Fund will seek to invest in municipal securities of
such maturities as the Adviser believes will produce current income consistent
with prudent investment. The Adviser will also consider current market
conditions and the cost of the insurance obtainable on such securities.
11
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The payment of principal and interest on most securities purchased by the
Tax-Exempt Money Market Fund and Ohio 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 and Ohio 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, including credit downgrades, supply and demand. 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.
The Fund may enhance the credit of its investments by a guaranty, letter of
credit or insurance. Any bankruptcy, receivership, default or change in the
credit quality if the credit enhancer will adversely effect the quality and
marketability of the underlying security and could cause losses to a Fund and
affect its share price. The Ohio Tax-Exempt Money Market Fund may have more
than 25% of its total assets invested in securities credit-enhanced by banks.
The Fund typically evaluates the credit quality and ratings of credit-enhanced
securities based upon the financial condition and ratings of the party providing
the credit enhancement, rather than the issuer.
Municipal obligations acquired by the Tax-Exempt Money Market Fund and Ohio
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 issued by or on behalf of public authorities to
finance various privately operated facilities are considered to be municipal
securities. Private activity bonds have been or are issued to obtain funds to
provide, among other things, 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 to 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. Furthermore, payment of principal and interest on
municipal securities 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
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redemption and limitations on obtaining deficiency judgments. In the event of a
foreclosure, collection of the proceeds of the foreclosure may be delayed, and
the amount of proceeds from the foreclosure may not be sufficient to pay the
principal of and accrued interest on the defaulted municipal securities.
Interest on private activity bonds, although free from regular federal income
taxation, may be an item of tax preference for purposes of the federal
alternative minimum tax.
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 Tax-Exempt Money Market Fund and
Ohio Tax-Exempt Money Market 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 Funds 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.
The Tax-Exempt Money Market Fund and the Ohio Tax-Exempt Money Market Fund
may purchase put options on municipal obligations. A put gives a 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. A 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.
Municipal obligations purchased by the Tax-Exempt Money Market Fund and
Ohio Tax-Exempt Money Market Fund may include variable and floating rate
instruments issued by industrial development authorities and other governmental
entities. If such instruments are unrated, they will be determined by the
Funds' 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 Funds, the Funds
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
Funds to dispose of a variable or floating rate demand instrument if the issuer
defaulted
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on its payment obligation or during periods that the Fund is not entitled to
exercise its demand rights, and the Funds 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 U. S. Treasury Money
---------------------------------------------
Market Fund, Tax-Exempt Money Market Fund and Ohio Tax-Exempt Money Market Fund
may purchase securities on a "when-issued" or "forward commitment" basis. These
transactions, which involve a commitment by the Funds to purchase particular
securities with payment and delivery taking place beyond the normal settlement
date, permit the Funds 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 Funds
expect that its when- issued purchases and forward commitments will not exceed
25% ( or 20% for the U. S. Treasury Money Market Fund and Ohio Tax-Exempt Money
Market Fund) of the value of its total assets absent unusual market conditions,
and that a forward commitment or commitment to purchase when-issued securities
will not exceed forty-five days. The Funds do not intend to engage in when-
issued purchases and forward commitments for speculative purposes but only in
furtherance of their investment objective.
When the Funds agree 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 Funds 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 Funds' commitments. It
may be expected that the market value of the Funds' 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 Funds will set aside cash
or liquid assets to satisfy its purchase commitments in the manner described,
the Funds' liquidity and ability to manage their portfolios might be affected in
the event their forward commitments and commitments to purchase when-issued
securities ever exceeded 25% (or 20% for the U. S. Treasury Money Market Fund
and Ohio Tax-Exempt Money Market Fund) of the value of their total assets.
The U. S. Treasury Money Market Fund and Tax-Exempt Money Market Fund will
purchase securities on a when-issued or forward commitment basis only with the
intention of completing the
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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 U. S. Treasury Money Market Fund and 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 U. S. Treasury Money Market Fund and 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.
The Ohio Tax-Exempt Money Market Fund does not currently intend to engage
in forward commitments.
Stand-By Commitments. The Tax-Exempt Money Market Fund and the Ohio Tax-
--------------------
Exempt Money Market Fund may acquire "stand-by commitments" with respect to
municipal obligations held in its portfolio. Under a "stand-by commitment" a
dealer agrees to buy from the Fund, at the Fund's option, specified municipal
obligations at a specified price. "Stand-by commitments" acquired by each 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 a 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 a Fund
only with the instrument involved.
The Funds expect that "stand-by commitments" will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Funds 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). 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 Funds intend 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 Funds' 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.
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The Funds would acquire "stand-by commitments" solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. The acquisition of a "stand-by commitment" would not affect
the valuation or assumed maturity of the underlying Municipal Securities, which
would continue to be valued in accordance with the ordinary method of valuation
employed by the Fund. "Stand-by commitments" acquired by a Fund would be valued
at zero in determining net asset value. Where a 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.
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.
Other Investment Considerations--Ohio Tax-Exempt Money Market 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.
The Ohio Tax-Exempt Money Market Fund may invest in high-quality taxable
investments for temporary defensive purposes. Occasionally, such as when
suitable municipal securities are not available, the Fund may invest a portion
of its assets in cash. Any portion of the Fund's assets maintained in cash
reduces the amount of assets in municipal securities and thereby reduces the
Fund's yield. This policy may result in high portfolio turnover. Since the
cost of these transactions is small, high turnover is not expected to adversely
affect net asset value or yield. The Adviser does not anticipate that portfolio
turnover will result in adverse tax consequences to the Fund.
These temporary investments include:
. obligations issued by or on behalf of municipal or corporate issuers
having the same quality and maturity characteristics as municipal
securities purchased by the Fund;
. marketable obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities; instruments issued by banks or other
depository institutions which have capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment;
. repurchase agreements; and
. prime commercial paper rated A-1 by S&P, Prime-1 by Moody's, or F-1 by
Fitch, and other short-term credit instruments.
Such investments will be made in such proportions as in the opinion of the
Adviser, prevailing market or economic conditions warrant. Uninvested cash
reserves will not earn income. Taxable obligations acquired by each Fund will
not exceed under normal conditions 20% of the Fund's net assets at the time of
purchase.
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Municipal Lease Obligations. The Ohio Tax-Exempt Money Market 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 financial
institutions from which the Ohio Tax-Exempt Money Market Fund purchases
participation interests frequently provide or secure from other financial
institutions irrevocable letters of credit or guarantees and give the Fund the
right to demand payment on specified notice (normally within 7 days) from the
issuer of the letter of credit or guarantee. In the acquisition of
participation interests, the Adviser will consider the following quality
factors:
. a high quality underlying municipal security (of which the Fund takes
possession);
. a high quality issuer of the participation interest; or
. a guarantee or letter of credit from a high-quality financial
institution supporting the participation interest.
The Adviser determines and monitors the liquidity of municipal lease
obligations (including certificates of participation) under guidelines approved
by the Board of Directors requiring the Adviser to evaluate the credit quality
of such obligations and report on the nature of and the Fund's trading
experience in the municipal lease market. Under the guidelines, municipal lease
obligations that are not readily marketable and transferable are treated as
illiquid. 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.
Ohio Obligations. As described above, the Ohio Tax-Exempt Money Market
-----------------
Fund will invest most of its net assets in securities issued by or on behalf of
(or in certificates of participation in lease-purchase obligations of) the State
of Ohio, political subdivisions of the State, or agencies or instrumentalities
of the State or its political subdivisions (Ohio Obligations). The Ohio Tax-
Exempt Money Market Fund is therefore susceptible to general or particular
economic, political or regulatory factors that may affect issuers of Ohio
Obligations. The following information constitutes only a brief summary of some
of the many complex factors that may have an effect. The information does not
apply to "conduit" obligations on which the public issuer itself has no
financial responsibility. This information is derived from official statements
of certain Ohio issuers published in connection with their issuance of
securities and from other publicly available information, and is believed to be
accurate. No independent verification has been made of any of the following
information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
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There may be specific factors that at particular times apply in connection
with investment in particular Ohio Obligations or in those obligations of
particular Ohio issuers. It is possible that the investment may be in particular
Ohio Obligations, or in those of particular issuers, as to which those factors
apply. However, the information below is intended only as a general summary, and
is not intended as a discussion of any specific factors that may affect any
particular obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,100 indicated a 0.5% population increase from 1980. The Census estimate
for 1999 was 11,256,700.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In earlier years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However, in
recent years except 1999 the annual State rates were below the national rates
(4.3% vs. 4.5% in 1998, 4.3% vs. 4.2% in 1999, and with State rates slightly
higher than national rates in January through March 2000 but the same or
slightly lower in April through August). The unemployment rate and its effects
vary among geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio Tax-Exempt Money Market Fund or the ability of
particular obligors to make timely payments of debt service on (or lease
payments relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year (FY) or fiscal biennium in a deficit position. Most State operations
are financed through the General Revenue Fund (GRF), for which the personal
income and sales-use taxes are the major sources. Growth and depletion of GRF
ending fund balances show a consistent pattern related to national economic
conditions, with the ending FY balance reduced during less favorable and
increased during more favorable economic periods. The State has well-established
procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods. Those
procedures included general and selected reductions in appropriations spending.
The 1992-93 biennium presented significant challenges to State finances,
successfully addressed. To allow time to resolve certain budget differences an
interim appropriations act was enacted effective July 1, 1991; it included GRF
debt service and lease rental appropriations for the entire biennium, while
continuing most other appropriations for a month. Pursuant to the general
appropriations act for the entire biennium, passed on July 11, 1991, $200
million was transferred from the Budget Stabilization Fund (BSF, a cash and
budgetary management fund) to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in
light of a continuing uncertain nationwide economic situation, there was
projected and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to
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reduce GRF spending in the last six months of FY 1992 by a total of
approximately $184 million; the $100.4 million BSF balance and additional
amounts from certain other funds were transferred late in the FY to the GRF, and
adjustments were made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions, including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to its
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for
debt service or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based
on June 30, 1994 balances, an additional $260 million was deposited in the BSF.
The biennium ended June 30, 1995 with a GRF ending fund balance of $928 million,
which, after leaving in the GRF an unreserved and undesignated balance of $70
million, was transferred to the BSF ($535.2 million) and other funds including
school assistance funds and, in anticipation of possible federal program
changes, a human services stabilization fund.
From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100
million was transferred for elementary and secondary school computer network
purposes and $30 million to a new State transportation infrastructure fund.
Approximately $400.8 million served as a basis for temporary 1996 personal
income tax reductions aggregating that amount. Of the 1996-97 biennium-ending
$834.9 million GRF fund balance, $250 million went to school buildings, $94
million to the school computer network, $44.2 million for school textbooks and
instructional materials and a distance learning program, and $34 million to the
BSF, and the $263 million balance to the State income tax reduction fund.
The 1998-99 biennium ending GRF balances were $1.5 billion (cash) and $976
million (fund). Of that fund balance, $325.7 million was transferred to school
building assistance, $46.3 million to the BSF, $90 million for classroom
computers and interactive video distance learning, and the remaining amount to
the State income tax reduction fund.
The GRF appropriations acts for the current 2000-01 biennium (one for all
education purposes, and one for general GRF purposes) were passed in June 1999
and promptly signed (after selective vetoes) by the Governor. Those acts
provided for total GRF biennial expenditures of over $39.8 billion. Necessary
GRF debt service and lease-rental appropriations for the entire biennium were
requested in the Governor's proposed budget and incorporated in the
appropriations bills as introduced, and were included in the bill versions as
passed by the House and the Senate and in the acts as passed and signed.
From the June 30, 2000 FY ending GRF fund balance of over $855 million
transfers were made in amounts of $610 million to the income reduction fund and
$49 million to the BSF. The BSF had an October 31, 2000 balance of slightly over
$1 billion.
The State's incurrence or assumption of debt without a vote of the people
is, with exceptions noted below, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for.
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The Constitution expressly precludes the State from assuming the debts of any
local government or corporation. (An exception is made in both cases for any
debt incurred to repel invasion, suppress insurrection or defend the State in
war.)
By 17 constitutional amendments approved from 1921 to date (the latest in
2000) Ohio voters authorized the incurrence of State debt and the pledge of
taxes or excises to its payment. At October 31, 2000, $1.57 billion (excluding
certain highway bonds payable primarily from highway user receipts) of this debt
was outstanding or awaiting delivery. The only such State debt at that date
authorized to be incurred were portions of the highway bonds, and the following:
(a) up to $100 million of obligations for coal research and development may be
outstanding at any one time ($29.6 million outstanding); (b) obligations for
local infrastructure improvements, no more than $120 million of which may be
issued in any calendar year (over $1.22 billion outstanding or awaiting
delivery); and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resources purposes which may be outstanding at any one
time ($131.4 million outstanding, with no more than $50 million to be issued in
any one year).
The electors in 1995 approved a constitutional amendment extending the
local infrastructure bond program (authorizing an additional $1.2 billion of
State full faith and credit obligations to be issued over 10 years for the
purpose), and authorizing additional highway bonds (expected to be payable
primarily from highway user receipts). The latter authorizes not more than $1.2
billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
A constitutional amendment approved by the voters in 1999 authorizes State
general obligation debt to pay costs of facilities for a system of common
schools throughout the State ($130.1 million outstanding as of October 31, 2000)
and facilities for state supported and assisted institutions of higher education
($300 million outstanding).
