<PAGE> 1
Rule 497(c)
File Nos. 33-21489
811-5545
RIVERSIDE CAPITAL MONEY MARKET FUND
RIVERSIDE CAPITAL VALUE EQUITY FUND
RIVERSIDE CAPITAL FIXED INCOME FUND
RIVERSIDE CAPITAL TENNESSEE MUNICIPAL OBLIGATIONS FUND
RIVERSIDE CAPITAL LOW DURATION GOVERNMENT SECURITIES FUND
RIVERSIDE CAPITAL GROWTH FUND
3435 Stelzer Road For current yield, purchase, and
Columbus, Ohio 43219 redemption information, call
(800) 874-8376.
The Sessions Group (the "Group") is an open-end management investment
company. The Group includes the Riverside Capital Money Market Fund (the "Money
Market Fund"), the Riverside Capital Value Equity Fund (the "Value Fund"), the
Riverside Capital Fixed Income Fund (the "Fixed Income Fund"), the Riverside
Capital Low Duration Government Securities Fund (the "Government Securities
Fund") and the Riverside Capital Growth Fund (the "Growth Fund"), each of which
is a diversified investment fund of the Group, and the Riverside Capital
Tennessee Municipal Obligations Fund (the "Tennessee Fund"), which is a
non-diversified investment fund of the Group (the Money Market, Value, Fixed
Income, Tennessee, Government Securities, and Growth Funds are hereinafter
collectively referred to as the "Funds" and individually as a "Fund"). The
Trustees of the Group have divided each Fund's beneficial ownership into an
unlimited number of transferable units called shares (the "Shares").
National Bank of Commerce, Memphis, Tennessee (the "Adviser"), which is a
wholly owned subsidiary of National Commerce Bancorporation ("NCB"), acts as the
investment adviser to each of the Funds.
THE SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, THE ADVISER, NCB OR ANY OF THEIR AFFILIATES. SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY, AND AN INVESTMENT IN A FUND
INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
IN ADDITION, AN INVESTMENT IN THE MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THE MONEY MARKET FUND SEEKS TO MAINTAIN A
CONSTANT NET ASSET VALUE OF $1.00 PER SHARE, BUT THERE CAN BE NO ASSURANCE THAT
NET ASSET VALUE WILL NOT VARY.
Additional information about the Funds, contained in a Statement of
Additional Information, has been filed with the Securities and Exchange
Commission and is available upon request without charge by writing to the Funds
at their address or by calling the Funds at the telephone number shown above.
The Statement of Additional Information bears the same date as this Prospectus
and is incorporated by reference in its entirety into this Prospectus.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. Investors should read this
Prospectus and retain it for future reference.
(Continued on next page)
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
The date of this Prospectus is October 31, 1996.
<PAGE> 2
(Continued from previous page)
The MONEY MARKET FUND seeks current income with liquidity and stability of
principal. The Money Market Fund invests in high-quality money market
instruments and other instruments of high quality. All securities or instruments
in which the Money Market Fund invests have remaining maturities of 397 days or
less, although instruments subject to repurchase agreements may bear longer
maturities.
The VALUE FUND seeks growth of capital by investing primarily in a
diversified portfolio of common stocks and securities convertible into common
stock. The Value Fund will invest in securities of companies believed by the
Adviser to exhibit strong financial characteristics and to be selling below
their long-term intrinsic value.
The FIXED INCOME FUND seeks current income and preservation of capital
through investment in high grade fixed income securities.
The TENNESSEE FUND seeks (1) income which is exempt from federal income tax
and Tennessee state income tax, although such income may be subject to the
federal alternative minimum tax when received by certain Shareholders, and (2)
preservation of capital. The Tennessee Fund will invest, under normal market
conditions, at least 80% of its net assets in Exempt Securities (as defined
below).
The GOVERNMENT SECURITIES FUND seeks current income consistent with
preservation of capital. The Government Securities Fund will invest primarily in
obligations issued or guaranteed by the U.S. Government and its agencies and
instrumentalities, and, under normal market conditions, will maintain an average
portfolio duration of approximately one to four years and a dollar-weighted
average portfolio maturity of approximately two to six years.
The GROWTH FUND seeks growth of capital by investing primarily in a
diversified portfolio of common stocks and securities convertible into common
stock. The Growth Fund will invest in securities of companies believed by its
investment adviser to have an attractive outlook for growth in earnings.
Each of the Value Fund's, the Growth Fund's, the Fixed Income Fund's, the
Tennessee Fund's, and the Government Securities Fund's net asset value per share
will fluctuate as the value of its portfolio changes in response to changing
market prices, market rates of interest and/or other factors.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), Columbus, Ohio, acts as the Funds' administrator and distributor.
BISYS Fund Services Ohio, Inc., Columbus, Ohio, an affiliate of BISYS, acts as
the Funds' transfer agent (the "Transfer Agent") and performs certain fund
accounting services for each of the Funds.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................................... 4
Fee Table............................................................................. 6
Financial Highlights.................................................................. 8
Performance Information............................................................... 12
Investment Objectives and Policies.................................................... 13
Investment Restrictions............................................................... 26
Valuation of Shares................................................................... 28
How to Purchase and Redeem Shares..................................................... 29
Dividends and Taxes................................................................... 36
Management of the Group............................................................... 39
General Information................................................................... 42
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS 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 BISYS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY
ANY FUND OR BY BISYS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
3
<PAGE> 4
PROSPECTUS SUMMARY
Shares Offered............... Units of beneficial interest ("Shares") of the
Money Market Fund, the Value Fund, the Fixed
Income Fund, the Tennessee Fund, the Government
Securities Fund and the Growth Fund, six
separate investment funds (collectively, the
"Funds") of The Sessions Group, an Ohio business
trust (the "Group").
Offering Price............... The public offering price of the Money Market
Fund is equal to the net asset value per share
which such Fund will seek to maintain at $1.00
per Share.
The public offering price of each of the other
Funds is equal to the net asset value per share
plus a sales charge ranging from 4.5% to 2%
(depending upon the Fund) of the public offering
price, reduced on investments of $100,000
($250,000 for the Government Securities Fund) or
more (See "HOW TO PURCHASE AND REDEEM
SHARES -- Sales Charges"). Under certain
circumstances, the sales charge may be
eliminated (See "HOW TO PURCHASE AND REDEEM
SHARES -- Sales Charge Waivers").
Minimum Purchase............. $1,000 minimum initial investment with $50
minimum subsequent investments. Such minimum
initial investment is reduced to $100 for
investors using the Auto Invest Plan described
herein, such minimum subsequent investment may
be waived if purchases are made in connection
with an IRA, and both minimums may be waived if
purchases are made pursuant to a payroll
deduction plan.
Type of Company.............. Each Fund is a series of an open-end, management
investment company. The Money Market Fund, the
Value Fund, the Fixed Income Fund, the
Government Securities Fund and the Growth Fund
are each a diversified Fund. The Tennessee Fund
is a non-diversified Fund.
Investment Objectives........ For the MONEY MARKET FUND, current income with
liquidity and stability of principal.
For the VALUE FUND, growth of capital by
investing primarily in a diversified portfolio
of common stocks and securities convertible into
common stocks.
For the FIXED INCOME FUND, current income and
preservation of capital through investment in
high grade fixed income securities.
For the TENNESSEE FUND, (1) income which is
exempt from federal income tax and Tennessee
state income tax, although such income may be
subject to the federal alternative minimum tax
when received by certain Shareholders, and (2)
preservation of capital.
For the GOVERNMENT SECURITIES FUND, current
income consistent with preservation of capital.
For the GROWTH FUND, growth of capital by
investing primarily in a diversified portfolio
of common stocks and securities convertible into
common stock.
Investment Policies.......... The MONEY MARKET FUND invests in high-quality
money market instruments and other instruments
of high quality. All securities or instruments
in which the Money Market Fund invests have
remain-
4
<PAGE> 5
ing maturities of 397 days (13 months) or less,
although instruments subject to repurchase
agreements may bear longer maturities.
Under normal market conditions, the VALUE FUND
will invest at least 80% of its total assets in
common stocks, and securities convertible into
common stocks, of companies believed by the
Adviser to exhibit strong financial
characteristics and to be selling below their
long-term intrinsic value.
Under normal market conditions, the FIXED INCOME
FUND will invest at least 80% of its total
assets in debt securities of all types.
Under normal market conditions, the TENNESSEE
FUND will invest at least 80% of its net assets
in municipal securities issued by or on behalf
of the State of Tennessee or any county,
political subdivision or municipality thereof,
including any agency, board, authority or
commission of any of the foregoing, and debt
obligations issued by the Government of Puerto
Rico, which generate interest income which is
exempt from federal and Tennessee state income
taxes (but may be treated as a preference item
of certain Shareholders for purposes of the
federal alternative minimum tax).
Under normal market conditions, the GOVERNMENT
SECURITIES FUND will invest at least 65% of its
net assets in obligations issued or guaranteed
by the U.S. Government, its agencies or
instrumentalities, and will maintain an average
portfolio duration of approximately one to four
years and a dollar-weighted average portfolio
maturity of approximately two to six years.
Under normal market conditions, the GROWTH FUND
will invest at least 65% of its total assets in
common stocks, and securities convertible into
common stocks, of companies believed by the
Adviser to have an attractive outlook for growth
in earnings.
Risk Factors and
Special Considerations..... An investment in any of the Funds is subject to
certain risks, as set forth in detail under
"INVESTMENT OBJECTIVES AND POLICIES -- Risk
Factors and Investment Techniques." As with
other mutual funds, there can be no assurance
that any of the Funds will achieve its
investment objectives. The Funds, to the extent
set forth under "INVESTMENT OBJECTIVES AND
POLICIES," may engage in one or more of the
following practices: the purchase of securities
from primarily one state, the use of repurchase
agreements and reverse repurchase agreements,
entering into options transactions on securities
in which the Funds may invest, the lending of
portfolio securities and the purchase of
securities on a when-issued or delayed-delivery
basis.