That 1999 amendment also provided that State general obligation debt and
other debt represented by direct obligations of the State (including that
authorized by the Ohio Public Facilities Commission and Ohio Building Authority,
and some authorized by the Treasurer), may not be issued if future FY total debt
service on those direct obligations to be paid from the GRF or net lottery
proceeds exceeds 5% of total estimated revenues of the State for the GRF and
from net State lottery proceeds during the FY of issuance.
A constitutional amendment approved by Ohio electors in November 2000
authorizes the issuance of State bonds for land conservation and revitalization
purposes (including statewide brownfields clean-up). For each of the two
purposes, not more than $50,000,000 in principal amount may be issued in any FY
and not more than $200,000,000 in principal amount may be outstanding in
accordance with their terms at any time. The bonds for conservation purposes
will be State general obligations, and those for revitalization purposes will be
special obligations of the State payable from revenues and receipts to be
designated by the General Assembly.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $5.5 billion of
which were outstanding or awaiting delivery at October 31, 2000.
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In recent years, State agencies have participated in transportation and
office building projects that may have some local as well as State use and
benefit, in connection with which the State enters into lease purchase
agreements with terms ranging from 7 to 20 years. Certificates of participation,
or special obligation bonds of the State or a local agency, are issued that
represent fractionalized interests in or are payable from the State's
anticipated payments. The State estimates highest future FY payments under those
agreements (as of October 31, 2000) to be approximately $28 million (of which
$23.9 million is payable from sources other than the GRF, such as federal
highway money distributions). State payments under all those agreements are
subject to biennial appropriations, with the lease terms being two years subject
to renewal if appropriations are made.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate of less than 50% in FY 2000) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 127 districts (as
of October 31, 2000) on voter-authorized income taxes, for significant portions
of their budgets. Litigation, similar to that in other states, has been pending
questioning the constitutionality of Ohio's system of school funding and
compliance with the constitutional requirement that the State provide a
"thorough and efficient system of common schools." In May 2000 the Ohio Supreme
Court in a 4-3 decision concluded, as it had in 1997, that the State, even after
crediting significant gubernatorial and legislative steps in recent years, did
not comply with that requirement. It set as general base threshold requirements
that every school district have enough funds to operate, an ample number of
teachers, sound and safe buildings, and equipment sufficient for all students to
be afforded an educational opportunity. The Court maintains continuing
jurisdiction, and has scheduled for June 2001 further review by it of State
responses to its ruling. With particular respect to funding sources, the Supreme
Court repeated its conclusion that property taxes no longer may be the primary
means of school funding in Ohio, noting that recent efforts to reduce that
historic reliance have been laudable but in its view insufficient.
A small number of the State's 611 local school districts have in any year
required special assistance to avoid year-end deficits. A now superseded program
provided for school district cash need borrowing directly from commercial
lenders, with diversion of State subsidy distributions to repayment if needed.
The annual number of loans under this program ranged from 10 to 44, and the
aggregate annual dollar amount of
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loans ranged from over $11 million to over $113 million (including $90 million
to one for restructuring its prior loans).
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes to finance their operations. With other subdivisions,
they also receive local government support and property tax relief moneys from
State resources.
For those few municipalities and school districts that on occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) As of October 31, 2000,
six municipalities were in "fiscal emergency" status and two in preliminary
"fiscal watch" status, and a school district "fiscal emergency" provision was
applied to nine districts with three on preliminary "fiscal watch" status.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions
and other local taxing districts. The Constitution has since 1934 limited to 1%
of true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
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 (other than the Ohio Tax-Exempt Money Market 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.
22
<PAGE>
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.
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
23
<PAGE>
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.
The Ohio Tax-Exempt Money Market Fund may not:
1. Sell any securities short.
2. Purchase any securities on margin, but it may obtain such short-term
credits as may be necessary for clearance of purchases and sales of portfolio
securities.
3. Issue senior securities, except that the Fund may borrow money directly
or through reverse repurchase agreements in amounts up to one-third of the value
of its total assets, including the amount borrowed.
4. Borrow money or engage in reverse repurchase agreements for investment
leverage. However, the Fund may borrow money up to one-third of the value of its
total assets as a temporary, extraordinary, or emergency measure or to
facilitate management of the Fund by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. Interest paid on borrowed funds will serve to
reduce the Fund's income. The Fund will not purchase any securities while
borrowings and reverse repurchase agreements in excess of 5% of its total assets
are outstanding. During the period any reverse repurchase agreements are
outstanding, the Funds will restrict the purchase of portfolio securities to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreements, but only to the extent necessary to assure
completion of the reverse repurchase agreements.
5. Mortgage, pledge, or hypothecate any assets except to secure permitted
borrowings. In those cases, they may mortgage, pledge, or hypothecate assets
having a market value not exceeding 15% of the value of total assets at the time
of the pledge. Margin deposits for the purchase and sale of futures contracts
and related options are not deemed to be a pledge.
6. Underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale of
securities in accordance with its investment objective, policies, and
limitations.
7. Purchase or sell real estate, including limited partnership interests.
However, it may invest in the securities of companies whose business involves
the purchase or sale of real estate or in securities that are secured by real
estate or interests in real estate.
24
<PAGE>
8. Purchase or sell commodities, commodity contracts, or commodity futures
contracts.
9. Lend any of its assets, except portfolio securities. This shall not
prevent the Fund from purchasing or holding bonds, debentures, notes,
certificates of indebtedness or other debt securities, entering into repurchase
agreements or engaging in other transactions where permitted by its investment
objectives, policies, and limitations or the By-Laws.
10. Invest more than 10% of the value of their net assets in securities
subject to restrictions on resale under the Securities Act of 1933 except for
certain other restricted securities which meet the criteria for liquidity as
established by the Company's Board of Directors.
The Directors may change the following investment limitations without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
1. The Ohio Tax-Exempt Money Market Fund will not invest more than 10% of
the value of its net assets in illiquid securities, including certain restricted
securities not determined to be liquid under criteria established by the
Directors and repurchase agreements providing for settlement in more than seven
days after notice.
Under criteria established by the Board of Directors, certain restricted
securities are considered to be liquid. The Funds will limit their purchases of
illiquid securities to 10% of their respective net assets which include
restricted securities not determined by the Directors to be liquid, non-
negotiable time deposits, over-the-counter options, and repurchase agreements
providing for settlement in more than 7 days after notice.
2. The Ohio Tax-Exempt Money Market Fund will limit its investment in
other investment companies to:
. no more than 3% of the total outstanding voting stock of any investment
company,
. no more than 5% of its total assets in any one investment company,
. no more than 10% of its total assets in investment companies in general.
The Ohio Tax-Exempt Money Market Fund will limit its investments in the
securities of other investment companies to those of money market funds having
investment objectives and policies similar to its own.
The Ohio Tax-Exempt Money Market Fund will not purchase or acquire any
security issued by a registered closed-end investment company if, immediately
after the purchase or acquisition, 10% or more of the voting securities of the
closed-end investment company would be owned by the Fund and other investment
companies having the same adviser and companies controlled by these investment
companies. The Fund will purchase securities of closed-end investment companies
only in open-market transactions involving customary broker's commissions. The
Adviser will waive its investment advisory fee on assets of the Fund invested in
securities of open-end investment companies.
25
<PAGE>
These limitations are not applicable if the securities are acquired in a
merger, consolidation, reorganization or acquisition of assets. It should be
noted that investment companies may incur certain expenses that may be
duplicative of certain fees incurred by the Fund.
3. The Ohio Tax-Exempt Money Market Fund will not purchase securities if,
as a result of such purchase, more than 25% of the value of the Fund's assets
would be invested in any one industry, industrial development bonds or other
securities, the interest upon which is paid from revenues of similar types of
projects. However, the Fund may invest more than 25% of the value of its assets
in debt obligations issued by or on behalf of Ohio and its political
subdivisions and financing authorities, cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
instruments secured by these money market instruments, such as repurchase
agreements.
The Ohio Tax-Exempt Money Market Fund may invest more than 25% of the value
of its assets in tax-exempt project notes guaranteed by the U.S. government,
regardless of the location of the issuing municipality. If the value of Fund
assets invested in the securities of a governmental subdivision changes because
of changing values, the Fund will not be required to make any reduction in its
holdings.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Fund does not expect to borrow money or pledge securities in excess of
5% of the value of its respective total assets in the coming fiscal year.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings association having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items."
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 is calculated separately for the
Institutional Shares and Retail A Shares and 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
26
<PAGE>
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 applicable only to the Retail A Shares and
certain payments under the Funds' Shareholder Servicing Plans applicable to
Retail A Shares and Institutional Shares of the Money Market Funds. 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.
Net asset value for purposes of pricing purchase and redemption orders is
normally determined as of 11:30 a.m. Central Time (9:00 a.m. Central Time for
the Ohio Tax-Exempt Money Market Fund and 1:00 p.m. Central Time for the U. S.
Treasury Money Market Fund) on each day the Exchange is open for trading and the
Federal Reserve Banks' Fedline System is open. Currently the Exchange and the
Fedline System observe the following holidays: New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday (Exchange only), Memorial Day,
Independence Day, Labor Day, Columbus Day (Fedline only), Veteran's Day (Fedline
only), Thanksgiving and Christmas.
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.
27
<PAGE>
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.
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<PAGE>
Exchange transactions described in paragraphs A, B, C, D, E, F and G 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 Retail A 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 Retail A Shares acquired through reinvestment of dividends
or distributions on such Retail A 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 Firstar Fund that are offered without a sales load.
F. Institutional Shares of any Fund may be exchanged for Institutional
Shares of any other Firstar Fund.
G. Y Shares of any Fund may be exchanged for Y Shares of any other Firstar
Fund. Y Shares of any Fund may be exchanged for shares of the Institutional
Money Market Fund or Institutional Shares of a Money Market 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.
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<PAGE>
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 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.
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: Retail 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
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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.
31
<PAGE>
Additional Information Regarding Shareholder Services For Retail A Shares
-------------------------------------------------------------------------
Periodic Investment Plan
------------------------
The Retail A 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 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 Retail A Shares of 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 Retail A 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.
32
<PAGE>
DESCRIPTION OF SHARES
The Company's Articles of Incorporation authorize the Board of Directors to
issue an indefinite number of full and fractional shares of common stock, $.0001
par value per share that shall be divided into two hundred 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") as follows:
Class and Series of Common Stock
------------
1-Money Market Fund/Institutional
1-Money Market Fund/A
2-Tax-Exempt Money Market Fund/Institutional
2-Tax-Exempt Money Market Fund/A
3-U.S. Government Money Market Fund/Institutional
3-U.S. Government Money Market Fund/A
4-Institutional Money Market Fund/Institutional
4-Institutional Money Market Fund/A
5-U.S. Treasury Money Market Fund/Institutional
5-U.S. Treasury Money Market Fund/A
27-Ohio Tax-Exempt Money Market Fund/Institutional
27-Ohio Tax-Exempt Money Market Fund/A
The Board of Directors has also authorized the issuance of classes 6
through 26 and 28 through 36 common stock representing interests in 30 other
separate investment portfolios which are described in separate statements of
additional information. The remaining authorized shares have been classified by
the Board into 164 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
33
<PAGE>
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.
34
<PAGE>
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. Moreover, if a Fund were to fail to make
sufficient distributions in a year, the Fund would be subject to corporate
income taxes and/or excise taxes in respect of the shortfall or, if the
shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of their
ordinary taxable income for the calendar year and capital gain net income
(excess of capital gains over capital losses) for the one year period ending
October 31 of such calendar year and 100% of any such amounts that were not
distributed in the prior year. Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year if such dividends are actually paid during January of the following
year.
Each Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends or gross sale proceeds paid to
any shareholder who (i) has failed to provide a correct tax identification
number, (ii) is subject to back-up withholding by the Internal Revenue Service
for failure to properly include on his or her return payments of taxable
interest or dividends, or (iii) has failed to certify to the Fund that he or she
is not subject to back-up withholding when required to do so or that he or she
is an "exempt recipient."
Investments in the Ohio Tax-Exempt Money Market Fund are not intended to
constitute a balanced investment program. Shares of the Fund would not be
suitable for tax-exempt institutions and may not be suitable for retirement
plans qualified under Section 401 of the Code, H.R. 10 plans and individual
retirement accounts because such plans and accounts are generally tax-exempt
and, therefore, not only would the shareholder not gain any additional benefit
from the Fund's dividends being tax-exempt, but such dividends would be
ultimately taxable to the beneficiaries when distributed. In addition, the Fund
may not be an appropriate investment for entities that 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 (i) regularly uses a part of such facilities in his or her
trade or business and whose gross revenues derived with respect to the
facilities in his or her 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, (ii) occupies more
than 5% of the usable area of such facilities or (iii) are persons for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. "Related persons" include certain
35
<PAGE>
related natural persons, affiliated corporations, a partnership and its partners
and an S corporation and its shareholders.
Capital gains experienced by the Ohio Tax-Exempt Money Market Fund could
result in an increase in dividends. Capital losses could result in a decrease in
dividends. If, for some extraordinary reason, the Fund realizes net long-term
capital gains, it will distribute them at least once every 12 months.
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.
Ohio Taxes.
----------
Under current Ohio law, individuals and estates that are subject to Ohio
personal income tax or municipal or school district income taxes in Ohio will
not be subject to such taxes on distributions with respect to shares of the Ohio
Tax-Exempt Money Market Fund ("Distributions") to the extent that such
Distributions are properly attributable to interest on obligations of the State
of Ohio, political subdivisions thereof or agencies or instrumentalities of Ohio
or its political subdivisions ("Ohio Obligations"). Corporations that are
subject to the Ohio corporation franchise tax will not have to include
Distributions in their tax base for purposes of calculating the Ohio corporation
franchise on the net income basis to the extent that such Distributions either
constitute exempt-interest dividends for federal income tax purposes or are
properly attributable to interest on Ohio Obligations. However, shares of the
Ohio Tax-Exempt Money Market Fund will be included in a corporation's tax base
for purposes of calculating the Ohio corporation franchise tax on the net worth
basis.
Distributions that consist of interest on obligations of the United States
or its territories or possessions or of any authority, commission, or
instrumentality of the United States ("Territorial Obligations") the interest on
which is exempt from state income taxes under the laws of the United States are
exempt from the Ohio personal income tax, and municipal and school district
income taxes in Ohio, and, provided, in the case of Territorial Obligations,
such interest is excluded from gross income for federal income tax purposes, are
excluded from the net income base of the Ohio corporation franchise tax.
Distributions properly attributable to profit on the sale, exchange or
other disposition of Ohio Obligations will not be subject to the Ohio personal
income tax, or municipal or school district income taxes in Ohio and will not be
included in the net income base of the Ohio corporation franchise tax.
Distributions attributable to other sources generally will not be exempt from
the Ohio personal income tax, municipal or school district income taxes in Ohio
or the net income base of the Ohio corporation franchise tax.
The Ohio Tax-Exempt Money Market Fund is not subject to the Ohio personal
income tax or school district or municipal income taxes in Ohio. The Ohio Tax-
Exempt Money Market Fund is not subject to the Ohio corporation franchise tax or
the Ohio dealers in intangibles tax, provided that, if there is a sufficient
nexus between the State of Ohio and such entity that would enable the State to
tax such entity, the Fund timely files the annual report required by Section
5733.09 of the Ohio Revised Code.
36
<PAGE>
The Ohio Tax Commissioner has waived this annual filing requirement for each tax
year since 1990, the first tax year to which such requirement applied.
This discussion of Ohio taxes assumes that the Ohio Tax-Exempt Money Market
Fund will continue to qualify as a regulated investment company under the
Internal Revenue Code and that at all times at least 50% of the value of the
total assets of the Fund consists of Ohio Obligations or similar obligations of
other states or their subdivisions.
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
Name, Address & Age the Company Other Affiliations
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Glen R. Bomberger Director Executive Vice President, Chief Financial
One Park Plaza Officer and Director, A.O. Smith Corporation (a
11270 West Park Place diversified manufacturing company) since January
Milwaukee, WI 53224-3690 1987; Director of companies affiliated with A.O.
Age: 62 Smith Corporation; Director, Smith Investment
Company; Director of companies affiliated with
Smith Investment Company.
Bronson J. Haase* Director President and CEO of Wisconsin Gas Company,
6948 Wildwood Point WICOR Energy, FieldTech and Vice President of
Chenequa, WI 53029 WICOR, Inc. from 1998 to October 2000; President
Age: 56 and CEO of Ameritech - Wisconsin (formerly
Wisconsin Bell) from 1993 to 1998; President of
Wisconsin Bell Communications from 1993 to 1998;
Board of Directors, The Marcus Corporation;
Trustee of Roundy Foods; Chairman of the
Wisconsin Utilities Association.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Position(s) held with Principal Occupations During Past 5 Years and
Name, Address & Age the Company Other Affiliations
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dawn M. Hornback Trustee of Firstar Stellar Funds from February
c/o Firstar Corporation 1997 to December 2000; Founder, President and
425 Walnut Street Chief Executive Officer of Observatory Group,
Cincinnati, OH 45202 Inc. (brand identity firm) since August 1990.
Age: 36
Joseph J. Hunt Director of Mercantile Mutual Funds, Inc. since
Iron Workers International 1994; Treasurer of the International Association
Union of Bridge, Structural and Ornamental Iron
1750 New York Ave., N.W. Workers (IABSOIW) (international labor union)
Suite 400 since 1998; General Vice-President of IABSOIW
Washington, D.C. 20006 from 1994 to 1998.
Age: 57
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 from 1999 to 2000; Vice-President, FIRMCO from
Milwaukee, WI 53202 1994 to 1999.
Age: 40
Jerry G. Remmel Director Retired; Vice President, Treasurer and Chief
16650A Lake Circle Financial Officer of Wisconsin Energy
Brookfield, WI 53005 Corporation from 1994 to 1996; Treasurer of
Age: 68 Wisconsin Electric Power Company from 1973 to
1996; Director of Wisconsin Electric Power
Company from 1989 to 1996; Senior Vice
President, Wisconsin Electric Power Company from
1988 to 1994; Chief Financial Officer, Wisconsin
Electric Power Company from 1983 to 1996; Vice
President and Treasurer, Wisconsin Electric
Power Company from 1983 to 1989.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Position(s) held with Principal Occupations During Past 5 Years and
Name, Address & Age the Company Other Affiliations
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard K. Riederer Director President and Chief Executive Officer of Weirton
400 Three Springs Drive Steel since 1995; Director of Weirton Steel
Weirton, WV 26062-4989 since 1993; Executive Vice President and Chief
Age: 56 Financial Officer, Weirton Steel January from
1994 to 1995; Vice President of Finance and
Chief Financial Officer, Weirton Steel January
from 1989 to 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.
James M. Wade Chairman of the Board Retired; Vice President and Chief Financial
2802 Wind Bluff Circle Officer, Johnson Controls, Inc. (a controls
Wilmington, NC 28409 manufacturing company) from January 1987 to May
Age: 56 1991.
Jerry V. Woodham N/A Chairman of the Board, President and Director of
St. Louis University Mercantile Mutual Funds, Inc. since 1982;
Fitzgerald Hall Treasurer, St. Louis University since August
3500 Lindell Blvd. 1996; Treasurer, Washington University from 1981
St. Louis, MO 63131 to 1995.
Age: 57
Marian Zentmeyer* Director Chief Equity Investment Officer and Director,
777 E. Wisconsin Ave. FIRMCO, since 1998; Senior Vice President and
Suite 800 Senior Portfolio Manager, FIRMCO from 1995 to
Milwaukee, WI 53202 1998.
Age 43
William H. Zimmer, III Trustee and member of Audit Committee of Firstar
c/o Firstar Corporation Stellar Funds from February 1996 to December
425 Walnut Street 2000, Senior Vice President and Chief Financial
Cincinnati, OH 42502 Officer, ecampus.com since September 1999
Age: 46 (e-commerce); Executive Vice-President and Chief
Financial Officer, Advanced Communications
Group, Inc. since December 1998; Corporate Vice
President, Cincinnati Bell, Inc. from 1997 to
1998; Assistant Treasurer, Cincinnati Bell, Inc.
from 1988 to 1991.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Position(s) held with Principal Occupations During Past 5 Years and
Name, Address & Age the Company Other Affiliations
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th & Cherry Streets
Philadelphia, PA 19103
Age: 57
Laura J. Rauman Vice President Senior Vice President, FIRMCO since 1995; Vice
777 E. Wisconsin Avenue, President of Mercantile Mutual Funds since
Suite 800 April, 2000; Senior Auditor, Price Waterhouse,
Milwaukee, WI 53202 LLP, prior thereto.
Age: 31
Joseph C. Neuberger Assistant Treasurer Senior Vice President, Firstar Mutual Fund
615 E. Michigan Street Services, LLC since 1994; Manager, Arthur
Milwaukee, WI 53202 Andersen LLP, prior thereto.
Age: 38
</TABLE>
* Mr. Haase, Mr. Laning and Ms. Zentmyer are considered by the Company to be
"interested persons" of the Company as defined in the 1940 Act.
40
<PAGE>
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
PENSION OR COMPENSATION FROM
RETIREMENT ESTIMATED COMPANY
AGGREGATE BENEFITS ACCRUED ANNUAL AND FUND
NAME OF COMPENSATION FROM AS PART OF FUND BENEFITS UPON COMPLEX* PAID TO
PERSON/POSITION THE COMPANY EXPENSES 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
Dawn M. Hornback++ $ 0 $0 $0 $ 0
Director
Joseph J. Hunt++ $ 0 $0 $0 $ 0
Director
Jerry V. Woodham++ $ 0 $0 $0 $ 0
Director
William H. Zimmer++ $ 0 $0 $0 $ 0
Director
Bruce Laning++ $ 0 $0 $0 $ 0
Director
Marian Zentmyer++ $ 0 $0 $0 $ 0
Director
</TABLE>
41
<PAGE>
*The "Fund Complex" includes only the Company. The Company is comprised of
36 separate portfolios.
+Includes $15,000 which Mr. Bomberger elected to defer under the Company's
deferred compensation plan.
++Mesdames Hornback and Zentmyer and Messrs. Hunt, Woodham and Zimmer were
elected as Directors on November 8, 2000. Mr. Laning was appointed a Director in
February 2000.
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"), a Wisconsin limited liability company and
subsidiary of Firstar Corporation, a bank holding company, became the investment
adviser to the Money Market, Institutional Money Market, U. S. Government Money
Market, U. S. Treasury Money Market and Tax-Exempt Money Market Funds as of
February 3, 1992, and to the Ohio Tax-Exempt Money Market Fund on April 1, 2000.
Prior thereto, investment advisory services to the Money Market, Institutional
Money Market, U. S. Government Money Market, U. S. Treasury Money Market and
Tax-Exempt Money Market Funds were provided by Firstar Trust Company ("Firstar
Trust"), an affiliate of the Adviser. Prior to April 1, 2000 investment advisory
services to the Ohio Tax-Exempt Money Market Fund and the Predecessor Stellar
Treasury Fund were provided by the Capital Management Division of Firstar Bank,
N. A., also a subsidiary of Firstar Corporation. In its Investment Advisory
Agreements, 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
42
<PAGE>
securities lending activity. The Adviser may voluntarily waive additional
advisory fees otherwise payable by the Funds.
The Adviser has contractually agreed to waive fees and reimburse expenses
for Retail A and Institutional Shares for the Ohio Tax-Exempt Money Market Fund
and U. S. Treasury Money Market Fund until October 31, 2001.
On November 27, 2000, the Mercantile Treasury Money Market Portfolio and
the Firstar Stellar Treasury Fund, which were similarly managed to the Firstar
U. S. Treasury Money Market Fund, reorganized into the Firstar U. S. Treasury
Money Market Fund. On December 11, 2000, the Firstar Stellar Ohio Tax-Free Money
Market Fund reorganized into the Firstar Ohio Tax-Exempt Money Market Fund. For
periods prior to November 27, 2000 and December 11, 2000, as applicable,
historical data presented below for the Firstar U. S. Treasury Money Market Fund
and Firstar Ohio Tax-Exempt Money Market Fund is that of the Predecessor Firstar
Stellar Treasury Fund and Predecessor Firstar Stellar Ohio Tax-Free Money Market
Fund. Prior to April 1, 2000, investment advisory services for the Predecessor
Firstar Stellar Treasury and Firstar Ohio Tax-Free Money Market Funds were
provided by the Capital Management Division of Firstar Bank, N. A., also a
subsidiary of the Firstar Corporation.
FIRMCO is entitled to be contractual fees calculated daily and paid
monthly, at the annual rate (as a percentage of such Fund's average daily net
assets) as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Fund Amount Before Waivers
---- ---------------------
------------------------------------------------------------------
<S> <C>
Money Market Fund 0.50%
------------------------------------------------------------------
Institutional Money Market Fund 0.49%
------------------------------------------------------------------
U. S. Treasury Money Market Fund 0.44%
------------------------------------------------------------------
U. S. Government Money Market Fund 0.50%
------------------------------------------------------------------
Tax-Exempt Money Market Fund 0.50%
------------------------------------------------------------------
Ohio Tax-Exempt Money Market Fund 0.50%
------------------------------------------------------------------
</TABLE>
FIRMCO has contractually agreed to waive fees and reimburse expenses as
applicable until October 31, 2001.
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:
Net Advisory Fees Paid (Advisory Fees Waived)
<TABLE>
<CAPTION>
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 519,416 (15,375) 313,106 (74,162) 264,236 (69,017)
Fund
U.S. Government Money Market 1,248,897 (6,821) 904,397 (81,346) 933,618 (50,816)
Fund
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C> <C>
Tax-Exempt Money Market Fund 678,369 (14,071) 454,275 (88,110) 384,622 (72,448)
Institutional Money Market 6,285,747 (4,398,932) 3,552,582 (2,555,949) 2,758,246 (2,045,957)
Fund
</TABLE>
For the fiscal years ended November 30, 1999, 1998 and 1997, the Capital
Management Division of Firstar Bank, N.A., was paid advisory fees, as follows:
<TABLE>
<CAPTION>
Gross Advisory Fees (Waivers)
-----------------------------
Predecessor Stellar Fund 1999 1998 1997
------------------------ ---- ---- ----
<S> <C> <C> <C>
Ohio Tax-Free Money $ 307,088 (192,918) $ 195,781(142,326)/1/ N/A
Market Fund
Stellar Treasury Money Market Fund $9,863,583 $6,734,607 $4,990,143
</TABLE>
__________________________
/1/ For the period from December 2, 1997 (commencement of operations) to
November 30, 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 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 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 Company. 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 Company's operations. The following
administrative services are also provided by Firstar Mutual Fund Services, LLC:
compile data for and prepare, with respect to the Company, timely Notices to the
SEC required pursuant to Rule 24f-2 under the 1940 Act and Semi-Annual Reports
to the
44
<PAGE>
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
Funds' 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 the Funds' 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 Fund 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.