Investment Adviser........... National Bank of Commerce (the "Adviser").
Dividends.................... For the Money Market Fund, dividends from net
income are declared daily and generally paid
monthly. For each of the other Funds, dividends
from net income are declared and generally paid
monthly. Net realized capital gains are
distributed at least annually.
Distributor.................. BISYS Fund Services Limited Partnership d/b/a
BISYS Fund Services ("BISYS").
5
<PAGE> 6
FEE TABLE
<TABLE>
<CAPTION>
MONEY MARKET VALUE FIXED INCOME
FUND FUND FUND
------------ ----- ------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)........................ 0% 4.50% 3.00%
Maximum Sales Load Imposed on Reinvested Dividends (as a
percentage of offering price).............................. 0% 0% 0%
Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds, as applicable)............... 0% 0% 0%
Redemption Fees (as a percentage of amount redeemed, if
applicable)................................................ 0% 0% 0%
Exchange Fee................................................ $ 0 $ 0 $ 0
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................. .35% .92% .65%
12b-1 Fees After Voluntary Fee Reduction (1)................ .13 .12 .06
Other Expenses After Voluntary Fee Reduction(1)(2).......... .51 .54 .77
--- ----- -----
Total Fund Operating Expenses After Voluntary Fee
Reduction.................................................. .99% 1.58% 1.48%
=========== ==== ==========
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT
TENNESSEE SECURITIES GROWTH
FUND FUND FUND
--------- ---------- ------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)........................... 3.00% 2.00% 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)........................... 0% 0% 0%
Deferred Sales Load (as a percentage of original purchase price
or redemption proceeds, as applicable)........................ 0% 0% 0%
Redemption Fees (as a percentage of amount redeemed, if
applicable)................................................... 0% 0% 0%
Exchange Fee................................................... $ 0 $ 0 $ 0
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (3)............................................ .05% .25% .35%
12b-1 Fees After Voluntary Fee Reduction (1)................... .17 .07 .10
Other Expenses After Voluntary Fee Reduction(1)(2)............. .76 1.12 .69
--------- ----- ------
Total Fund Operating Expenses After Voluntary Fee Reduction.... .98% 1.44% 1.14%
======= ======== =====
</TABLE>
Example
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund.................................. $ 10 $32 $ 55 $121
Value Fund......................................... $ 60 $93 $ 127 $224
Fixed Income Fund.................................. $ 45 $75 $ 108 $202
Tennessee Fund..................................... $ 40 $60 $ 83 $147
Government Securities Fund......................... $ 34 $65 $ 97 $189
Growth Fund........................................ $ 56 $80 $ 105 $177
</TABLE>
6
<PAGE> 7
The purpose of the above table is to assist a potential purchaser of Shares
of any of the Funds in understanding the various costs and expenses that an
investor in a Fund will bear directly or indirectly. Such expenses do not
include any fees charged by the Adviser or any of its affiliates to its customer
accounts which may have invested in Shares of the Funds. See "MANAGEMENT OF THE
GROUP" and "GENERAL INFORMATION" for a more complete discussion of the
Shareholder transaction expenses and annual operating expenses of each Fund. As
a result of the payment of sales loads, as applicable, and Rule 12b-1 Fees,
long-term Shareholders may pay more than the maximum front-end sales charge
permitted by the Rules of the National Association of Securities Dealers, Inc.
(the "NASD"). The expense information above reflects current fees. For
information on fees and expenses for the fiscal year ended June 30, 1996, please
see the Funds' annual report or the financial information contained in the
Funds' Statement of Additional Information. THE FOREGOING EXAMPLES SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
- ------------------------------
(1) BISYS has agreed with the Group to reduce voluntarily the amount of its
12b-1 fees until on or about October 31, 1997, to the extent necessary to
cause (a) the total of Rule 12b-1 fees and administrative servicing fees to
not exceed .29% of each Fund's respective net assets and (b) the
administration fees for each of the Growth Fund and the Government
Securities Fund not to exceed .15% of such Funds' respective net assets.
Absent such voluntary fee reductions, Rule 12b-1 fees and administrative
services fees would each be .25% for each of the Funds and administration
fees for the Growth Fund and the Government Securities Fund would be .20%.
Absent such voluntary fee reductions and the voluntary advisory fee
reductions described in Note 3 below, Total Fund Operating Expenses would
have been 1.20% for the Money Market Fund, 1.79% for the Value Fund, 1.69%
for the Fixed Income Fund, 1.83% for the Tennessee Fund, 2.20% for the
Government Securities Fund and 1.97% for the Growth Fund.
(2) "Other Expenses" include administration fees and administrative servicing
fees.
(3) The Adviser has agreed with the Group to reduce voluntarily the amount of
its investment advisory fee with respect to the Tennessee Fund, the
Government Securities Fund and the Growth Fund until on or about October 31,
1997. Absent such voluntary fee reductions, Management Fees for the
Tennessee Fund, the Government Securities Fund and the Growth Fund would be
.65%, .50% and 1.00%, respectively.
7
<PAGE> 8
FINANCIAL HIGHLIGHTS
Each Fund is a separate fund of the Group. The table below sets forth
certain information concerning the investment results of each Fund since its
inception. Further financial information is included in the Statement of
Additional Information. The Financial Highlights contained in the following
tables have been audited by KPMG Peat Marwick LLP, independent certified public
accountants for the Group, whose report on the five fiscal years ended June 30,
1996, 1995, 1994, 1993 and 1992, or such shorter period as the Funds may have
been in existence, is included in the Statement of Additional Information and
which may be obtained by Shareholders.
<TABLE>
<CAPTION>
THE MONEY MARKET FUND
-----------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR JULY 25,
ENDED ENDED ENDED ENDED ENDED ENDED ENDED 1988 TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1994 1993 1992 1991 1990 1989(A)
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
Beginning of
period............ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Income from
investment
operations:
Net investment
income.......... 0.046 0.044 0.026 0.032 0.051 0.071 0.081 0.077
Net gains or
losses on
securities
(both realized
and
unrealized)..... -- (0.004) -- -- 0.003 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total from
investment
operations........ 0.046 0.040 0.026 0.032 0.054 0.071 0.081 0.077
--------- --------- --------- --------- --------- --------- --------- ---------
Less Distributions:
Dividends (from
net investment
income)......... (0.046) (0.044) (0.026) (0.032) (0.051) (0.071) (0.081) (0.077)
Distributions
(from capital
gains).......... -- -- -- -- (0.003) -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total
Distributions... (0.046) (0.044) (0.026) (0.032) (0.054) (0.071) (0.081) (0.077)
--------- --------- --------- --------- --------- --------- --------- ---------
Capital
Transactions...... -- 0.004 -- -- -- -- -- --
Net asset value,
End of period..... $ 1,000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= ======= ======= ======= =======
Total Return....... 4.75%+ 4.44%+ 2.65% 3.20% 5.61% 7.29% 8.41% 7.97%(b)
ANNUALIZED
RATIOS/SUPPLEMENTAL
DATA:
Net assets, End
of period (000
omitted)........ $134,146 $157,904 $128,001 $141,840 $162,361 $165,242 $103,809 $85,441
Ratio of expenses
to average net
asset........... 0.99% 0.97% 0.95% 0.85% 0.66% 0.63% 0.59% 0.83%(c)
Ratio of net
investment
income to
average net
assets.......... 4.65% 4.41% 2.62% 3.17% 5.12% 6.95% 8.09% 8.24%(c)
Ratio of expenses
to average net
assets*......... 1.20% 1.18% 1.09% 0.94% 0.91% 0.68% 0.76% 1.05%(c)
Ratio of net
investment
income to
average net
assets*......... 4.44% 4.20% 2.48% 3.08% 4.87% 6.90% 7.92% 8.02%(c)
</TABLE>
- ---------------
+ The capital contribution had no impact on the total return for the years ended
June 30, 1995 and June 30, 1996.