Firstar Trust Company became Co-Administrator to the Company on September
1, 1994, and assigned its rights and obligations to Firstar Mutual Fund
Services, LLC on October 1, 1998. From January 1, 1995 until August 1, 2000,
B.C. Ziegler and Company served as co-administrator to the Company (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. 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>
Prior to October 1, 1998, Federated Administrative Services ("Federated")
served as administrator to the Predecessor Stellar Funds of the Ohio Tax-Exempt
Money Market Fund and the U. S. Treasury Money Market Fund. Edgewood Services,
Inc. served as sub-administrator to the Predecessor Stellar Funds. For its
services, Edgewood was paid a fee by Firstar Mutual Fund Services,
45
<PAGE>
LLC and was not paid by the Funds. Effective October 1, 1998, Firstar Mutual
Fund Services, LLC served as administrator to those Predecessor Funds.
For the fiscal years ended November 30, 1999, 1998 and 1997, administration
fees, after waivers, were paid to Firstar Mutual Fund Services, LLC and
Federated as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
Net Administration Fees Paid (Waivers)
--------------------------------------
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Predecessor Stellar Fund Firstar Firstar Federated Federated
------------------------ ------- ------- --------- ---------
1999 10/1/1998 - 12/1/1997 - 1997
---- ------------ ----------- ----
11/30/98 9/30/98
-------- -------
------------------------------------------------------------------------------------------------------------------------------
Stellar Treasury Money $2,169,989 $290,973 $1,270,147 $922,287
Market Fund
------------------------------------------------------------------------------------------------------------------------------
Ohio Tax-Free Money Market $ 61,418 $ 5,715 $ 41,217($18,871) N/A
Fund
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Quasar Distributors, LLC, (the "Distributor") located at 615 East Michigan
Street, Milwaukee, Wisconsin, 53202, provides distribution services for each
Fund as described in the Funds' Prospectus pursuant to a Distribution Agreement
with the Funds under which the Distributor, as agent, sells shares of each Fund
on a continuous basis. The Distributor has agreed to use its best efforts to
solicit orders for the sale of shares, although it is not obliged to sell any
particular amount of shares. The Distributor causes expenses to be paid for the
cost of printing and distributing prospectuses to persons who are not
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. Prior to August 1, 2000, B.C. Ziegler &
Company ("Ziegler") served as Distributor to the Money Market, Institutional
Money Market, U. S. Government Money Market and Tax-Exempt Money Market Funds.
For the fiscal years ended October 31, 1999, 1998 and 1997, Ziegler received no
fees for its distribution services.
From April 1, 1999 to December 11, 2000, Edgewood Services, Inc.
("Edgewood") served as distributor to the Predecessor Stellar Funds. From
October 1, 1998 to March 31, 1999, Ziegler served as distributor. Prior to
October 1, 1998, Federated Securities Corp. ("Federated") served as distributor.
No commissions were payable by the Predecessor Stellar Treasury and Tax-Free
Funds.
Firstar Stellar Funds adopted a Distribution and Service Plan, on behalf of
the Predecessor Stellar Treasury Fund, with respect to Retail A Shares (known as
Class C Shares with respect to the Predecessor Stellar Treasury Fund) pursuant
to the 1940 Act and Rule 12b-1 thereunder.
Pursuant to the Distribution and Services Plan for Retail A Shares, the
Predecessor Stellar Treasury Fund was charged the following amounts: (1) for the
fiscal year ended November 30, 1999, $668,817 was paid to Edgewood Services,
Inc. for the period from April 1, 1999 to November 30, 1999 and $251,336 was
paid to Ziegler for the period from December 1, 1998 to March 31, 1999; (2) for
the fiscal year ended November 30, 1998, $125,705 was paid to Ziegler for the
period from October 1, 1998 to November 30, 1998 and $539,210 was paid to
Federated from December 1, 1997 to September 30, 1998; and (3) for the fiscal
year ended November 30, 1997, $202,834 was paid to Federated.
46
<PAGE>
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 Retail A Shares of the Funds.
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, under the
Distribution and Service Plan applicable to Retail A Shares(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 Retail A Shares.
The Funds' arrangements with Shareholder Organizations under the agreements
are governed by a Service Plan for Retail A Shares, a Service Plan for
Institutional Shares and, except for the Institutional Money Market Fund, a
Distribution and Service Plan for Retail A Shares, which have been adopted by
the Board of Directors. Because the Distribution and Service Plan for Retail A
Shares 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 Plan, 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
Retail A 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 Retail A 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 for Retail A Shares
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 for Retail A Shares 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.
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
47
<PAGE>
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.
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
Retail A Shares 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
</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
48
<PAGE>
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; Tax-Exempt Money Market and Ohio Tax-Exempt Money Market
Funds--$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
Continuing 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
49
<PAGE>
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.
The Company's Annual Report to Shareholders with respect to the Predecessor
Stellar Funds for the fiscal year ended November 30, 1999 has been audited by
Arthur Andersen LLP and has been filed with the SEC, and the unaudited Semi-
Annual Report for the Predecessor Stellar Funds has been filed with the SEC. The
audited financial statements and financial highlights incorporated by reference
in this Statement of Additional Information have been audited by Arthur
Andersen, LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing. The unaudited financial
statements included in the Semi-Annual Report are also incorporated by reference
in to this Statement of Additional Information.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, is a partner), One Logan Square, 18/th/ 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.
CODE OF ETHICS
The Company, Adviser and Distributor have adopted codes of ethics that
permit personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the Fund.
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 and Ohio 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
50
<PAGE>
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 and
Ohio 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.
Interest earned on tax-exempt obligations of the Ohio Tax-Exempt Money
Market 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.
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. The yield of the Ohio Tax-
Exempt Money Market Fund may be compared to the Salomon Brothers Six-Month Prime
Muni Notes Index, Salomon Brothers One-Month Tax-Exempt Commercial Paper Index
and Donoghue's Money Fund Report. 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.
51
<PAGE>
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.
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 of an investment in a Fund's series of shares will fluctuate.
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.
For the seven day period ended April 30, 2000 the annualized yields of the
Funds would be as follows:
<TABLE>
<CAPTION>
Current Yield Current Yield Effective Yield Effective Yield
with Waivers without with Waivers without
Waivers Waivers
<S> <C> <C> <C> <C>
Money Market Fund - Retail A 5.41% 5.18% 5.56% 5.33%
Shares
Institutional Money Market 5.76% 5.52% 5.93% 5.27%
Fund
U. S. Government Money 5.33% 5.13% 5.47% 5.27%
Market Fund - Retail A Shares
Tax-Exempt Money Market 3.78% 3.78% 3.85% 3.85%
Fund - Retail A Shares
</TABLE>
For the seven day period ended April 30, 2000 the tax equivalent yield of
the Retail A Shares of the Tax-Exempt Money Market Fund was 5.48% (assuming a
federal income tax rate of 31%).
No Institutional Shares of the Funds were outstanding on April 30, 2000.
For the seven day period ended May 31, 2000 the annualized yields of the
Predecessor Stellar Treasury Fund and Predecessor Stellar Ohio Tax-Free Money
Market Fund were as follows:
52
<PAGE>
<TABLE>
<CAPTION>
Current Yield Current Yield Effective Yield Effective Yield
with Waivers without with Waivers without
Waivers Waivers
<S> <C> <C> <C> <C>
U. S. Treasury Money Market 5.16% 5.01% 5.29% 5.14%
Fund - Retail A Shares
Ohio Tax-Exempt Money Market 3.37% 3.17% 3.43% 3.23%
Fund - Retail A Shares*
Ohio Tax-Exempt Money Market N/A N/A N/A N/A
Fund - Institutional Shares*
</TABLE>
*This yield is based on the yield of the corresponding class of the
Predecessor Stellar Tax-Free Money Market Fund.
For the seven day period ended May 31, 2000 the tax equivalent yield of the
Ohio Tax-Exempt Money Market Fund was as follows:
Ohio Tax-Exempt Money Market Fund Retail A Shares - 5.41%
Institutional Shares - N/A
The yield assumes a federal income tax rate of 31% and an Ohio income tax
rate of 6.65%. The yield is based on the corresponding class of the Predecessor
Ohio Tax-Free Money Market Fund.
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 November 30, 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 portfolio of the Company
because they possessed sole voting or investment power with respect to such
shares:
Money Market 41%
Institutional Money Market 71%
Tax-Exempt Money Market 75%
Treasury Money Market 78%
U.S. Government Money Market 81%
53
<PAGE>
Short-Term Bond 86%
Intermediate Bond 62%
U.S. Government Securities 88%
Aggregate Bond 89%
Bond IMMDEX (TM) 66%
Tax-Exempt Intermediate Bond 70%
National Municipal Bond 96%
Balanced Income 79%
Balanced Growth 74%
Growth & Income 68%
Equity Index 76%
Large Cap Core Equity 82%
MidCap Core Equity 75%
MidCap Index 70%
Small Cap Core Equity 75%
MicroCap 77%
International Value 85%
International Growth 92%
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.
54
<PAGE>
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.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key factor
in this analysis. An obligor's capacity to repay foreign obligations may be
lower than its capacity to repay obligations in its local currency due to the
sovereign government's own relatively lower capacity to repay external versus
domestic debt. These sovereign risk considerations are incorporated in the debt
ratings assigned to specific issues. Foreign currency issuer ratings are also
distinguished from local currency issuer ratings to identify those instances
where sovereign risks make them different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of issuers to
honor senior financial obligations and contracts. These obligations have an
original maturity not exceeding one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
<PAGE>
"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.
Fitch 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 for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest 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 a
capacity for meeting financial commitments which is solely reliant upon a
sustained, favorable business and economic environment.
A-2
<PAGE>
"D" - Securities are in actual or imminent payment default.
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.
A-3
<PAGE>
"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" - An obligation rated "C" is currently highly vulnerable to nonpayment.
The "C" rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action taken, but payments on this obligation are being
continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
- PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
- "r" - The 'r' highlights obligations that Standard & Poor's believes have
significant 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. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
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.
A-4
<PAGE>
"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" - Bonds are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa " - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Con. (...) - Bonds for which the security depends on the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the 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 ratings used by Fitch for corporate and municipal
bonds:
A-5
<PAGE>
"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" and "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.
A-6
<PAGE>
- To provide more detailed indications of credit quality, the Fitch 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 does not rate the issuer or issue in question.
- `Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
- RatingWatch: Ratings are placed on RatingWatch 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. RatingWatch is typically resolved over a relatively short
period.
A-7
<PAGE>
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 superior credit quality.
Excellent protection afforded by established cash flows, highly reliable
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - This designation denotes strong credit quality. Margins
of protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes acceptable credit. Liquidity
and cash flow protection may be narrow and market access for refinancing is
likely to be less well established.
"SG" - This designation denotes speculative-grade credit quality. Debt
instruments in this category lack sufficient margins of protection.
Fitch uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
A-8
<PAGE>
FIRSTAR FUNDS INC.
Statement of Additional Information
REIT Fund
December 11, 2000
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
FIRSTAR FUNDS, INC......................................... 2
DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS...... 2
INVESTMENT STRATEGIES AND RISKS............................ 4
NET ASSET VALUE............................................ 11
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............. 12
DESCRIPTION OF SHARES...................................... 19
ADDITIONAL INFORMATION CONCERNING TAXES.................... 20
MANAGEMENT OF THE COMPANY.................................. 22
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES AGENT.... 31
EXPENSES................................................... 32
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS........... 32
COUNSEL.................................................... 33
CODE OF ETHICS............................................. 33
PERFORMANCE CALCULATIONS................................... 34
MISCELLANEOUS.............................................. 37
APPENDIX A................................................. A-1
</TABLE>
This Statement of Additional Information ("SAI"), which is not a
prospectus, supplements and should be read in conjunction with the Firstar
Funds, Inc.'s prospectus ("Prospectus") dated December 11, 2000, for Retail A,
Retail B, Y and Institutional Shares of the REIT Fund ("the Fund"). This SAI is
incorporated by reference in its entirety into the Prospectus. The Fund
commenced operations as a portfolio (the "Predecessor Fund") of the Firstar
Select Funds as further explained herein. On December 11, 2000, the Predecessor
Fund was reorganized as a new portfolio of Firstar Funds, Inc. The Prospectus,
as well as the Predecessor Fund's Semi-Annual Report to Shareholders dated
September 30, 1999 and the Predecessor Fund's Annual Report to Shareholders
dated March 31, 2000, may be obtained, without charge, by writing Firstar Mutual
Fund Services, LLC 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' reports thereon are incorporated by reference from the
Predecessor Fund's Annual and Semi-Annual Reports into this SAI. No other parts
of the Annual and Semi-Annual Reports are incorporated herein by reference.
<PAGE>
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.
The REIT Fund (the "Fund") was originally organized as the Firstar Select
REIT-Plus Fund, a separate investment portfolio of Firstar Select Funds. On
December 11, 2000, the Fund was reorganized as an investment portfolio of the
Company.
This SAI pertains to Retail A, Retail B, Y and Institutional Shares of the
Fund. The Fund is a diversified portfolio under the Investment Company Act of
1940, as amended (the "1940 Act"). The Company also offers other investment
portfolios that are described in separate prospectuses and statements of
additional information. For information concerning these other portfolios,
contact Firstar Mutual Fund Services, LLC by telephone at 1-800-677-FUND or in
writing at 615 East Michigan Street, P.O. Box 3011, Milwaukee, Wisconsin 53201-
3011.
DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
The Company is an open-end management investment company. The following
policies supplement the Fund's respective investment objectives and policies as
set forth in the Prospectus.
Portfolio Transactions
----------------------
Subject to the general supervision of the Board of Directors, Firstar
Investment Research & Management Company, LLC ("FIRMCO" or the "Adviser") is
responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for the Fund.