8
<PAGE> 9
<TABLE>
<CAPTION>
THE VALUE FUND
----------------------------------------------------------------------------------
OCTOBER 31, 1991
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993 JUNE 30, 1992 (A)
-------------- -------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
Beginning of period................... $ 12.63 $12.67 $11.57 $11.04 $10.00
Income from investment operations:
Net investment income................ 0.14 0.14 0.07 0.21 0.17
Net gains or losses on securities
(both realized and unrealized)...... 2.40 0.76 1.28 0.96 1.03
-------- ------ ------ ------ ------
Total from investment operations..... 2.54 0.90 1.35 1.17 1.20
-------- ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income)............................. (0.14) (0.13) (0.05) (0.22) (0.16)
Distributions (from capital gains)... (0.49) (0.15) (0.19) (0.42) --
In excess of net realized gains...... -- (0.66) -- -- --
-------- ------ ------ ------ ------
Total Distribution................... (0.63) (0.94) (0.25) (0.64) (0.16)
-------- ------ ------ ------ ------
Net asset value,
End of period......................... $ 14.54 $12.63 $12.67 $11.57 $11.04
======== ====== ====== ====== ======
Total Return (excludes sales
charges).............................. 20.50% 8.03% 11.75% 10.94% 12.04%(b)
ANNUALIZED RATIOS/SUPPLEMENTAL DATA:
Net assets, End of period (000
omitted)............................ $81,055 $80,264 $79,232 $52,629 $25,461
Ratio of expenses to average net
assets.............................. 1.58% 1.58% 1.36% 0.73% 0.67%(c)
Ratio of net investment income to
average net assets.................. 1.01% 1.13% 0.52% 1.84% 2.43%(c)
Ratio of expenses to average net
assets*............................. 1.79% 1.79% 1.74% 1.69% 1.95%(c)
Ratio of net investment income to
average net assets*................. 0.80% 0.92% 0.14% 0.88% 1.15%(c)
Portfolio turnover................... 27.89% 35.64% 62.17% 16.13% 23.07%
Average commission rate paid(d)...... $0.0605 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
THE FIXED INCOME FUND
----------------------------------------------------------------------------------
OCTOBER 31, 1991
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993 JUNE 30, 1992 (A)
-------------- -------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
Beginning of period................... $ 9.27 $ 9.43 $10.44 $10.26 $10.00
Income from investment operations:
Net investment income................ 0.59 0.58 0.57 0.68 0.42
Net gains or losses on securities
(both realized and unrealized)...... (0.48) (0.15) (0.76) 0.27 0.22
------ ------ ------ ----- -----
Total from investment operation...... 0.11 0.43 (0.19) 0.95 0.64
------ ------ ------ ----- -----
Less Distributions:
Dividends (from net investment
income)............................. (0.58) (0.58) (0.57) (0.69) (0.38)
Distributions (from capital gains)... -- -- -- (0.08) --
In excess of net realized gains...... (0.03) -- (0.25) -- --
In excess of net investment income... -- (0.01) -- -- --
------ ------ ------ ----- -----
Total Distributions.................. (0.61) (0.59) (0.82) (0.77) (0.38)
------ ------ ------ ----- -----
Net asset value,
End of period......................... $ 8.77 $ 9.27 $ 9.43 $10.44 $10.26
====== ====== ====== ====== ======
Total Return (excludes sales
charges)............................. 1.05% 4.82% (2.20)% 9.64% 6.56%(b)
ANNUALIZED RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000
omitted)............................ $28,847 $39,496 $42,309 $35,951 $27,256
Ratio of expenses to average net
assets.............................. 1.48% 1.43% 1.37% 0.74% 0.69%(c)
Ratio of net investment income to
average net assets.................. 6.32% 6.33% 5.61% 6.65% 6.51%(c)
Ratio of expenses to average net
assets*............................. 1.69% 1.64% 1.70% 1.42% 1.63%(c)
Ratio of net investment income to
average net assets*................. 6.11% 6.12% 5.28% 5.97% 5.58%(c)
Portfolio turnover................... 363.84% 223.29% 328.44% 234.71% 40.85%
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
THE TENNESSEE FUND
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED NOVEMBER 4, 1992
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 TO JUNE 30, 1993(A)
------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
Net asset value, Beginning of
period.............................. $ 9.84 $ 9.81 $ 10.44 $ 10.00
Income from investment operations:
Net investment income.............. 0.53 0.50 0.48 0.30
Net gains or losses on securities
(both realized and unrealized).... (0.08) 0.03 (0.57) 0.43
------- ------- ------- ------
Total from investment operations..... (0.45) 0.53 (0.09) 0.73
------- ------- ------- ------
Less Distributions:
Dividends (from net investment
income)......................... (0.53) (0.50) (0.48) (0.29)
Distributions (from capital
gains).......................... -- -- -- --
In excess of net realized gains.... -- -- (0.06) --
------- ------- ------- ------
Total Distributions.................. (0.53) (0.50) (0.54) (0.29)
------- ------- ------- ------
Net asset value, End of period....... $ 9.76 $ 9.84 $ 9.81 $ 10.44
======= ======= ======= =======
Total Return (excludes sales
charges)........................... 4.67% 5.61% (1.00)% 7.39%(b)
ANNUALIZED RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000
omitted).......................... $19,037 $20,827 $19,965 $17,425
Ratio of expenses to average net
assets............................ 0.98% 1.12% 1.19% 0.82%(c)
Ratio of net investment income to
average net assets................ 5.40% 5.24% 4.67% 4.76%(c)
Ratio of expenses to average net
assets*........................... 1.83% 1.98% 1.99% 1.62%(c)
Ratio of net investment income to
average net assets*............... 4.55% 4.38% 3.87% 3.96%(c)
Portfolio turnover................. 60.76% 62.59% 86.57% 52.52%
</TABLE>
<TABLE>
<CAPTION>
THE GOVERNMENT SECURITIES FUND
-----------------------------------------------------
YEAR ENDED YEAR ENDED APRIL 15, 1994
JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994(A)
------------- ------------- -------------------
<S> <C> <C> <C>
Net asset value, Beginning of period............. $ 10.15 $ 9.93 $ 10.00
Income from investment operations:
Net investment income.......................... 0.53 0.56 0.07
Net gains on losses on securities (both
realized and unrealized)...................... (0.20) 0.21 (0.08)
------- ------- ------
Total from investment operations................. 0.33 0.77 (0.01)
------- ------- ------
Less Distributions:
Dividends (from net investment income)......... (0.53) (0.55) (0.06)
Distributions (from capital gains)............. -- -- --
------- ------- ------
Total Distributions.............................. (0.53) (0.55) (0.06)
------- ------- ------
Net asset value, End of period................... $ 9.95 $ 10.15 $ 9.93
======= ======= =======
Total Return (excludes sales charges)............ 3.31% 8.03% (0.13)%(b)
ANNUALIZED RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000 omitted)........ $ 7,461 $ 7,653 $ 7,692
Ratios of expenses to average net assets....... 1.44% 1.33% 2.85%(c)
Ratio of net investment income to average net
assets...................................... 5.19% 5.67% 3.63%(c)
Ratio of expenses to average net assets*....... 2.20% 2.10% 3.67%(c)
Ratio of net investment income to average net
assets*..................................... 4.43% 4.89% 2.81%(c)
Portfolio turnover............................. 20.87% 34.47% 21.20%
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
THE GROWTH FUND
-----------------------------------------------------
YEAR ENDED YEAR ENDED APRIL 18, 1994
JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994(A)
------------- ------------- -------------------
<S> <C> <C> <C>
Net asset value, Beginning of Period............. $ 12.14 $ 9.82 $ 10.00
Income from investment operations:
Net investment income.......................... 0.18 0.16 --
Net gains on losses on securities (both
realized and unrealized)...................... 2.13 2.30 (0.18)
------- ------- -------
Total from investment operations................. 2.31 2.46 (0.18)
------- ------- -------
Less Distributions:
Dividends (from net investment income)......... (0.18) (0.14) --
In excess of net investment income............. (0.01) -- --
Distributions (from capital gains)............. (0.25) -- --
------- ------- -------
Total Distributions.............................. (0.44) (0.14) --
------- ------- -------
Net asset value, End of period................... $ 14.01 $ 12.14 $ 9.82
======= ======= =======
Total Return (excludes sales charges)............ 19.35% 25.27% (1.80)%(b)
ANNUALIZED RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000 omitted)........ $33.767 $21,485 $6,345
Ratios of expenses to average net assets....... 1.05% 1.24% 2.59%(c)
Ratio of net investment income to average net
assets...................................... 1.37% 1.64% 0.25%(c)
Ratio of expenses to average net assets*....... 1.97% 2.51% 3.90%(c)
Ratio of net investment income to average net
assets*..................................... 0.45% 0.37% (1.07)%(c)
Portfolio turnover............................. 31.22% 29.36% 0.00%
Average commissions rate paid(d)............... $0.0686 -- --
</TABLE>
- ------------------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
11
<PAGE> 12
PERFORMANCE INFORMATION
From time to time performance information for the Funds showing the Funds'
average annual total return, yield, taxable equivalent yield, seven-day yield
and/or seven-day effective yield may be presented in advertisements, sales
literature and shareholder reports. SUCH PERFORMANCE FIGURES ARE BASED ON
HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Average
annual total return will be calculated for the period since commencement of
operations for a Fund and will reflect the imposition of the maximum sales
charge, if any. Average annual total return is measured by comparing the value
of an investment in such Fund at the beginning of the relevant period to the
redeemable value of the investment at the end of the period (assuming immediate
reinvestment of any dividends or capital gains distributions), which figure is
then annualized. Yield will be computed by dividing a Fund's net investment
income per share earned during a recent one-month period by that Fund's per
share maximum offering price (reduced by any undeclared earned income expected
to be paid shortly as a dividend) on the last day of the period and annualizing
the result. Taxable equivalent yield of a Fund demonstrates the taxable yield
necessary to produce an after-tax yield equivalent to the yield of that Fund.
Each of the Funds may also present its average annual total return, aggregate
total return, yield and taxable equivalent yield, as the case may be, excluding
the effect of a sales charge, if any.
The seven-day yield of the Money Market Fund refers to the income generated
by an investment therein over a seven-day period (which period will be stated 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 Money Market Fund may also present a 30-day yield which is calculated
similarly but instead refers to a 30-day period rather than a seven-day period.
The seven-day effective yield is calculated similarly but, when annualized, the
income earned by an investment in the Money Market Fund is assumed to be
reinvested. The seven-day effective yield is slightly higher than the seven-day
yield because of the compounding effect of this assumed reinvestment.
In addition, from time to time, the Funds may present their distribution
rates in supplemental sales literature and in shareholder reports, both of which
must be accompanied or preceded by a prospectus. Distribution rates will be
computed by dividing the distribution per share made by a Fund over a
twelve-month period by the maximum offering price per share at the end of that
period. The calculation of income in the distribution rate includes both income
and capital gain dividends and does not reflect unrealized gains or losses,
although each Fund may also present a distribution rate excluding the effect of
capital gains and/or a sales charge, if any. The distribution rate differs from
the yield, because it includes capital gain dividends which are often
non-recurring in nature, whereas yield does not include such items.
Investors may also judge the performance of each Fund by comparing or
referencing it to the performance of other mutual funds with comparable
investment objectives and policies through various mutual fund or market indices
and to data prepared by various services, which indices or data may be published
by such services or by other services or publications. In addition to
performance information, general information about these Funds that appears in
such publications may be included in advertisements, sales literature and
reports to Shareholders.