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period by
the monthly average value of the portfolio securities owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Fund to receive favorable tax
treatment. Portfolio turnover will not be a limiting factor in making portfolio
decisions, and the Fund may engage in short-term trading to achieve its
investment objective. Generally, a high portfolio turnover rate results in
increased transaction costs and higher taxes paid by the Fund's shareholders. In
addition a high rate of portfolio turnover may result in the realization of a
larger amount of capital gains which, when distributed to the Fund's
shareholders, are taxable to them.
2
<PAGE>
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 will normally deal directly with dealers who make a
market in the securities involved except in those circumstances where better
prices and execution are available elsewhere or as described below.
The Fund may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Fund will engage in this practice, however, only when the Adviser in its
sole discretion believes such practice to be in the Fund's interest.
For the fiscal years ended March 31, 2000 and 1999, the Predecessor Fund paid
brokerage commissions as follows:
2000 1999
---- ----
$45,919 $94,143.88
None of the brokerage commissions were paid to affiliates of the Company, the
Adviser, or the Administrator.
The Advisory Agreement between the Company and the Adviser provides that,
in executing portfolio transactions and selecting brokers or dealers, the
Adviser will seek to obtain the best overall terms available. In assessing the
best overall terms available for any transaction, the Adviser shall consider
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, and the reasonableness of the commissions, if any, both
for the specific transaction and on a continuing basis. In addition, the
Agreement authorizes the Adviser to cause the Fund to pay a broker-dealer which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker-dealer for effecting the same transaction,
provided that the Adviser determines in good faith that such commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either the particular
transaction or the overall responsibilities of the Adviser to the Fund. Such
brokerage and research services might consist of reports and statistics relating
to specific companies or industries, general summaries of groups of stocks or
bonds and their comparative earnings and yields, or broad overviews of the
stock, bond and government securities markets and the economy.
3
<PAGE>
Supplementary research information so received is in addition to, and not
in lieu of, services required to be performed by the Adviser and does not reduce
the advisory fees payable to it by the Fund. The Directors will periodically
review the commissions paid by the Fund to consider whether the commissions paid
over representative periods of time appear to be reasonable in relation to the
benefits inuring to the Fund. It is possible that certain of the supplementary
research or other services received will primarily benefit one or more other
investment companies or other accounts for which investment discretion is
exercised. Conversely, the Fund may be the primary beneficiary of the research
or services received as a result of portfolio transactions effected for such
other account or investment company.
Portfolio securities will not be purchased from or sold to (and savings
deposits will not be made in and repurchase and reverse repurchase agreements
will not be entered into with the Adviser, Quasar Distributors, LLC (the
"Distributor") or an affiliated person of any of them (as such term is defined
in the Investment Company Act of 1940, as amended (the "1940 Act")) acting as
principal. In addition, the Fund will not purchase securities during the
existence of any underwriting or selling group relating thereto of which the
Distributor or their 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 Fund 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 Fund. When a purchase or sale of the same security is made at
substantially the same time on behalf of the 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 the 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 the Fund with those to be sold or purchased for other
investment companies or accounts in executing transactions.
INVESTMENT STRATEGIES AND RISKS
Ratings. The ratings of Standard & Poor's Rating Group ("Standard &
-------
Poor's"), Moody's Investors Service, Inc. ("Moody's") and other nationally
recognized rating agencies represent their opinions as to the quality of debt
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality, and debt securities with the same maturity,
interest rate and rating may have different yields while debt securities of the
same maturity and interest rate with different ratings may have the same yield.
The payment of principal and interest on most debt securities purchased by
the Fund will depend upon the ability of the issuers to meet their obligations.
An issuer's obligations under its debt securities are subject to the provisions
of bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal
4
<PAGE>
or interest, or both, or imposing other constraints upon enforcement of such
obligations. The power or ability of an issuer to meet its obligations for the
payment of interest on, and principal of, its debt securities may be materially
adversely affected by litigation or other conditions.
Subsequent to its purchase by the Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Adviser will consider such an event in determining
whether the Fund should continue to hold the security. For a more detailed
description of ratings, see Appendix A.
Equity Securities. The Fund may invest in common stock, preferred stock
-----------------
and common stock equivalents (such as convertible preferred stock and
convertible debentures) of real estate related companies (including real estate
investment trusts ("REITs")) and other companies. Convertible preferred stock is
preferred stock that can be converted into common stock pursuant to its terms.
Convertible debentures are debt instruments that can be converted into common
stock pursuant to their terms. The Adviser intends to invest only in convertible
debentures rated A or higher by Standard & Poor's or Moody's or, if unrated, are
deemed to be of comparable quality by the Adviser. The Fund may hold warrants
and rights issued in conjunction with common stock, but in general will sell any
such warrants or rights as soon as practicable after they are received. Warrants
are options to purchase equity securities at a specified price valid for a
specific time period. Rights are similar to warrants, but normally have a short
duration and are distributed by the issuer to its shareholders.
Corporate Debt Securities. Corporate debt securities are bonds or notes
-------------------------
issued by corporations and other business organizations, including business
trusts, in order to finance their credit needs. Corporate debt securities
include commercial paper which consists of short-term (usually from one to two
hundred seventy days) unsecured promissory notes issued by corporations in order
to finance their current operations. Corporate debt securities are subject to
the risk that the company may not be able to make interest and principal
payments when due. In addition, these debt securities may decrease in value when
interest rates rise. This interest rate risk increases with debt securities of
longer maturities. Under normal circumstances, the Fund may invest up to 5% of
its net assets in corporate bonds and notes. The Fund intends to invest only in
fixed income securities rated A or higher by Moody's or Standard & Poor's or, if
unrated, are deemed to be of comparable quality by the Adviser.
Securities Lending. The Fund may lend its portfolio securities to
------------------
unaffiliated domestic broker/dealers and other institutional investors pursuant
to agreements requiring that the loans, which may be long-term or short-term, be
secured by collateral equal in value to at least the market value of the
securities loaned in order to increase return on portfolio securities.
Collateral for such loans may include cash, securities of the U.S. government,
its agencies or instrumentalities, or an irrevocable letter of credit issued by
a bank which meets the investment standards stated below under "Money Market
Instruments," or any combination thereof. There may be risks of delay in
receiving additional collateral or in recovering the securities loaned or even a
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the
Adviser to be of good standing and when, in the Adviser's judgment, the income
to be earned from the loan justifies the attendant risks. When the Fund lends
its securities, it continues to receive interest or dividends
5
<PAGE>
on the securities loaned and may simultaneously earn interest on the investment
of the cash collateral which will be invested in readily marketable, high-
quality, short-term obligations. Although voting rights, or rights to consent,
attendant to securities on loan pass to the borrower, such loans may be called
at any time and will be called so that the securities may be voted by the Fund
if a material event affecting the investment is to occur. In accordance with
current SEC policies, the Fund is currently limiting its securities lending to
33-1/3% of the value of its total assets (including the value of the collateral
for the loans) at the time of the loan.
Securities lending arrangements with broker/dealers and other institutional
investors 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 Fund 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,
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.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Although the Fund will invest in money market obligations
of foreign banks or foreign branches of U.S. banks only where the Adviser
determines the instrument to present minimal credit risks, such investments may
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase, and investments by the Fund in the
obligations of foreign banks and foreign branches of U.S. banks will not exceed
25% of the Fund's total assets at the time of purchase. The Fund may also make
interest-bearing savings deposits in commercial and savings banks in amounts not
in excess of 5% of its net assets.
Repurchase Agreements. The Fund may agree to purchase securities from
---------------------
financial institutions subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). During the term of the
agreement, the Adviser will continue to monitor the creditworthiness of the
seller and will require the seller to maintain the value of the securities
subject to the agreement at not less than 102% of the repurchase price. Default
or bankruptcy of the seller would, however, expose the Fund to possible loss
because of adverse market action or delay in connection with the disposition of
the underlying securities. The securities held subject to a repurchase
agreement may have stated maturities exceeding one year, provided the repurchase
agreement itself matures in less than one year.
The Fund intends to enter into repurchase agreements only with banks with
assets of $1 billion or more and registered securities dealers determined by the
Adviser to be creditworthy.
6
<PAGE>
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by the Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement). Securities subject
to repurchase agreements will be held by the Fund's custodian or in the Federal
Reserve/Treasury book-entry system or other authorized securities depository.
Repurchase agreements are considered to be loans under the 1940 Act.
Investment Companies. The Fund 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 Fund within the limits prescribed by the 1940 Act. See "Investment
Limitations" below. As a shareholder of another investment company, the Fund
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. In addition,
investment companies in which the Fund may invest may impose a sales or
distribution charge in connection with the purchase or redemption of their
shares as well as other types of commissions or charges. These expenses would be
in addition to the advisory and other expenses that the Fund bears directly in
connection with their own operations.
U.S. Government Obligations. The Fund 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 Fund 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 ("GNMA"),
Federal National Mortgage Association ("FNMA"), General Services Administration,
Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal Intermediate Credit Banks, Maritime Administration, and Resolution Trust
Corp.
Obligations of certain agencies and instrumentalities of the U.S.
Government, such as GNMA, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the Export-Import Bank of the United States,
are supported by the right of the issuer to borrow from the Treasury; others,
such as those of the FNMA, are supported by the discretionary authority of the
U.S. Government to purchase the agency's obligations; still others, such as
those of the FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
Under normal circumstances, the Fund may invest up to 5% of its net assets
in U.S. government obligations.
Foreign Securities. The Fund may invest up to 10% of its net assets at the
------------------
time of purchase in foreign equity securities including REITs. Purchases of
foreign securities are usually made in foreign currencies and, as a result, the
Fund may incur currency conversion costs and may be affected favorably or
unfavorably by changes in the value of foreign currencies against
7
<PAGE>
the U.S. dollar. In addition, there may be less information publicly available
about a foreign company than about a U.S. company, and foreign companies are not
generally subject to accounting, auditing and financial reporting standards and
practices comparable to those in the U.S. Other risks associated with
investments in foreign securities include changes in restrictions on foreign
currency transactions and rates of exchanges, changes in the administrations or
economic and monetary policies of foreign governments, the imposition of
exchange control regulations, the possibility of expropriation decrees and other
adverse foreign governmental action, the imposition of foreign taxes, less
liquid markets, less government supervision of exchanges, brokers and issuers,
difficulty in enforcing contractual obligations, delays in settlement of
securities transactions and greater price volatility. In addition, investing in
foreign securities will generally result in higher commissions than investing in
similar domestic securities.
Option Transactions. The Fund may engage in option transactions involving
-------------------
individual securities and stock indexes. An option involves either (a) the right
or the obligation to buy or sell a specific instrument at a specific price until
the expiration date of the option, or (b) the right to receive payments or the
obligation to make payments representing the difference between the closing
price of a stock index and the exercise price of the option expressed in dollars
times a specified multiple until the expiration date of the option. Options are
sold (written) on securities and stock indexes. The purchaser of an option on a
security pays the seller (the writer) a premium for the right granted but is not
obligated to buy or sell the underlying security. The purchaser of an option on
a stock index pays the seller a premium for the right granted, and in return the
seller of such an option is obligated to make the payment. A writer of an option
may terminate the obligation prior to expiration of the option by making an
offsetting purchase of an identical option. Options are traded on organized
exchanges and in the over-the-counter market. To cover the potential obligations
involved in writing options, the Fund will either (a) own the underlying
security, or in the case of an option on a market index, will hold a portfolio
of stocks substantially replicating the movement of the index, or (b) the Fund
will segregate with the custodian high grade liquid debt obligations sufficient
to purchase the underlying security or equal to the market value of the stock
index option, marked to market daily.
The purchase and writing of options requires additional skills and
techniques beyond normal portfolio management, and involves certain risks. The
purchase of options limits the Fund's potential loss to the amount of the
premium paid and can afford the Fund the opportunity to profit from favorable
movements in the price of an underlying security to a greater extent than if
transactions were effected in the security directly. However, the purchase of an
option could result in the Fund losing a greater percentage of its investment
than if the transaction were effected directly. When the Fund writes a call
option, it will receive a premium, but it will give up the opportunity to profit
from a price increase in the underlying security above the exercise price as
long as its obligation as a writer continues, and it will retain the risk of
loss should the price of the security decline. When the Fund writes a put
option, it will assume the risk that the price of the underlying security or
instrument will fall below the exercise price, in which case the Fund may be
required to purchase the security or instrument at a higher price than the
market price of the security or instrument. In addition, there can be no
assurance that the Fund can effect a closing transaction on a particular option
it has written. Further, the total
8
<PAGE>
premium paid for any option may be lost if the Fund does not exercise the
option, or, in the case of over-the-counter options, the writer does not perform
its obligations.
Convertible Securities. The Fund may hold convertible securities, subject
----------------------
to its investment limitations. 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, the
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.
Investment Limitations. The Fund is subject to the investment limitations
----------------------
enumerated below which may be changed with respect to the Fund only by a vote of
the holders of a majority of the Fund's outstanding shares (as defined under
"Miscellaneous" below).
1. Borrowing Money. The Fund will not borrow money, except (a) from a
---------------
bank, provided that immediately after such borrowing there is an asset coverage
of 300% for all borrowings of the Fund; or (b) from a bank or other persons for
temporary purposes only, provided that such temporary borrowings are in an
amount not exceeding 5% of the Fund's total assets at the time when the
borrowing is made. This limitation does not preclude the Fund from entering
into reverse repurchase transactions, provided that the Fund has an asset
coverage of 300% for all borrowings and repurchase commitments of the Fund
pursuant to reverse repurchase transactions.