Yield and total return are generally functions of market conditions,
interest rates, types of investments held, and operating expenses. Consequently,
current yields and total return will fluctuate and are not necessarily
representative of future results. Any fees charged by NCB or by any of its
affiliated or correspondent banks, including the Adviser, to its customer
accounts which may have invested in Shares of a Fund will not be included in
performance calculations; such fees, if charged, will reduce the actual
performance from that quoted. In addition, if the Adviser or BISYS voluntarily
reduces all or part of its fees for a Fund, as discussed below, the yield and
total return for that Fund will be higher than they would otherwise be in the
absence of such voluntary fee reductions.
Further information about the performance of the Funds is contained in the
Funds' Annual Report to Shareholders which may be obtained without charge by
contacting the Group at (800) 874-8376.
12
<PAGE> 13
INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
The investment objective of the Money Market Fund is to seek current income
with liquidity and stability of principal. The investment objective of the Value
Fund is to seek growth of capital by investing primarily in a diversified
portfolio of common stocks and securities convertible into common stocks. The
investment objective of the Fixed Income Fund is to seek current income as well
as preservation of capital by investing in high grade fixed income securities.
The investment objectives of the Tennessee Fund are to seek (1) income which is
exempt from federal income tax and Tennessee state income tax, although such
income may be subject to the federal alternative minimum tax when received by
certain Shareholders, and (2) preservation of capital. The investment objective
of the Government Securities Fund is to seek current income consistent with
preservation of capital. The investment objective of the Growth Fund is to seek
growth of capital by investing primarily in a diversified portfolio of common
stocks and securities convertible into common stocks.
The investment objectives with respect to a Fund are fundamental policies
and as such may not be changed without a vote of the holders of a majority of
the outstanding Shares of that Fund (as defined below under "GENERAL
INFORMATION -- Miscellaneous"). There can be no assurance that the investment
objectives of any Fund will be achieved.
THE MONEY MARKET FUND
As a money market fund, the Money Market Fund invests exclusively in United
States dollar-denominated instruments which the Trustees of the Group and the
Adviser determine present minimal credit risks and which at the time of
acquisition are rated by one or more appropriate nationally recognized
statistical rating organizations ("NRSROs") (e.g., Standard & Poor's Corporation
and Moody's Investors Service, Inc.) in one of the two highest rating categories
for short-term debt obligations or, if unrated, are of comparable quality. The
Money Market Fund also diversifies its investments so that, with minor
exceptions and except for United States Government securities, not more than
five percent of its total assets is invested in the securities of any one
issuer, not more than five percent of its total assets is invested in securities
of issuers rated by the NRSRO at the time of investment in the second highest
rating category for short-term debt obligations or, if unrated, deemed by the
Adviser to be of comparable quality ("Second Tier Securities") and not more than
the greater of one percent of total assets or one million dollars is invested in
the securities of one issuer that are Second Tier Securities. All securities or
instruments in which the Money Market Fund invests have remaining maturities of
397 calendar days or less. The dollar-weighted average maturity of the
securities in the Money Market Fund will not exceed 90 days.
Subject to the foregoing general limitations, the Money Market Fund expects
to invest in the following types of securities.
The Money Market Fund may invest in a variety of U.S. Treasury obligations,
differing in their interest rates, maturities, and times of issuance, and other
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (collectively, "Government Obligations"). Obligations of
certain agencies and instrumentalities of the U.S. Government, such as the
Government National Mortgage Association ("GNMA") and the Export-Import Bank of
the United States, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Student Loan Marketing Association, are supported
by the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Federal Farm Credit Banks or the
Federal Home Loan Mortgage Corporation ("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 agencies
or instrumentalities if it is not obligated to do so by law. The Money Market
Fund will invest in the obligations of such agencies or instrumentalities only
when the Adviser believes that the credit risk with respect thereto is minimal.
The Money Market Fund may also invest in taxable State Securities, as defined
below under "The Government Securities Fund."
13
<PAGE> 14
The Money Market Fund may invest in bankers' acceptances guaranteed by
domestic and foreign banks if at the time of investment the guarantor bank has
capital, surplus, and undivided profits in excess of $100,000,000 (as of the
date of its most recently published financial statements). The Money Market Fund
may also invest in certificates of deposit and time deposits of domestic and
foreign banks and savings and loan associations if (a) at the time of investment
the depositor institution has capital, surplus, and undivided profits in excess
of $100,000,000 (as of the date of their most recently published financial
statements) or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation.
The Money Market Fund may also invest in Eurodollar Certificates of Deposit
("ECDs") 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 deposits in
a foreign branch of a U.S. bank or a foreign bank; Canadian Time Deposits
("CTDs") which are essentially the same as ETDs except they are issued by
Canadian offices of major Canadian banks; and Yankee Certificates of Deposit
("Yankee CDs") which are certificates of deposit issued by U.S. branch of a
foreign bank denominated in U.S. dollars and held in the United States. Under
normal market conditions, the Money Market Fund will not invest more than 20% of
its total assets in such foreign securities (including CCP and Europaper as
defined below).
The Money Market Fund will not invest in excess of 10% of its total assets
in time deposits with maturities in excess of seven days which are subject to
penalties upon early withdrawal. Such time deposits include ETDs and CTDs but do
not include certificates of deposit.
The Money Market Fund may invest in short-term promissory notes issued by
corporations (including variable amount master demand notes) and in taxable
municipal obligations rated at the time of purchase by one or more appropriate
NRSROs in one of the two highest rating categories for short-term debt
obligations or, if not rated, found by the Adviser to be of comparable quality
to instruments that are so rated. Instruments may be purchased in reliance upon
a rating only when the rating organization is not affiliated with the issuer or
guarantor of the instrument. For a description of the rating symbols of the
NRSROs, see the Appendix to the Statement of Additional Information. The Money
Market Fund may also invest in Canadian Commercial Paper ("CCP"), which is
commercial paper issued by a Canadian corporation or a Canadian subsidiary of a
U.S. corporation, and in Europaper, which is U.S. dollar denominated commercial
paper of a foreign issuer which, in each case, is rated at the time of purchase
by one or more appropriate NRSROs in one of the two highest rating categories
for short-term debt obligations or, if not rated, found by the Adviser to be of
comparable quality to instruments that are rated high quality.
The Money Market Fund may also invest in corporate debt securities with
remaining maturities of 397 days or less although at the time of issuance such
securities had maturities exceeding 397 days. The Money Market Fund may invest
in such securities so long as comparable securities of such issuer have been
rated in the highest rating category for short-term debt obligations by the
appropriate NRSROs or are otherwise deemed to be eligible for purchase by the
Money Market Fund in accordance with the guidelines adopted by the Group's Board
of Trustees.
Variable amount master demand notes in which the Money Market Fund may
invest are unsecured demand notes that permit the indebtedness thereunder to
vary and that provide for periodic adjustments in the interest rate according to
the terms of the instrument. Because master demand notes are direct lending
arrangements between the Money Market Fund and the issuer, they are not normally
traded. Although there is no secondary market in the notes, the Money Market
Fund may demand payment of principal and accrued interest at any time. While the
notes are not typically rated by NRSROs, such variable amount master demand
notes must be determined by the Adviser to be of comparable quality to the
commercial paper in which the Fund may invest. The Adviser will consider the
earning power, cash flow, and other liquidity ratios of the issuers of such
notes and will continuously monitor their financial status and ability to meet
payment on demand. In determining dollar-weighted average portfolio maturity, a
variable amount master demand note will be deemed to have a maturity equal to
the period of time remaining until the principal amount can be recovered from
the issuer through demand. The period of time remaining until the principal
amount can be recovered under a variable master demand note shall not exceed
seven days.
14
<PAGE> 15
The Money Market Fund may also acquire variable and floating rate notes
issued by both governmental and nongovernmental issuers, subject to the Money
Market Fund's investment objective, policies and restrictions. A variable rate
note is one whose terms provide for the adjustment of its interest rate on set
dates and which, upon such adjustment, can reasonably be expected to have a
market value that approximates its amortized cost. However, in the event the
interest rate of such a note is established by reference to an index or an
interest rate that may from time to time lag behind other market interest rates,
there is the risk that the market value of such note, on readjustment of its
interest rate, will not approximate its amortized cost which could adversely
affect the Money Market Fund's ability to maintain a stable net asset value. In
such an instance, the Adviser will seek to sell such note to the extent it can
do so in an orderly fashion given current market conditions.
A floating rate note is one whose terms provide for the adjustment of its
interest rate whenever a specified interest rate changes and which, at any time,
can reasonably be expected to have a market value that approximates its
amortized cost. Such notes are frequently not rated by credit rating agencies;
however, unrated variable and floating rate notes purchased by the Money Market
Fund will be determined by the Adviser under guidelines established by the
Group's Board of Trustees to be of comparable quality at the time of purchase to
rated instruments eligible for purchase under the Money Market Fund's investment
policies. In making such determinations, the Adviser will consider the earning
power, cash flow and other liquidity ratios of the issuers of such notes (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. Although there may be no
active secondary market with respect to a particular variable or floating rate
note purchased by the Money Market Fund, the Money Market Fund may attempt to
resell the note at any time to a third party. The absence of an active secondary
market, however, could make it difficult for the Money Market Fund to dispose of
a variable or floating rate note in the event the issuer of the note defaulted
on its payment obligations and the Money Market Fund could, as a result or for
other reasons, suffer a loss to the extent of the default. Variable or floating
rate notes may be secured by bank letters of credit.
To the extent that the Money Market Fund holds a note for which the Money
Market Fund is not entitled to receive the principal amount within seven days of
demand and for which no readily available market exists, such a note will be
treated as an illiquid security for purposes of calculation of the 10%
limitation on illiquid securities as set forth below.