2. Senior Securities. The Fund will not issue senior securities. This
-----------------
limitation is not applicable to activities that may be deemed to involve the
issuance or sale of a senior security by the Fund, provided that the Fund's
engagement in such activities is (a) consistent with or permitted by the 1940
Act, the rules and regulations promulgated thereunder or interpretations of the
SEC or its staff and (b) as described in the Prospectus and this Statement of
Additional Information.
3. Underwriting. The Fund will not act as underwriter of securities
------------
issued by other persons. This limitation is not applicable to the extent that,
in connection with the disposition of portfolio securities (including restricted
securities), the Fund may be deemed an underwriter under certain federal
securities laws.
4. Real Estate. The Fund will not purchase or sell real estate. This
-----------
limitation is not applicable to investments in marketable securities which are
secured by or represent interests in real estate. This limitation does not
preclude the Fund from investing in mortgage-related securities or investing in
companies engaged in the real estate business or that have a significant portion
of their assets in real estate (including real estate investment trusts).
9
<PAGE>
5. Commodities. The Fund will not purchase or sell commodities unless
-----------
acquired as a result of ownership of securities or other investments. This
limitation does not preclude the Fund from purchasing or selling options or
futures contracts, from investing in securities or other instruments backed by
commodities or from investing in companies which are engaged in a commodities
business or have a significant portion of their assets in commodities.
6. Loans. The Fund will not make loans to other persons, except (a) by
-----
loaning portfolio securities, (b) by engaging in repurchase agreements, or (c)
by purchasing nonpublicly offered debt securities. For purposes of this
limitation, the term "loans" shall not include the purchase of a portion of an
issue of publicly distributed bonds, debentures or other securities.
7. Concentration. The Fund will not invest 25% or more of its total
-------------
assets in any particular industry other than the real estate industry. This
limitation is not applicable to investments in obligations issued or guaranteed
by the U.S. government, its agencies and instrumentalities or repurchase
agreements with respect thereto.
With respect to the percentages adopted by the Board of Directors as
maximum limitations on the Company's investment policies and limitations, an
excess above the fixed percentage will not be a violation of the policy or
limitation unless the excess results immediately and directly from the
acquisition of any security or the action taken. This paragraph does not apply
to the borrowing policy set forth in paragraph 1 above.
Notwithstanding any of the foregoing limitations, any investment company,
whether organized as a trust, association or corporation, or a personal holding
company, may be merged or consolidated with or acquired by the Company, provided
that if such merger, consolidation or acquisition results in an investment by
the Fund in the securities of any issuer prohibited by said paragraphs, the
Company shall, within ninety days after the consummation of such merger,
consolidation or acquisition, dispose of all of the securities of such issuer so
acquired or such portion thereof as shall bring the total investment therein
within the limitations imposed by said paragraphs above as of the date of
consummation.
The following additional investment limitations with respect to the
Fund are not fundamental and may be changed by the Board of Directors without
shareholder approval:
1. Pledging. The Fund will not mortgage, pledge, hypothecate or in any
--------
manner transfer, as security for indebtedness, any assets of the Fund except as
may be necessary in connection with borrowings described in limitation (1)
above. Margin deposits, security interests, liens and collateral arrangements
with respect to transactions involving options, futures contracts, short sales
and other permitted investments and techniques are not deemed to be a mortgage,
pledge or hypothecation of assets for purposes of this limitation.
2. Borrowing. The Fund will not purchase any security while borrowings
---------
(including reverse repurchase agreements) representing more than 5% of its total
assets are outstanding. The Fund will not engage in borrowing or enter into
reverse repurchase agreements.
10
<PAGE>
3. Margin Purchases. The Fund will not purchase securities or evidences
----------------
of interest thereon on "margin." This limitation is not applicable to short-
term credit obtained by the Fund for the clearance of purchases and sales or
redemption of securities, or to arrangements with respect to transactions
involving options, futures contracts, short sales and other permitted
investments and techniques.
4. Options. The Fund will not purchase or sell puts, calls, options or
-------
straddles, except as described in the Prospectus and this Statement of
Additional Information.
5. Short Sales. The Fund will not effect short sales of securities.
-----------
6. Illiquid Securities. The Fund will not purchase securities that are
-------------------
restricted as to resale or otherwise illiquid. For this purpose, illiquid
securities generally include securities which cannot be disposed of within seven
days in the ordinary course of business without taking a reduced price. Certain
Rule 144A securities may be considered liquid; however the Fund has no present
intention of investing in such securities.
7. Money Market Funds. The Fund will not purchase shares of any money
------------------
market fund if immediately after such purchase more than 3 percent of the total
outstanding shares of the money market fund would be owned by the Fund and its
affiliates.
Although the foregoing investment limitations would permit the Fund to
invest in futures contracts, the Fund does not intend to engage in such
transactions. Prior to engaging in such transactions, the Fund would add
appropriate disclosure concerning its investments in such instruments in the
Prospectus and this Statement of Additional Information.
NET ASSET VALUE
The net asset value per share of the Fund is calculated separately for
Retail A, Retail B, Y and Institutional Shares by adding the value of all
portfolio securities and other assets belonging to the 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 the Fund consist of the consideration received upon the issuance of
shares of the Fund together with all net investment income, realized
gains/losses and proceeds derived from the investment thereof, including any
proceeds from the sale of such investments, any funds or payments derived from
any reinvestment of such proceeds, and a portion of any general assets of the
Company not belonging to a particular investment portfolio. The liabilities that
are charged to the Fund are borne by each share of the Fund, except for certain
payments under the Fund's Distribution and Service Plans and Service Plans
applicable to Retail A, Retail B, Institutional and Y Shares. Subject to the
provisions of the Articles of Incorporation, determinations by the Board of
Directors as to the direct and allocable liabilities, and the allocable portion
of any general assets, with respect to the Fund are conclusive.
Net asset value for purposes of pricing purchase and redemption orders for
the Fund is determined as of the close of regular trading hours on the New York
Stock Exchange (the
11
<PAGE>
"Exchange"), normally 3:00 p.m. Central Time, on each day the Exchange is open
for trading. Currently, the Exchange observes the following holidays: New Year's
Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day
(observed), Independence Day (observed), Labor Day, Thanksgiving Day and
Christmas.
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 the Fund's portfolio securities that are traded on stock exchanges
outside the United States are based upon the price on the exchange as of the
close of business of the exchange immediately preceding the time of valuation,
except when an occurrence subsequent to the time a value was so established is
likely to have changed such value. Exchange-traded securities for which there
were no transactions are valued at the current bid prices for the Fund.
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 the Fund is not calculated. The calculation of the net asset
value of the Fund may not take place contemporaneously with the determination of
the prices of portfolio securities used in such calculation. Events affecting
the values of portfolio securities that occur between the time their prices are
determined and 3:00 P.M. Central time, and at other times, may not be reflected
in the calculation of net asset value of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Computation of Offering Price of the Fund. An illustration of the
-----------------------------------------
computation of the initial offering price per share of the Retail A Shares of
the Fund based on the value of the assets of the Predecessor Fund and number of
outstanding securities at September 30, 2000 for the Fund, as follows:
Net Assets (000s) $ 90
Number of Shares Outstanding (000s) 12
Net Asset Value Per Share $7.38
Sales Charge 5.00% of offering price
(5.28% of net asset value per share) $0.39
Public Offering Price $7.77
Shareholder organizations or institutions may be paid by the Fund 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.
12
<PAGE>
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC. (The Fund may also suspend or postpone the recording
of the transfer of its shares upon the occurrence of any of the foregoing
conditions.)
The Company's Articles of Incorporation permit the Fund to redeem an
account involuntarily, upon sixty days' notice, if redemptions cause the
account's net asset value to remain at less than $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 Prospectus under "Redemption
of Shares," the Fund may redeem shares involuntarily when appropriate under the
1940 Act, such as to reimburse the Fund 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 Funds, 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 in equity Fund having a current value of $1,000, the sales charge applicable
to the subsequent purchase would be reduced to 3.50% 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 such
13
<PAGE>
Shares were purchased at one time. 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
at 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 he or she
purchases Shares.
Exchange Privilege. By use of the exchange privilege, shareholders
------------------
authorize the Fund's 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, F and G 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 the 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 Retail A Shares of any
other Fund offered by the Company.
B. Retail A Shares of the Fund or Retail A shares of a Firstar Funds money
market fund ("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 Retail A Shares acquired through reinvestment of dividends or
distributions on such Retail A 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 of the Fund acquired pursuant to an exchange
transaction will continue to be subject to a contingent deferred sales charge.
However, Retail B Shares of the
14
<PAGE>
Fund that have been acquired through an exchange of Retail B Shares may be
exchanged for Retail B Shares of any other Fund offered by the Company 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
Retail B Shares originally held will be added to the holding period of the
Retail B Shares acquired through exchange.
D. Retail B Shares of the Fund 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 Retail B Shares originally held will be added to the holding
period of the MMF Shares acquired through exchange. If the shareholder
subsequently exchanges the MMF Shares back into Retail B Shares of the Fund, the
holding period 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 the Fund, the contingent deferred sales charge applicable to the accumulated
Retail B Shares and MMF shares will be charged.
E. Retail A Shares of the Fund may be exchanged without a sales load for
Retail A Shares of any other Fund that is offered by the Company without a sales
load.
F. Institutional Shares of the Fund may be exchanged for Institutional
Shares of any other Fund offered by the Company.
G. Y Shares of the Fund may be exchanged for Y Shares of any other Fund
offered by the Company. Y Shares of the Fund may be exchanged for shares of the
Institutional Money Market Fund or Institutional Shares of any other money
market fund offered by the Company.
Except as stated above, a sales load will be imposed when shares of the
Fund that were purchased or otherwise acquired without a sales load are
exchanged for Retail A Shares of another Fund offered by the Company which are
sold with a sales load.
Retail A Shares of the Fund will be exchanged for Institutional Shares of
the Fund if the shares are registered in the name of an employer-sponsored
qualified retirement plan administered by Firstar and assets of which 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 the Fund that are being exchanged 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.
15
<PAGE>
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 Shares of the Fund
-------------------------------------------
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 Fund 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 any Roth IRA of the account owner 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.
16
<PAGE>
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 Fund. Any person who wishes to establish a
retirement plan account may do so by contacting Firstar Investor Services at 1-
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 Shares of the Fund offer a Periodic Investment Plan whereby a
shareholder may automatically make purchases of shares of the Fund on a regular,
monthly basis ($50
17
<PAGE>
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 Shares. The Periodic Investment Plan must be implemented with a financial
institution that is a member of the Automated Clearing House. No service fee is
currently charged by the Fund for participation in the Periodic Investment Plan.
A $20 fee will be imposed by the transfer agent if sufficient funds are not
available in the 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 Shares of the Fund permit shareholders to effect ConvertiFund(R)
transactions, an automated method by which a Retail A or Retail B shareholder
may invest proceeds from one Retail A or Retail B Share account to another
Retail A or Retail B Share account of the Company, as the case may be. 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.
The Retail Shares of the Fund offer shareholders a Systematic Withdrawal
Plan, which allows a shareholder who owns shares of the 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 the Fund may, in the discretion of the Fund, be made
in the form of securities that are permissible investments for the Fund as
described in its Prospectus. For further information about this form of
payment, contact Firstar Investor Services at 1-800-677-FUND. In connection
with an in-kind securities payment, the Fund will require, among other things,
that the securities be valued on the day of purchase in accordance with the
pricing
18
<PAGE>
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 an indefinite number of full and fractional shares of common stock, $.0001
par value per share, which is divided into 200 classes, numbered consecutively 1
through 200. Classes 1 through 36 have been designated as individual portfolios
of the Company and each such class is divided into series. The remaining
classes will be reserved for future issuance. Shares designated Class 34
represent interests in the Fund and are divided into four series designated as
Institutional Shares, Retail A Shares, Retail B Shares and Y Shares (each, a
"Series"). Each Series consists of the number of shares set forth in the table
below:
<TABLE>
<CAPTION>
Class-Series of Number of Authorized
Common Stock Shares in Each Series
------------ ---------------------
<S> <C>
34-Institutional 100 Million
34-Y 100 Million
34-A 100 Million
34-B 100 Million
</TABLE>
In the event of a liquidation or dissolution of the Company or the Fund,
shareholders of the Fund would be entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based upon
the relative assets of the Company's respective investment portfolios, of any
general assets not belonging to any particular portfolio which are available for
distribution. Subject to the allocation of certain costs, expenses, charges and
reserves attributed to the operation of a particular series as described in the
Prospectus, shareholders of the Fund are entitled to participate equally in the
net distributable assets of the Fund on liquidation, based on the number of
shares of the Fund that are held by each shareholder.
Shareholders of each series of the Fund are entitled to one vote for each
full share held and proportionate fractional votes for fractional shares held.
Shareholders of the Fund, as well as those of any other investment portfolio
offered by the Company, will vote together in the aggregate and not separately
on a portfolio-by-portfolio basis, except as otherwise required by law or when
the Board of Directors determines that the matter to be voted upon affects only
the interests of the 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
19
<PAGE>
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 the Fund (such as a
Distribution and Service Plan applicable to Retail A or Retail B Shares) but not
the other series of the Fund, only the affected series will be entitled to vote.
Each Institutional, Retail A, Retail B or Y Share of the Fund represents an
equal proportionate interest with other Institutional, Retail A, Retail B or Y
Shares in the Fund, respectively. 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 Fund do not have preemptive rights.