THE VALUE FUND
Under normal market conditions, the Value Fund will invest at least 80% of
its total assets in common stocks and securities convertible into common stocks
(i.e., convertible bonds, convertible preferred stock, warrants, options and
rights), traded in U.S. markets, including the New York Stock Exchange, the
American Stock Exchange and NASDAQ, and issued by companies believed by the
Adviser to exhibit strong financial characteristics and to be selling below
their long-term intrinsic value. The Value Fund may also invest up to 20% of its
total assets in preferred stocks, corporate bonds, notes, warrants, and
short-term obligations (with maturities of 12 months or less) such as commercial
paper (including variable amount master demand notes), bankers' acceptances,
certificates of deposit, repurchase agreements, Government Obligations (as
described above), and demand and time deposits of domestic and foreign banks and
savings and loan associations. The Value Fund may also invest in equity real
estate investment trusts ("REITs") and may hold securities of other investment
companies, including Shares of the Money Market Fund as described more fully
below under "Risk Factors and Investment Techniques -- Other Investment
Policies." During temporary defensive periods as determined by the Adviser, the
Value Fund may hold up to 100% of its total assets in short-term obligations
including domestic bank certificates of deposit, bankers' acceptances and
repurchase agreements secured by bank instruments. However, to the extent that
the Value Fund is so invested in debt obligations, the Fund may not achieve its
investment objective.
Subject to the foregoing limitations, the Value Fund will invest only in
corporate debt securities which are rated at the time of purchase within the
three highest rating groups assigned by one or more appropriate NRSROs or, if
unrated, which the Adviser deems to be of comparable quality. For a description
of the rating symbols of the NRSROs, see the Appendix to the Statement of
Additional Information.
15
<PAGE> 16
Equity securities such as those in which the Value Fund may invest are more
volatile and carry more risk than some other forms of investment, including
investments in high grade fixed income funds. Depending upon the performance of
the Value Fund's investments, the net asset value per share of the Value Fund
may decrease instead of increase.
Subject to the foregoing limitations, the Equity Fund may invest in foreign
securities through the purchase of sponsored and unsponsored American Depositary
Receipts ("ADRs"). Unsponsored ADRs may be less liquid than sponsored ADRs and
there may be less information available regarding the underlying foreign issuer
for unsponsored ADRs. The Value Fund may also invest in securities issued by
foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper.
Investment in foreign securities is subject to special risks, as more fully
discussed below under "Risk Factors and Investment Techniques--Foreign
Investments."
THE FIXED INCOME FUND
Under normal market conditions, the Fixed Income Fund will invest at least
80% of its total assets in debt securities of all types, although up to 20% of
its total assets may be invested in preferred stocks and other investments. Debt
securities include bonds, debentures, notes, mortgage-related securities, state,
municipal or industrial revenue bonds, Government Obligations, taxable State
Securities (as defined below under "The Government Fund") and fixed-income
securities convertible into, or exchangeable for, common stocks. In addition, a
portion of the Fixed Income Fund may from time to time be invested in first
mortgage loans and participation certificates in pools of mortgages issued or
guaranteed by the U.S. Government or its agencies or instrumentalities and in
securities which are restricted as to their disposition, including those
eligible for resale under Rule 144A under the Securities Act of 1933 ("Rule 144A
Securities"). Some of the securities in which the Fixed Income Fund invests may
have warrants or options attached.
Under normal market conditions, the Fixed Income Fund expects to invest
primarily in Government Obligations and in debt obligations of United States
corporations. The Fixed Income Fund also intends that, under normal market
conditions, its portfolio will maintain a dollar-weighted average maturity of
approximately seven years. However, the Fixed Income Fund may extend or shorten
the dollar-weighted average maturity of its portfolio depending upon anticipated
changes in interest rates or other relevant market factors.
The Fixed Income Fund expects to invest in a variety of U.S. Treasury
obligations, differing in their interest rates, maturities, and times of
issuance, and other Government Obligations as more fully described above under
"The Money Market Fund." The Fixed Income Fund will invest in the obligations of
such U.S. Government agencies or instrumentalities only when the Adviser
believes that the credit risk with respect thereto is minimal.
The Fixed Income Fund also expects to invest in bonds, notes and debentures
of a wide range of U.S. corporate issuers. Such obligations, in the case of
debentures, will represent unsecured promises to pay, in the case of notes and
bonds, may be secured by mortgages on real property or security interests in
personal property and will in most cases differ in their interest rates,
maturities and times of issuance.
The Fixed Income Fund will invest only in corporate debt securities which
are rated at the time of purchase within the three highest rating groups
assigned by one or more appropriate NRSROs or, if unrated, which the Adviser
deems to be of comparable quality. For a description of the rating symbols of
the NRSROs see the Appendix to the Statement of Additional Information.
The Fixed Income Fund may hold some short-term obligations (with maturities
of 12 months or less) such as domestic and foreign commercial paper (including
variable amount master demand notes), bankers' acceptances, certificates of
deposit and demand and time deposits of domestic and foreign branches of U.S.
banks and foreign banks, and repurchase agreements. The Fixed Income Fund may
also invest in securities of other investment companies, including other
investment companies advised by the Adviser, as described more fully below.
The Fixed Income Fund may also invest in U.S. dollar denominated
international bonds for which the primary trading market is in the United States
("Yankee Bonds"), or for which the primary trading market is
16
<PAGE> 17
abroad ("Eurodollar Bonds"), and in Canadian Bonds and bonds issued by
institutions organized for a specific purpose, such as the World Bank and the
European Economic Community, by two or more sovereign governments
("Supranational Agency Bonds").
The Fixed Income Fund may invest in mortgage-related securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
nongovernmental entities which are rated, at the time of purchase, within the
three highest bond rating categories assigned by one or more appropriate NRSROs,
or, if unrated, which the Adviser deems present attractive opportunities and are
of comparable quality. Such mortgage-related securities have mortgage
obligations backing such securities, including among others, conventional thirty
year fixed rate mortgage obligations, graduated payment mortgage obligations,
fifteen year mortgage obligations and adjustable rate mortgage obligations. All
of these mortgage obligations can be used to create pass-through securities. A
pass-through security is created when mortgage obligations are pooled together
and undivided interests in the pool or pools are sold. The cash flow from the
mortgage obligations is passed through to the holders of the securities in the
form of periodic payments of interest, principal and prepayments (net of a
service fee). Prepayments occur when the holder of an individual mortgage
obligation prepays the remaining principal before the mortgage obligation's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgage
obligations vary, it is not possible to predict accurately the realized yield or
average life of a particular issue of pass-through certificates. Prepayment
rates are important because of their effect on the yield and price of the
securities. In addition, prepayment rates will be used to determine a security's
estimated average life and a Fund's average portfolio duration and its dollar-
weighted average portfolio maturity. Accelerated prepayments have an adverse
impact on yields for pass-through securities purchased at a premium (i.e., a
price in excess of principal amount) and may involve additional risk of loss of
principal because the premium may not have been fully amortized at the time the
obligations are repaid. The opposite is true for pass-through securities
purchased at a discount. The Fixed Income Fund may purchase mortgage-related
securities at a premium or a discount. Reinvestment of principal payments may
occur at higher or lower rates than the original yield on such securities. Due
to the prepayment feature and the need to reinvest payments and prepayments of
principal at current rates, mortgage-related securities can be less effective
than typical bonds of similar maturities at maintaining yields during periods of
declining interest rates.
Certain debt securities such as, but not limited to, mortgage-backed
securities, collateralized mortgage obligations (CMOs), asset backed securities
and securitized loan receivables, as well as securities subject to prepayment of
principal prior to the stated maturity date, are expected to be repaid prior to
their stated maturity dates. As a result, the effective maturity of these
securities is expected to be shorter than the stated maturity. For purposes of
compliance with stated maturity policies and calculation of the Fixed Income
Fund's dollar-weighted average maturity, the effective maturity of such
securities will be used. The Fixed Income Fund may invest up to 10% of its net
assets in CMOs. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively referred
to as "Mortgage Assets"). Payments of principal or interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs. CMOs may be issued by agencies or instrumentalities of the
U.S. Government or by private originators of, or investors in, mortgage loans.
An increase in interest rates will generally reduce the value of the
investments in the Fixed Income Fund, and a decline in interest rates will
generally increase the value of those investments. Depending upon the prevailing
market conditions, the Adviser may purchase debt securities at a discount from
face value, which produces a yield greater than the coupon rate. Conversely, if
debt securities are purchased at a premium over face value, the yield will be
lower than the coupon rate. In making investment decisions, the Adviser will
consider many factors other than current yield, including the preservation of
capital, maturity, and yield to maturity.
17
<PAGE> 18
THE TENNESSEE FUND
Under normal market conditions, at least 80% of the net assets of the
Tennessee Fund will be invested in a portfolio of obligations consisting of
bonds, notes, commercial paper and certificates of indebtedness, issued by or on
behalf of the State of Tennessee, or any county, political subdivision or
municipality thereof (including any agency, board, authority or commission of
any of the foregoing), the interest on which, in the opinion of bond counsel to
the issuer, is exempt from federal income tax and Tennessee income tax (but may
be treated as a preference item for individuals for purposes of the federal
alternative minimum tax) ("Tennessee Exempt Securities") and in debt obligations
issued by the Government of Puerto Rico and such other governmental entities
whose debt obligations, either by law or treaty, generate interest income which
is exempt from federal and Tennessee state income taxes (but may be treated as a
preference item for certain Shareholders for purposes of the federal alternative
minimum tax) (together, with Tennessee Exempt Securities, called "Exempt
Securities"). In addition, under normal market conditions, at least 65% of the
Tennessee Fund's net assets will be invested in Tennessee Exempt Securities. As
a matter of fundamental policy, under normal market conditions, at least 80% of
the net assets of the Tennessee Fund will be invested in securities, the
interest on which is exempt from federal income tax, although such income may be
subject to the federal alternative minimum tax when received by certain
Shareholders.
The two principal classifications of Exempt Securities which may be held by
the Tennessee Fund are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from proceeds of a special
excise tax or other specific revenue source such as the user of the facility
being financed. Private activity bonds held by the Tennessee Fund are in most
cases revenue securities and 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.
The Tennessee Fund may also invest in "moral obligation" securities, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
The Tennessee Fund invests in Exempt Securities which are rated at the time
of purchase within the three highest rating groups assigned by one or more
appropriate NRSROs for bonds, notes, tax-exempt commercial paper, or variable
rate demand obligations, as the case may be. The Tennessee Fund may also
purchase Exempt Securities which are unrated at the time of purchase but are
determined to be of comparable quality by the Adviser. The applicable Exempt
Securities ratings are described in the Appendix to the Statement of Additional
Information.
The Tennessee Fund may hold uninvested cash reserves pending investment
during temporary defensive periods or if, in the opinion of the Adviser,
suitable Exempt Securities are unavailable. There is no percentage limitation on
the amount of assets which may be held uninvested. Uninvested cash reserves will
not earn income.
Under normal market conditions, at least 80% of the net assets of the
Tennessee Fund will be invested in Exempt Securities. However, investments of
the Tennessee Fund may be made in taxable obligations if, for example, suitable
tax-exempt obligations are unavailable or if acquisition of U.S. Government or
other taxable securities is deemed appropriate for temporary defensive purposes
as determined by the Adviser to be warranted due to market conditions. Such
taxable obligations consist of Government Obligations, certificates of deposit
and bankers' acceptances of selected banks, securities which are restricted as
to disposition, including Rule 144A Securities, and commercial paper meeting the
Tennessee Fund's quality standards (as described above) for tax-exempt
commercial paper, and such taxable obligations which may be subject to
repurchase agreements. These obligations are described further in the Statement
of Additional Information. The Tennessee Fund may also invest up to 10% of its
total assets in money market mutual funds for purposes of short-term cash
management, including shares of the Money Market Fund, as discussed more fully
below under "Risk Factors and Investment Techniques -- Other Investment
Policies." Under such circumstances
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and during the period of such investment, the Tennessee Fund may not achieve its
stated investment objectives.
Interest income from certain types of Exempt Securities may be subject to
federal alternative minimum tax. The Tennessee Fund will include securities
issued by or on behalf of the State of Tennessee, or any county, political
subdivision or municipality thereof, which are subject to federal alternative
minimum tax in the calculation of compliance with the 80% test described above
as a fundamental policy of the Tennessee Fund. Therefore, to the extent the
Tennessee Fund invests in these securities, individual shareholders, depending
on their own tax status, may be subject to alternative minimum tax on that part
of the Tennessee Fund's distributions derived from these bonds. For further
information relating to the types of municipal securities the interest on which
will be included in income subject to alternative minimum tax, see "ADDITIONAL
INFORMATION -- Additional Tax Information" in the Statement of Additional
Information.
Opinions relating to the validity of Exempt Securities and to the exemption
of interest thereon from federal and Tennessee state income taxes are normally
rendered by bond counsel to the respective issuers at the time of issuance.
Neither the Tennessee Fund nor the Adviser will review the proceedings relating
to the issuance of Exempt Securities or the basis for such opinions.
Exempt Securities purchased by the Tennessee Fund may include rated and
unrated variable and floating rate notes the interest on which is tax-exempt.
Such notes are more fully described above under "The Money Market Fund."
Variable and floating rate notes for which no readily available market exists
will be purchased in an amount which, together with other illiquid securities,
exceeds 15% of the Fund's net assets only if such notes are subject to a demand
feature that will permit the Tennessee Fund to receive payment of the principal
within seven days after demand by the Tennessee Fund.
An increase in interest rates will generally reduce the value of the
investments in the Tennessee Fund, and a decline in interest rates will
generally increase the value of those investments. Depending upon the prevailing
market conditions, the Adviser may purchase debt securities at a discount from
face value, which produces a yield greater than the coupon rate. Conversely, if
debt securities are purchased at a premium over face value, the yield will be
lower than the coupon rate. In making investment decisions, the Adviser will
consider many factors other than current yield, including the preservation of
capital, maturity, and yield to maturity.
The Tennessee Fund may use one or more of the investment techniques
described below. Use of such techniques may cause such Fund to earn income which
would be taxable to its Shareholders.
THE GOVERNMENT SECURITIES FUND
Under normal market conditions, the Government Securities Fund will invest
no less than 65% of its net assets in Government Obligations. The Government
Securities Fund may also invest, under normal market conditions, in the
obligations of States of the United States or their counties, political
subdivisions, municipalities, instrumentalities, agencies or authorities
(collectively "agencies") ("State Securities") and in the other fixed income
instruments described below, in securities of other investment companies and in
repurchase agreements. It may also engage in the options transactions and in
other investment techniques described below. Under current market conditions,
the Government Securities Fund expects to maintain an average portfolio duration
of approximately one to four years and a dollar-weighted average portfolio
maturity of approximately two to six years.
Duration is a measure of the average life of a fixed income security that
was developed as a more precise alternative to the concept of "term to maturity"
as a measure of "volatility" or "risk" associated with changes in interest
rates. Duration incorporates a security's yield, coupon interest payments, final
maturity and call features into one measure. Duration is computed by determining
the expected period of time until each scheduled payment or unscheduled
prepayment of principal or interest and averaging such time periods on a
weighted basis in accordance with the present value of such expected payments. A
reduction in the coupon interest rate would generally increase duration; an
increase in the coupon interest rate would generally reduce duration.
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The Government Securities Fund may, for daily cash management purposes,
invest in high quality money market securities, in securities of other
investment companies, and in repurchase agreements. Such money market securities
consist of commercial paper (including variable amount master demand notes),
bankers' acceptances, certificates of deposit, and demand and time deposits of
domestic and foreign banks and savings and loan associations. The Government
Securities Fund may also invest in securities of other investment companies,
including Shares of the Money Market Fund as described more fully below. The
Government Securities Fund may invest, without limit, in any combination of
Government Obligations, State Securities, money market securities and repurchase
agreements during temporary defensive periods as determined by the Adviser.
The types of Government Obligations invested in by the Government
Securities Fund are those Government Obligations, including mortgage related
securities issued by governmental issuers, in which the Fixed Income Fund may
invest as described above under "The Fixed Income Fund."
In addition, the Government Securities Fund may also purchase (1) U.S.
Treasury securities that have been stripped of their unmatured interest coupons
(which typically provide for interest payments semi-annually), (2) interest
coupons that have been stripped from such U.S. Treasury securities and (3)
receipts and certificates for such stripped debt obligations and stripped
coupons ("Stripped Treasury Securities"). Stripped Treasury Securities are sold
at a deep discount because the buyer of those securities receives only the right
to receive a future fixed payment (representing principal or interest) on the
security and does not receive any rights to periodic interest payments on the
security.
Stripped Treasury Securities will include (1) coupons that have been
stripped from U.S. Treasury bonds, which may be held through the Federal Reserve
Bank's book-entry system called "Separate Trading of Registered Interest and
Principal of Securities" ("STRIPS") or through a program entitled "Coupon Under
Book-Entry Safekeeping" ("CUBES"), or (2) U.S. Treasury securities that are
stripped by investment banks and sold under proprietary names. Securities
stripped by investment banks may not be as liquid as STRIPS and CUBES and are
not viewed by the staff of the Commission as U.S. Government securities for
purposes of the Investment Company Act of 1940, as amended (the "1940 Act").
Also included among the Government Obligations that the Government
Securities Fund may purchase are CMOs and real estate mortgage investment
conduits ("REMICs"). CMOs may be collateralized by whole mortgage loans but are
more typically collateralized by portfolios of mortgage pass-through securities
guaranteed by the Government National Mortgage Association, the Federal Home
Loan Mortgage Corporation or the Federal National Mortgage Association, and
their income streams. Certain CMOs and REMICs are issued by private issuers.
Although they will not be treated as Government Obligations for purposes of the
65% policy stated above, they may be eligible for purchase by the Government
Securities Fund if (1) the issuer has obtained an exemptive order from the
Commission regarding purchases by investment companies of equity interests of
other investment companies or (2) such purchase is within the limitations
imposed by Section 12 of the 1940 Act.
The Government Securities Fund invests in State Securities which are rated
at the time of purchase within the three highest rating groups assigned by one
or more appropriate NRSROs for bonds, notes, commercial paper, or variable rate
demand obligations, as the case may be. The Government Securities Fund may also
purchase State Securities which are unrated at the time of purchase but are
determined to be of comparable quality by the Adviser. The applicable State
Securities ratings are described in the Appendix to the Statement of Additional
Information. The State Securities in which the Government Securities Fund will
invest may be "general obligation," "revenue" or "moral obligations" securities
as described above under "The Tennessee Fund" and are expected to be subject to
federal income tax.
Certain debt securities such as, but not limited to, mortgage related
securities and CMOs described above, as well as securities subject to prepayment
of principal prior to the stated maturity date, are expected to be repaid prior
to their stated maturity dates. As a result, the effective maturity of these
securities is expected to be shorter than the stated maturity. For purposes of
calculating the Government Securities Fund's dollar-weighted average portfolio
maturity, the effective maturity of such securities will be used.
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THE GROWTH FUND
Under normal market conditions, the Growth Fund will invest substantially
all, but in no event less than 65% of its total assets in common stocks and
securities convertible into common stocks (i.e., convertible bonds, convertible
preferred stock, warrants, options and rights), traded in U.S. markets,
including the New York Stock Exchange, the American Stock Exchange and NASDAQ,
and issued by companies believed by the Adviser to exhibit an attractive outlook
for growth in earnings. The Growth Fund may also invest up to 35% of its total
assets in preferred stocks, corporate bonds, notes, warrants, and short-term
obligations (with maturities of 12 months or less) such as commercial paper
(including variable amount master demand notes), bankers' acceptances,
certificates of deposit, repurchase agreements, Government Obligations, and
demand and time deposits of domestic and foreign banks and savings and loan
associations. The Growth Fund may also invest in equity REITs and securities of
other investment companies, including Shares of the Money Market Fund, as
described more fully below. It may also engage in the options transactions and
in other investment techniques described below. During temporary defensive
periods as determined by the Adviser, the Growth Fund may hold up to 100% of its
total assets in such short-term obligations. However, to the extent that the
Growth Fund is so invested in debt obligations, such Fund may not achieve its
investment objective.