When issued for payment as described in the Prospectus and this SAI, shares
of the Fund will be fully paid and non-assessable by the Company, except as
provided in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law, as
amended, which in general provides for personal liability on the part of a
corporation's 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
The 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 the 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
20
<PAGE>
dividends, although corporate shareholders could be eligible for the dividends
received deduction. Moreover, if the Fund were to fail to make sufficient
distributions in a year, the Fund would be subject to corporate income taxes
and/or excise taxes in respect of the shortfall or, if the shortfall is large
enough, the Fund could be disqualified as a regulated investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of their
ordinary taxable income for the calendar year and capital gain net income
(excess of capital gains over capital losses) for the one year period ending
October 31 of such calendar year and 100% of any such amounts that were not
distributed in the prior year. The Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by the Fund on December 31
of such year if such dividends are actually paid during January of the following
year.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends or gross sale proceeds paid to
any shareholder who (i) has failed to provide a correct tax identification
number, (ii) is subject to back-up withholding by the Internal Revenue Service
for failure to properly include on his or her return payments of taxable
interest or dividends, or (iii) has failed to certify to the Fund that he or she
is not subject to back-up withholding when required to do so or that he or she
is an "exempt recipient."
21
<PAGE>
MANAGEMENT OF THE COMPANY
The business and affairs of the Fund 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
Name, Address & Age the Company Other Affiliations
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Glen R. Bomberger Director Executive Vice President, Chief Financial
One Park Plaza Officer and Director, A.O. Smith Corporation (a
11270 West Park Place diversified manufacturing company) since January
Milwaukee, WI 53224-3690 1987; Director of companies affiliated with A.O.
Age: 62 Smith Corporation; Director, Smith Investment
Company; Director of companies affiliated with
Smith Investment Company.
Bronson J. Haase* Director President and CEO of Wisconsin Gas Company,
6948 Wildwood Point WICOR Energy, FieldTech and Vice President of
Chenequa, WI 53029 WICOR, Inc. from 1998 to October 2000; President
Age: 56 and CEO of Ameritech - Wisconsin (formerly
Wisconsin Bell) from 1993 to 1998; President of
Wisconsin Bell Communications from 1993 to 1998;
Board of Directors, The Marcus Corporation;
Trustee of Roundy Foods; Chairman of the
Wisconsin Utilities Association.
Dawn M. Hornback Trustee of Firstar Stellar Funds from February
c/o Firstar Corporation 1997 to December 2000; Founder, President and
425 Walnut Street Chief Executive Officer of Observatory Group,
Cincinnati, OH 45202 Inc. (brand identity firm) since August 1990.
Age: 36
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Position(s) held with Principal Occupations During Past 5 Years and
Name, Address & Age the Company Other Affiliations
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Joseph J. Hunt Director of Mercantile Mutual Funds, Inc. since
Iron Workers International 1994; Treasurer of the International Association
Union of Bridge, Structural and Ornamental Iron
1750 New York Ave., N.W. Workers (IABSOIW) (international labor union)
Suite 400 since 1998; General Vice-President of IABSOIW
Washington, D.C. 20006 from 1994 to 1998.
Age: 57
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 from 1999 to 2000; Vice-President, FIRMCO from
Milwaukee, WI 53202 1994 to 1999.
Age: 40
Jerry G. Remmel Director Retired; Vice President, Treasurer and Chief
16650A Lake Circle Financial Officer of Wisconsin Energy
Brookfield, WI 53005 Corporation from 1994 to 1996; Treasurer of
Age: 68 Wisconsin Electric Power Company from 1973 to
1996; Director of Wisconsin Electric Power
Company from 1989 to 1996; Senior Vice
President, Wisconsin Electric Power Company from
1988 to 1994; Chief Financial Officer, Wisconsin
Electric Power Company from 1983 to 1996; Vice
President and Treasurer, Wisconsin Electric
Power Company from 1983 to 1989.
Richard K. Riederer Director President and Chief Executive Officer of Weirton
400 Three Springs Drive Steel since 1995; Director of Weirton Steel
Weirton, WV 26062-4989 since 1993; Executive Vice President and Chief
Age: 56 Financial Officer, Weirton Steel January from
1994 to 1995; Vice President of Finance and
Chief Financial Officer, Weirton Steel January
from 1989 to 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.
James M. Wade Chairman of the Board Retired; Vice President and Chief Financial
2802 Wind Bluff Circle Officer, Johnson Controls, Inc. (a controls
Wilmington, NC 28409 manufacturing company) from January 1987 to May
Age: 56 1991.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Position(s) held with Principal Occupations During Past 5 Years and
Name, Address & Age the Company Other Affiliations
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Jerry V. Woodham N/A Chairman of the Board, President and Director of
St. Louis University Mercantile Mutual Funds, Inc. since 1982;
Fitzgerald Hall Treasurer, St. Louis University since August
3500 Lindell Blvd. 1996; Treasurer, Washington University from 1981
St. Louis, MO 63131 to 1995.
Age: 57
Marian Zentmeyer* Director Chief Equity Investment Officer and Director,
777 E. Wisconsin Ave. FIRMCO, since 1998; Senior Vice President and
Suite 800 Senior Portfolio Manager, FIRMCO from 1995 to
Milwaukee, WI 53202 1998.
Age 43
William H. Zimmer, III Trustee and member of Audit Committee of Firstar
c/o Firstar Corporation Stellar Funds from February 1996 to December
425 Walnut Street 2000, Senior Vice President and Chief Financial
Cincinnati, OH 42502 Officer, ecampus.com since September 1999
Age: 46 (e-commerce); Executive Vice-President and Chief
Financial Officer, Advanced Communications
Group, Inc. since December 1998; Corporate Vice
President, Cincinnati Bell, Inc. from 1997 to
1998; Assistant Treasurer, Cincinnati Bell, Inc.
from 1988 to 1991.
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th & Cherry Streets
Philadelphia, PA 19103
Age: 57
Laura J. Rauman Vice President Senior Vice President, FIRMCO since 1995; Vice
777 E. Wisconsin Avenue, President of Mercantile Mutual Funds since
Suite 800 April, 2000; Senior Auditor, Price Waterhouse,
Milwaukee, WI 53202 LLP, prior thereto.
Age: 31
Joseph C. Neuberger Assistant Treasurer Senior Vice President, Firstar Mutual Fund
615 E. Michigan Street Services, LLC since 1994; Manager, Arthur
Milwaukee, WI 53202 Andersen LLP, prior thereto.
Age: 38
</TABLE>
* Messrs. Haase and Laning and Ms. Zentmyer are considered by the Company to be
"interested persons" of the Company as defined in the 1940 Act.
The following table presents certain information for the fiscal year ended
October 31, 1999 about the fees received by the directors of the Company as
directors and/or officers of the Company:
24
<PAGE>
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
AGGREGATE BENEFITS ANNUAL FROM COMPANY
NAME OF COMPENSATION ACCRUED AS BENEFITS AND FUND
PERSON/ FROM THE PART OF FUND UPON COMPLEX* PAID
-------
POSITION COMPANY EXPENSES RETIREMENT TO 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 $15,000
Director
Dawn M. Hornback++ $ 0 $0 $0 $ 0
Director
Joseph J. Hunt++ $ 0 $0 $0 $ 0
Director
Jerry V. Woodham++ $ 0 $0 $0 $ 0
Director
William H. Zimmer++ $ 0 $0 $0 $ 0
Director
Bruce Laning++ $ 0 $0 $0 $ 0
Director
Marian Zentmyer++ $ 0 $0 $0 $ 0
Director
</TABLE>
___________________
*The "Fund Complex" includes only the Company. The Company is comprised of
35 separate portfolios.
+ Includes $15,000 which Mr. Bomberger elected to defer under the Company's
deferred compensation plan.
++ Mmes. Hornback and Zentmyer and Messrs. Huntz, Wooham and Zimmer were elected
as Directors on November 8, 2000. Mr. Laning was appointed a Director in
February 2000.
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
25
<PAGE>
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. Zentmyer, Ms.
Rauman and Mr. Neuberger receive no fees from the Company for their services as
directors and/or officers although FIRMCO, of which Mr. Laning, Ms. Zentmyer and
Ms. Rauman are President, Chief Equity Investment Officer and Senior Vice
President, 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 the 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, a Wisconsin limited liability company and subsidiary of Firstar
Corporation, a bank holding company, became the investment adviser to the Fund
as of December 11, 2000.
FIRMCO is entitled to be paid contractual fees computed daily and paid
monthly, at the annual rate (as a percentage of such Fund's average daily net
assets) as follows:
----------------------
Amount
Before Waivers
--------------
----------------------
0.75%
----------------------
FIRMCO has contractually agreed to waive fees and reimburse expenses for Retail
A, Retail B, Y and Institutional Shares for the Fund until October 31, 2001.
Prior to November 24, 2000, investment advisory services for the
Predecessor Fund were provided by Firstar Bank, N.A., also a subsidiary of
Firstar Corporation. For the fiscal years ended March 31, 2000, 1999 and 1998,
the Predecessor Fund paid Firstar Bank, N.A. advisory fees (after waivers), as
follows:
2000 1999 1998
---- ---- ----
$229,393 $281,358 $214,090/1/
_______________
/1/ For the period from June 24, 1997 (commencement of operations) to March 31,
1998.
26
<PAGE>
FIRMCO is also the investment adviser to the Money Market Fund,
Institutional Money Market Fund, U.S. Treasury Money Market Fund, U.S.
Government Money Market Fund, Tax-Exempt Money Market Fund, Ohio Tax-Exempt
Money Market Fund, Missouri Tax-Exempt Bond Fund, Strategic Income Fund, Science
& Technology Fund, Large Cap Growth Fund, Relative Value Fund, Equity Income
Fund, Small Cap Index Fund, Global Equity Fund, Short-Term Bond Market Fund,
Special Growth Fund, Bond IMMDEXtm Fund, Equity Index Fund, Growth Fund,
Intermediate Bond Market Fund, Balanced Income Fund, Balanced Growth Fund,
National Municipal Bond Fund, Emerging Growth Fund, MicroCap Fund, MidCap Index
Fund, International Equity Fund, Core International Equity Fund, Small Cap
Aggressive Growth Fund, National Municipal Bond Fund, Aggregate Bond Fund and
U.S. Government Securities 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 the 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.
Under its Investment Advisory Agreement, the Adviser is not liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of such Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its duties or from
its reckless disregard of its duties and obligations under the Agreement.
Administration and Distribution Services
----------------------------------------
Firstar Mutual Fund Services, LLC serves as administrator (the
"Administrator") to the Company. 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 Company's operations. The following
administrative services are also provided by the Administrator: compile data
for and prepare, with respect to the Company, 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 the Fund's
shareholders and Registration Statements for the Fund; monitor the Fund's
expense accruals and cause all appropriate expenses to be paid on proper
authorization from the Fund; monitor the Fund's status as a regulated investment
company under Subchapter M of the Code; maintain the Fund's fidelity bond as
required by the 1940 Act; and
27
<PAGE>
monitor compliance with the policies and limitations of the Fund as set forth in
the Prospectus and this 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 Fund 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.
Firstar Trust Company became Co-Administrator to the Company on September
1, 1994, and assigned its rights and obligations to Firstar Mutual Fund
Services, LLC on October 1, 1998. From January 1, 1995 until August 1, 2000,
B.C. Ziegler and Company served as co-administrator to the Company (together the
"Co-Administrators").
Prior to November 24, 2000, Unified Fund Services, Inc. ("Unified") served
as administrator, transfer agent and fund accountant to the Predecessor Fund.
Effective December 1, 2000, Firstar Mutual Fund Services, LLC serves as
administrator of the Predecessor Fund.
For the fiscal years ended March 31, 2000, 1999 and 1998, the Predecessor
Fund paid Unified administration and fund accounting fees (after waivers) as
follows:
2000 1999 1998
---- ---- ----
$66,953 $75,658 $29,253/1/
_____________
/1/ For the period from June 24, 1997 (commencement of operations) to March 31,
1998.
The Distributor provides distribution services for the Fund as described in
the Prospectus pursuant to a Distribution Agreement with the Fund under which
the Distributor, as agent, sells shares of the Fund on a continuous basis. The
Distributor has agreed to use its best efforts to solicit orders for the sale of
shares, although it is not obliged to sell any particular amount of shares. The
Distributor causes expenses to be paid for the cost of printing and distributing
prospectuses to persons who are not shareholders of the Fund (excluding
preparation and printing expenses necessary for the continued registration of
the Fund's shares) and of printing and distributing all sales literature.
Prior to December 11, 2000, Unified Management Corporation ("Unified")
served as distributor to the Predecessor Fund. Unified was obligated to sell
shares of the Predecessor Fund on a best efforts basis only against purchase
orders for the shares. Shares of the Predecessor Fund were offered to the
public on a continuous basis.
28
<PAGE>
Shareholder Organizations
-------------------------
Retail A Shares
---------------
As stated in the Prospectus, the Fund intends 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
Fund 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 the Fund; (ii) providing
information periodically to customers showing their share positions; (iii)
arranging for bank wires; (iv) responding to customer inquiries; (v) providing
sub-accounting with respect to shares beneficially owned by customers or the
information necessary for sub-accounting; (vi) forwarding 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 Fund. 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 Fund's Retail A Shares.
The Fund's arrangements with shareholder organizations under the agreements
are governed by two Plans (a Service Plan and a Rule 12b-1 Distribution and
Service Plan) for 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 Fund.