Subject to the foregoing limitations, the Growth Fund will invest only in
corporate debt securities which are rated at the time of purchase within the
three highest rating groups assigned by one or more NRSROs or, if unrated, which
the Adviser deems to be of comparable quality. For a description of the rating
symbols of the NRSROs, see the Appendix to the Statement of Additional
Information.
Equity securities such as those in which the Growth Fund may invest are
more volatile and carry more risk than some other forms of investment, including
investments in high grade fixed income funds. Depending upon the performance of
the Growth Fund's investments, the net asset value per share of the Growth Fund
may decrease instead of increase.
Subject to the foregoing limitations, the Growth Fund may invest in foreign
securities through the purchase of sponsored and unsponsored American Depositary
Receipts ("ADRs"). Unsponsored ADRs may be less liquid than sponsored ADRs and
there may be less information available regarding the underlying foreign issuer
for unsponsored ADRs. The Growth Fund may also invest in securities issued by
foreign branches of U.S. banks and foreign banks, in CCP and in Europaper.
RISK FACTORS AND INVESTMENT TECHNIQUES
Like any investment program, an investment in any of the Funds entails
certain risks. Equity securities such as those in which the Value Fund and the
Growth Fund may invest are more volatile and carry more risk than some other
forms of investment including investments in high grade fixed income securities.
Therefore, the Value and Growth Funds are each subject to stock market risk,
i.e., the possibility that stock prices in general will decline over short or
even extended periods of time.
Since the Fixed Income Fund, the Government Securities Fund and the
Tennessee Fund each invest in bonds, investors in those Funds are exposed to
bond market risk, i.e., fluctuations in the market value of bonds. Bond prices
are influenced primarily by changes in the level of interest rates. When
interest rates rise, the prices of bonds generally fall; conversely, when
interest rates fall, bond prices generally rise although certain types of bonds
are subject to the risks of prepayment as described above when interest rates
fall. While bonds normally fluctuate less in price than stocks, there have been
in the recent past extended periods of cyclical increases in interest rates that
have caused significant declines in bond prices and have caused the effective
maturity of securities with prepayment features to be extended, thus effectively
converting short or intermediate term securities (which tend to be less volatile
in price) into longer term securities (which tend to be more volatile in price).
Depending upon the performance of each Fund's investments, the net asset
value per share of a Fund may decrease instead of increase, except with respect
to the Money Market Fund, the net asset value of which the Adviser will attempt
to maintain at $1.00.
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Each Fund may invest in one or more of the following securities: certain
variable or floating rate securities, mortgage-backed securities, and as
described below, some of the Funds may invest in put and call options. Such
instruments may be considered to be "derivatives." A derivative is generally
defined as an instrument whose value is based upon, or derived from, some
underlying index, reference rate (e.g., interest rates), security, commodity or
other asset. No Fund will invest more than 15% of its total assets in any such
derivatives, except that with respect to the Money Market Fund, the Fixed Income
Fund, the Government Securities Fund, and the Tennessee Fund, there is no
limitation on the amount of its total assets which may be invested in variable
or floating rate obligations.
Risks of Non-Diversification. Because the Tennessee Fund invests primarily
in securities of the State of Tennessee and its political subdivisions,
municipalities and public authorities, the Tennessee Fund's performance is
closely tied to the general economic conditions within the State as a whole and
to the economic conditions within particular industries and geographic areas
represented or located within the State.
Historically, the economy of Tennessee has been dominated by manufacturing
and agriculture and is sensitive to the effects of recessions. However, since
1969, the retail and wholesale trade and the services industries combined have
accounted for more than 65% of the new jobs created in Tennessee, while
manufacturing accounted for only 21.5% of total employment by 1995, down from
over 34% during the 1960's.
While both the Tennessee economy and the national economy did experience a
downturn during the most recent recession, the downward trend began to reverse
itself in the first quarter of 1991. Tennessee's economy in a number of sectors
has continued to improve ever since. Even during the most recent recession,
Tennessee's economy, in terms of growth in nonagricultural jobs, outperformed
the national economy, in the same respect, as it has done during each of the
last five decades. The August 1996 unemployment rate for Tennessee was 4.4%
compared to 5.1% for the nation as a whole. Tennessee is the 17th most populous
state in the nation, with an estimated state-wide population of 5,256,051 as of
July 1995, but it has a relatively small state government in terms of receipts
and expenditures. During 1993 Tennessee ranked 47th in the nation in terms of
both state taxes per capita and government expenditures per capita.
The four largest cities in Tennessee by population are Memphis, Nashville,
Knoxville, and Chattanooga, in order from largest to smallest. Moody's Investor
Services, Inc. has rated long-term bonds for all four cities, with Memphis and
Nashville receiving AA ratings and Knoxville and Chattanooga receiving A1
ratings. Standard and Poor's Corporation has rated Memphis, Knoxville, and
Chattanooga at AA, AA-, and AA-, respectively.
The Tennessee Fund's classification as "non-diversified" investment
companies means that the proportion of that Fund's assets that may be invested
in the securities of a single issuer is not limited by the 1940 Act. However,
the Tennessee Fund intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended, which requires such Fund generally to invest as of the end of
each fiscal quarter, with respect to 50% of its total assets, not more than 5%
of such assets in the obligations of a single issuer; as to the remaining 50% of
its total assets, such Fund is not so restricted. In no event, however, may the
Tennessee Fund invest more than 25% of its total assets in the obligations of
any one issuer as of the end of each fiscal quarter. Since a relatively high
percentage of such Fund's assets may be invested in the obligations of a limited
number of issuers, some of which may be within the same economic sector, the
Tennessee Fund's portfolio securities may be more susceptible to any single
economic, political or regulatory occurrence than the portfolio securities of a
diversified investment company.
Repurchase Agreements. Securities held by each Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, a Fund would
acquire securities, in exchange for cash from banks and/or registered
broker-dealers which the Adviser deems creditworthy under guidelines approved by
the Group's Board of Trustees. The seller agrees to repurchase such securities
at a mutually agreed date and price. The repurchase price 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 underlying portfolio
securities. Securities subject to repurchase agreements must be of the same type
and quality as those in which such Fund may invest directly. For further
information about repurchase agreements and the related risks, see "INVEST-
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MENT OBJECTIVES AND POLICIES -- Additional Information on Portfolio
Instruments -- Repurchase Agreements" in the Statement of Additional
Information.
Reverse Repurchase Agreements. Each Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, a Fund
would sell portfolio securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them at a mutually agreed-upon date and
price. At the time a Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account assets such as U.S. Government
securities or other liquid high-grade debt securities consistent with such
Fund's investment restrictions having a value equal to the repurchase price
(including accrued interest), and will continually monitor the account to ensure
that such equivalent value is maintained at all times. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the price at which the Fund is obligated to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings by
a Fund under the 1940 Act. For further information about reverse repurchase
agreements, see "INVESTMENT OBJECTIVES AND POLICIES -- Additional Information on
Portfolio Instruments -- Reverse Repurchase Agreements" in the Statement of
Additional Information.
Except as otherwise disclosed to the Shareholders of the Funds, the Group
will not execute portfolio transactions through, acquire portfolio securities
issued by, make savings deposits in, or enter into repurchase or reverse
repurchase agreements with the Adviser, BISYS, or their affiliates, and will not
give preference to the Adviser's correspondents with respect to such
transactions, securities, savings deposits, repurchase agreements, and reverse
repurchase agreements.
Real Estate Investment Trusts, The Value Fund and the Growth Fund may each
invest in equity REITs. REITs pool investors' funds for investment primarily in
commercial real estate properties. Investment in REITs may subject a Fund to
certain risks. REITs may be affected by changes in the value of the underlying
property owned by the trust. REITs are dependent upon specialized management
skill, may not be diversified and are subject to the risks of financing
projects. REITs are also subject to heavy cash flow dependency, defaults by
borrowers, self liquidation and the possibility of failing to qualify for the
beneficial tax treatment available to REITs under the Internal Revenue Code and
to maintain its exemption from the 1940 Act. As a shareholder in a REIT, a Fund
would bear, along with other shareholders, its pro rata portion of the REIT's
operating expenses. These expenses would be in addition to the advisory and
other expenses a Fund bears directly in connection with its own operations.
Restricted Securities. Securities in which the Fixed Income and Tennessee
Funds may invest include securities issued by corporations without registration
under the Securities Act of 1933, as amended (the "1933 Act"), such as
securities issued in reliance on the so-called "private placement" exemption
from registration which is afforded by Section 4(2) of the 1933 Act ("Section
4(2) securities"). Section 4(2) securities are restricted as to disposition
under the Federal securities laws, and generally are sold to institutional
investors such as the Funds who agree that they are purchasing the securities
for investment and not with a view to public distribution. Any resale must also
generally be made in an exempt transaction. Section 4(2) securities are normally
resold to other institutional investors through or with the assistance of the
issuer or investment dealers who assist in the placement of such Section 4(2)
securities, thus providing liquidity. Any such restricted securities will be
considered to be illiquid for purposes of a Fund's limitations on investments in
illiquid securities unless, pursuant to procedures adopted by the Board of
Trustees of the Group, the Adviser has determined such securities to be liquid
because such securities are eligible for resale under Rule 144A under the 1933
Act and are readily saleable.