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 the 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 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
Fund's arrangements under the Plans and the purposes for which the expenditures
were made. In addition, the arrangements must be approved annually by a
majority
29
<PAGE>
of the Directors, including a majority of the Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) and have no direct or indirect
financial interest in such arrangements (the "Disinterested Directors").
Y Shares
--------
As stated in the Prospectus, the Fund intends to enter into agreements from
time to time with shareholder organizations providing for support services to
customers of the shareholder organizations who are the beneficial owners of Y
Shares of the Fund. Under the agreements, the Fund may pay shareholder
organizations up to 0.25% (on an annualized basis) of the average daily net
asset value of Y Shares beneficially owned by their customers. Support services
provided by shareholder organizations under their Service Agreements may
include: (i) processing dividend and distribution payments from the Fund; (ii)
providing information periodically to customers showing their share positions;
(iii) arranging for bank wires; (iv) responding to customer inquiries; (v)
providing sub-accounting with respect to shares beneficially owned by customers
or the information necessary for sub-accounting; (vi) forwarding 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 Fund. All fees paid under these agreements are borne
exclusively by the Fund's Y Shares.
The Fund believes that there is a reasonable likelihood that its
arrangements with shareholder organizations will benefit the Fund and the
holders of Retail A, Retail B or Y Shares as a way of allowing shareholder
organizations to participate with the Fund in the provision of support and
distribution services to customers of the shareholder organization who own
Retail A, Retail B or Y Shares. Any material amendment to the arrangements with
shareholder organizations under the respective 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 a
Distribution and Service Distribution and Service Plan with respect to the Fund
must be approved by the holders of a majority of the outstanding Retail A or
Retail B Shares of the Fund. So long as the Distribution and Service Plans are
in effect, the selection and nomination of the members of the Board of Directors
who are not "interested persons" (as defined in the 1940 Act) of the Fund will
be committed to the discretion of such Disinterested Directors.
Under the terms of their agreement with the Company, 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 wire of redemption proceeds may be billed directly to the
shareholder organization.
30
<PAGE>
Regulatory Matters. Conflict of interest restrictions may apply to the
------------------
receipt of compensation paid pursuant to a Service Agreement by the Fund to a
financial intermediary in connection with the investment of fiduciary funds in
the 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 Service
Agreements.
Shares of the Fund are not bank deposits, are neither endorsed by, insured
by, or guaranteed by, obligations of, nor otherwise supported by the FDIC, the
Federal Reserve Board, Firstar Bank, N.A. or FIRMCO, their affiliates or any
other bank, or any other governmental agency. An investment in the Fund
involves risks including possible loss of principal.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
Firstar Bank, N.A. serves as custodian of the Fund's assets. Under the
Custody Agreement, Firstar Bank, N.A. has agreed to (i) maintain a separate
account in the name of the Fund, (ii) make receipts and disbursements of money
on behalf of the Fund, (iii) collect and receive all income and other payments
and distributions on account of the Fund's portfolio investments, (iv) respond
to correspondence from shareholders, security brokers and others relating to its
duties, and (v) make periodic reports to the Company concerning the Fund's
operations. Firstar Bank, N.A. may, at its own expense, open and maintain a
custody account or accounts on behalf of the Fund with other banks or trust
companies, provided that Firstar 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, plus 0.01% of the Company's next $1 billion plus 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 the
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 Fund, (ii) make dividend and other distributions to
shareholders of the Fund, (iii) respond to correspondence by Fund shareholders
and others relating to its duties, (iv) maintain shareholder accounts, and (v)
make periodic reports to the Fund. 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 plus a 0.01% asset-based fee, and certain other transaction charges and
reimbursement for expenses.
In addition, the Fund has 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 Fund in compliance with the 1940 Act and to provide other
accounting services to the Fund. For its accounting services, Firstar Mutual
Fund Services, LLC is entitled to receive fees, payable monthly, at the
following annual
31
<PAGE>
rates of the market value of the Fund's assets -- $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.
Effective December 1, 2000, Firstar Mutual Fund Services, LLC, with
principal offices at 615 East Michigan Street Milwaukee, WI 53202, served as the
transfer agent and dividend disbursing agent to the Predecessor Fund. Prior to
November 24, 2000, Unified Fund Services, Inc., located at 431 North
Pennsylvania, Indianapolis, Indiana 46204, served as the Predecessor Fund's
transfer agent and dividend disbursing agent.
EXPENSES
Operating expenses of the Fund include taxes, interest, fees and expenses
of Directors and officers, SEC fees, state securities registration and
qualification fees, advisory fees, administrative fees, shareholder organization
fees (Retail A, Retail B and Y Shares only), charges of the custodian, 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 Fund also pays 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 Annual Report to Shareholders with respect to the Predecessor Fund for
the fiscal year ended March 31, 2000 was prepared by McCurdy & Associates, CPAs,
and has been filed with the SEC. The financial statements, notes thereto, and
Report of Independent Accountants in such Annual Report are incorporated by
reference into this Statement of Additional Information. The financial
statements and notes thereto in the Annual Report and Report of Independent
Accountants in such Annual Report are incorporated by reference in reliance upon
such report given upon the authority of McCurdy & Associates, CPAs as experts in
accounting and auditing.
The Semi-Annual Report to Shareholders with respect to the Predecessor
Funds for the six-month period ended September 30, 2000 has been filed with the
SEC. The financial statements and notes thereto in such Semi-Annual Report are
incorporated by reference into this Statement of Additional Information.
32
<PAGE>
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 Fund's Prospectus.
CODE OF ETHICS
The Company, Adviser and Distributor have adopted codes of ethics that
permit personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the Fund.
33
<PAGE>
PERFORMANCE CALCULATIONS
From time to time, the total return of the Retail A, Retail B, Y and
Institutional Shares of the Fund may be quoted in advertisements, shareholder
reports or other communications to shareholders. Performance information is
generally available by calling Firstar Mutual Fund Services, LLC at 1-800-677-
FUND.
Total Return Calculations.
-------------------------
The Fund computes "average annual total return" separately for its Retail
A, Retail B, Y 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 Fund may compute aggregate total return, which reflects the total
percentage change in value over the measuring period. The Fund computes its
aggregate total returns separately for its Retail A, Retail B, Y and
Institutional Shares, by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular series to the ending redeemable value of such investment in the
series. The formula for calculating aggregate total return is as follows:
Aggregate Total Return = [( ERV/P)-1]
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
34
<PAGE>
Fund's average annual total return and aggregate total return reflect the
deduction of the 5.50% maximum front-end sales charge in connection with the
purchase of Retail A Shares and the 5.00% maximum sales load charged in
connection with redemptions of Retail B Shares. The Fund may also advertise
total return data without reflecting sales charges in accordance with the rules
of the SEC. Quotations that do not reflect the sales charge will, of course, be
higher than quotations that do reflect the sales charge.
The total return of the 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 of the Fund's shares may be
compared to data prepared by Lipper Analytical Services, Inc. In addition, the
total return of the Fund's shares may be compared to the Lehman Brothers
Government/Corporate Total Index; S&P 500 Index; the S&P MidCap 400 Index, the
S&P Small Cap 600 Index, Morgan Stanley REIT Index, NAREIT Index, Lipper Growth
& Income Average, 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 1000 Value
Index, Russell 2000 Index; the Value Line Composite Index, an unmanaged index of
nearly 1,700 stocks reviewed in Ratings & Reports; the Russell MidCap Index; the
Wilshire Next 1750 Index; the Wilshire MidCap 750 Index; and the Consumer Price
Index. Total return data as reported in national financial publications, such as
Money Magazine, Forbes, Barron's, Morningstar Mutual Funds, 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 Fund.
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 the Fund's shares will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Since performance will fluctuate, performance data for
the Fund cannot necessarily be used to compare an investment in the Fund's
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 the Fund
will not be included in the Fund's calculations of total return and will reduce
the total return received by the accounts.
The Fund began operations on June 24, 1997 as a separate portfolio (the
"Predecessor Select Fund") of Firstar Select Funds. On December 11, 2000 the
Predecessor Select Fund was reorganized as a new portfolio of Firstar Funds,
Inc. The performance set forth below is based
35
<PAGE>
on the performance of corresponding classes of the Predecessor Select Fund. As
of the date of this SAI, the Fund has not offered Retail A or Y Shares. Because
those shares have less than one calendar year's performance, no average annual
returns are shown for them.
The performance for the period prior to June 24, 1997 is the performance of
a common trust fund managed by the Adviser which operated during the periods
prior to commencement of operations of the Predecessor Fund using materially
equivalent investment objectives, policies, guidelines and restrictions as the
Predecessor Select Fund. The common trust fund transferred its assets to the
Predecessor Select Fund at the commencement of operations. At the time of the
transfer, the Adviser did not manage any other collective investment or common
trust funds using materially equivalent investment objectives, policies and
guidelines and restrictions to those of the Predecessor Select Fund. The common
trust fund was not registered under 1940 Act and was not subject to certain
restrictions that are imposed by the 1940 Act and the Internal Revenue Code. The
common trust fund's performance was adjusted to reflect expenses of 1.34% (the
percentage of expenses estimated for the Predecessor Select Fund in its original
prospectus). If the common trust fund had been registered under the 1940 Act,
performance may have been adversely affected.
The following are the average annual total returns for shares of the Fund
from the date of the Fund's inception through September 30, 2000. These returns
are based on the returns of the Predecessor Fund. The Fund's Institutional
Shares correspond to the Predecessor Fund's B Shares and Y Shares.
Average Annual Total Return
---------------------------
<TABLE>
<CAPTION>
For the 1 Year Ended For the 5 Years Ended For the 10 Years
9/30/2000 9/30/2000 Ended 9/30/2000
<S> <C> <C> <C>
Institutional Shares 22.40% 9.33% 11.83%
Retail B Shares 22.20% N/A N/A%
</TABLE>
The Fund may also from time to time include discussions or illustrations of
the effects of compounding in advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested by
being paid in additional Fund shares, any future income or capital appreciation
of the Fund would increase the value, not only of the original Fund investment,
but also of the additional Fund shares received through reinvestment. As a
result, the value of the Fund investment would increase more quickly than if
dividends or other distribution had been paid in cash. The Fund may also include
discussions or illustrations of the potential investment goals of a prospective
investor, investment management techniques, policies or investment suitability
of the Fund, economic conditions, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of the Fund), as well as the views
of the Adviser as to market, economic, trade and interest trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to the Fund. The Fund may also include in
advertisements, charts, graphs or drawings which illustrate the potential risks
and
36
<PAGE>
rewards of investment in various investment vehicles, including but not limited
to stocks, bonds, treasury bills and shares of the Fund. In addition,
advertisement or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in the Fund. Such
advertisements or communications may include symbols, headlines or other
materials which highlight or summarize the information discussed in more detail
therein.
MISCELLANEOUS
As used in this SAI and in the Prospectus, a majority of the outstanding
shares of the Fund means, with respect to the approval of an investment advisory
agreement or a change in a fundamental investment policy, the lesser of (1) 67%
of the shares of the Fund represented at a meeting at which the holders of more
than 50% of the outstanding shares of the Fund are present in person or by
proxy, or (2) more than 50% of the outstanding shares of the Fund.
As of November 30, 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 41%
Institutional Money Market 71%
Tax-Exempt Money Market 75%
U.S. Treasury Money Market 78%
U.S. Government Money Market 81%
Short-Term Bond 86%
Intermediate Bond 62%
U.S. Government Securities 88%
Aggregate Bond 89%
Bond IMMDEXTM 66%
Tax-Exempt Intermediate Bond 70%
National Municipal Bond 96%
Balanced Income 79%
Balanced Growth 74%
Growth & Income 68%
Equity Index 76%
Large Cap Core Equity 82%
MidCap Core Equity 75%
MidCap Index 70%
Small Cap Core Equity 75%
MicroCap 77%
37
<PAGE>
International Value 85%
International Growth 92%
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.
38
<PAGE>
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.
Local Currency and Foreign Currency Risks
-----------------------------------------
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key factor
in this analysis. An obligor's capacity to repay foreign obligations may be
lower than its capacity to repay
A-1
<PAGE>
obligations in its local currency due to the sovereign government's own
relatively lower capacity to repay external versus domestic debt. These
sovereign risk considerations are incorporated in the debt ratings assigned to
specific issues. Foreign currency issuer ratings are also distinguished from
local currency issuer ratings to identify those instances where sovereign risks
make them different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of issuers to
honor senior financial obligations and contracts. These obligations have an
original maturity not exceeding 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.
Fitch 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 for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
A-2
<PAGE>
"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 a
capacity for meeting financial commitments which is solely reliant upon a
sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
A-3
<PAGE>
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.
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"C" - An obligation rated "C" is currently highly vulnerable to nonpayment.
The "C" rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action taken, but payments on this obligation are being
continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
- PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
- "r" - The `r' highlights obligations that Standard & Poor's believes have
significant 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. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
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
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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" - Bonds are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa " - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Con. (...) - Bonds for which the security depends on the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the 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 ratings used by Fitch for corporate and municipal
bonds:
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"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" and "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%.
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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 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 does not rate the issuer or issue in question.
- `Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
- RatingWatch: Ratings are placed on RatingWatch 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. RatingWatch is typically resolved over a relatively short
period.
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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:
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"MIG-1"/"VMIG-1" - This designation denotes superior credit quality.
Excellent protection afforded by established cash flows, highly reliable
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - This designation denotes strong credit quality. Margins
of protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes acceptable credit. Liquidity
and cash flow protection may be narrow and market access for refinancing is
likely to be less well established.
"SG" - This designation denotes speculative-grade credit quality. Debt
instruments in this category lack sufficient margins of protection.
Fitch uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
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