Options. The Value Fund, the Fixed Income Fund, the Tennessee Fund, the
Government Securities Fund and the Growth Fund may also each purchase put and
call options for hedging purposes. The Funds anticipate that such options will
be exchange traded options. However, in the future such options may also include
OTC-issued options, meaning that such options are purchased from or sold
directly to the other party, are not standardized and are not guaranteed by a
clearing agency, which is in contrast to exchange traded options. A put option
gives the purchaser of the option the right to sell, and obligates the writer
(seller) of the option to buy, the underlying security at the stated exercise
price at any time prior to the expiration date of the
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option, regardless of the market price of the security. A call option gives the
purchaser of the option the right to buy, and obligates the seller of the option
to sell, the underlying security at the stated exercise price at any time prior
to the expiration date of the option, regardless of the market price of the
security. Purchasing options is a specialized investment technique that entails
a substantial risk of a complete loss of the amounts paid as premiums to writers
of options.
For hedging purposes, each of such Funds may also engage in writing call
options from time to time as the Adviser deems appropriate. A Fund will write
only covered call options (options on securities owned by that Fund). When a
Fund writes a covered call option and such option is exercised, that Fund will
forego the appreciation, if any, on the underlying security in excess of the
exercise price. In order to close out a call option it has written, a Fund will
enter into a "closing purchase transaction" -- the purchase of a call option on
the same security with the same exercise price and expiration date as the call
option which that Fund previously wrote on any particular securities. When a
portfolio security subject to a call option is sold, the Fund which wrote the
call will effect a closing purchase transaction to close out any existing call
option on that security. There is no assurance of liquidity in the secondary
market for purposes of closing out options positions. If that Fund is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying security until the option expires or such Fund delivers the
underlying security upon exercise. A Fund may lose the expected benefit of
options transactions if interest rates or securities prices move in an
unanticipated manner. In addition, the value of a Fund's options positions may
not prove to be perfectly or even highly correlated with the value of its
portfolio securities, limiting such Fund's ability to hedge effectively against
market or interest rate risk. Under normal conditions, it is not expected that
any such Fund would permit the underlying value of its portfolio securities
subject to such options to exceed 25% of its net assets.
In addition, the Tennessee Fund may acquire "puts" with respect to Exempt
Securities held in its portfolio. Under a put, the Tennessee Fund would have the
right to sell a specified Exempt Security within a specified period of time at a
specified price. A put would be sold, transferred, or assigned only with the
underlying security. The Tennessee Fund will acquire puts solely to either
facilitate portfolio liquidity, shorten the maturity of the underlying
securities, or permit the investment of its funds at a more favorable rate of
return. The Tennessee Fund expects that it will generally acquire puts only
where the puts are available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Tennessee Fund may pay
for a put either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to the puts (thus reducing the yield to
maturity otherwise available for the same securities).
Guaranteed Investment Contracts. The Money Market Fund and the Fixed
Income Fund may each invest in guaranteed investment contracts ("GICs") issued
by insurance companies. Pursuant to such contracts, the Fund makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the deposit fund on a monthly basis guaranteed
interest which is based on an index. The GICs provide that this guaranteed
interest will not be less than a certain minimum rate. The insurance company may
assess periodic charges against a GIC for expense and service costs allocable to
it, and the charges will be deducted from the value of the deposit fund. A Fund
will only purchase a GIC when the Adviser has determined that the GIC presents
minimal credit risks to such Fund and is of comparable quality to instruments
that are rated high quality by an appropriate NRSRO. Because a Fund may not
receive the principal amount of a GIC from the insurance company on seven days'
notice or less, the GIC is considered an illiquid investment, and, together with
other instruments in such Fund which are not readily marketable, will not exceed
such Fund's limitation on investments in illiquid securities as set forth below.
In determining average weighted portfolio maturity, a GIC will be deemed to have
a maturity equal to the earlier of the period of time remaining until the next
readjustment of the guaranteed interest rate or the period remaining until the
principal amount can be recovered through demand.
Foreign Investments. Investments in foreign securities (including EDCs,
ETDs, CTDs, Yankee CDs, CCP and Europaper) may subject a Fund to investment
risks that differ in some respects from those related to investments in
securities of U.S. domestic issuers. Such risks include future adverse political
and economic developments, the possible imposition of withholding taxes on
interest or other investment income, possible seizure, nationalization, or
expropriation of foreign deposits or investments, the possible establishment of
exchange controls or taxation at the source, less stringent disclosure
requirements, less liquid or developed
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<PAGE> 25
securities markets or the adoption of other foreign governmental restrictions
which might adversely affect the payment of principal, interest or dividends on
such securities or the purchase or sale thereof. 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 recordkeeping
standards than those applicable to domestic branches of U.S. banks. A Fund will
acquire securities issued by foreign branches of U.S. banks, foreign banks, or
other foreign issuers only when the Adviser believes that the risks associated
with such instruments are minimal.
Other Investment Policies. In order to generate additional income, the
Value Fund, the Fixed Income Fund, the Tennessee Fund, the Government Securities
Fund and the Growth Fund may each, from time to time, lend its portfolio
securities to broker-dealers, banks, or institutional borrowers of securities. A
Fund must receive 100% collateral in the form of cash or U.S. Government
securities. This collateral will be valued daily by the Adviser. Should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to that Fund. During the time portfolio securities are on
loan, the borrower pays that Fund any dividends or interest received on such
securities. Loans are subject to termination by such Fund or the borrower at any
time. While a Fund does not have the right to vote securities on loan, each Fund
intends to terminate the loan and regain the right to vote if that is considered
important with respect to the investment. In the event the borrower would
default in its obligations, the Fund bears the risk of delay in recovery of the
portfolio securities and the loss of rights in the collateral. A Fund will enter
into loan agreements only with broker-dealers, banks, or other institutions that
the Adviser has determined are creditworthy under guidelines established by the
Group's Board of Trustees.
The Value Fund, the Fixed Income, the Tennessee Fund, the Government
Securities Fund and the Growth Fund may each purchase securities on a
when-issued or delayed-delivery basis. These transactions are arrangements in
which a Fund purchases securities with payment and delivery scheduled for a
future time. A Fund will engage in when-issued and delayed-delivery transactions
only for the purpose of acquiring portfolio securities consistent with and in
furtherance of its investment objective(s) and policies, not for investment
leverage, although such transactions represent a form of leveraging. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and yield and thereby involve a risk that the yield
obtained in the transaction will be less than those available in the market when
delivery takes place. A Fund will generally not pay for such securities or start
earning interest on them until they are received on the settlement date. When a
Fund agrees to purchase such securities, however, its custodian will set aside
cash or liquid securities equal to the amount of the commitment in a separate
account. Securities purchased on a when-issued basis are recorded as an asset
and are subject to changes in the value based upon changes in the general level
of interest rates. In when-issued and delayed-delivery transactions, a Fund
relies on the seller to complete the transaction; the seller's failure to do so
may cause such Fund to miss a price or yield considered to be advantageous.
Each of the Value Fund, the Fixed Income Fund, the Government Securities
Fund, the Tennessee Fund and the Growth Fund may also invest in the securities
of other investment companies, including Shares of the Money Market Fund, in
accordance with the limitations of the 1940 Act and any exemptions therefrom.
Each such Fund intends to invest in the securities of other investment companies
which, in the opinion of the Adviser, will assist such Fund in achieving its
investment objectives and/or in money market mutual funds for purposes of
short-term cash management. A Fund will incur additional expenses due to the
duplication of fees and expenses as a result of investing in mutual funds. In
order to avoid the imposition of additional fees as a result of investing in
shares of the Money Market Fund, the Adviser, the Administrator and their
affiliates will reduce their fees charged to a Fund by an amount equal to the
fees charged by such service providers based on a percentage of that Fund's
assets attributable to such Fund's investment in the Money Market Fund.
Additional restrictions on the Funds' investments in the securities of other
mutual funds are contained in the Statement of Additional Information.
PORTFOLIO TURNOVER
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of a Fund's purchases or sales of portfolio securities for the year by
the monthly average value of the portfolio securities. The
25
<PAGE> 26
Commission requires that the calculation exclude all securities whose remaining
maturities at the time of acquisition are one year or less. For the Money Market
Fund, portfolio turnover rate is expected to be zero percent for regulatory
purposes. The portfolio turnover rate for each of the other Funds may vary
greatly from year to year, as well as within a particular year, and may also be
affected by cash requirements for redemptions of Shares. High portfolio turnover
rates will generally result in higher transaction costs, including brokerage
commissions, to a Fund and may result in additional tax consequences to a Fund's
Shareholders. Portfolio turnover will not be a limiting factor in making
investment decisions. Portfolio turnover information is set forth above under
"FINANCIAL HIGHLIGHTS."
INVESTMENT RESTRICTIONS
Each Fund is subject to a number of investment restrictions that may be
changed only by a vote of a majority of the outstanding Shares of that Fund (as
defined under "GENERAL INFORMATION -- Miscellaneous" herein).
The Money Market Fund will not:
1. Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer, except
that 25% or less of the value of the Fund's total assets may be invested
without regard to such 5% limitation. There is no limit to the percentage
of assets that may be invested in U.S. Treasury bills, notes, or other
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
2. Purchase any securities which would cause more than 25% of the
value of the Fund's total assets at the time of purchase to be invested in
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 obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, domestic bank certificates of deposit or
bankers' acceptances, and repurchase agreements secured by bank instruments
or obligations of the U.S. Government, its agencies or instrumentalities;
(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 their 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.
Each of the Value and Fixed Income Funds will not:
1. Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of such Fund's total assets would be invested in such issuer, or such
Fund would hold more than 10% of any class of securities of the issuer,
except that up to 25% of the value of a Fund's total assets may be invested
without regard to such limitations, or such Fund would hold more than 10%
of the outstanding voting securities of such issuer. There is no limit to
the percentage of assets that may be invested in U.S. Treasury bills,
notes, or other obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities.
2. Purchase any securities which would cause more than 25% of the
value of such Fund's total assets at the time of purchase to be invested in
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 obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and repurchase agreements secured by
obligations of the U.S. Government, its agencies or instrumentalities; (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 their 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.
26
<PAGE> 27
In addition, each of the Money Market, Value and Fixed Income Funds will
not:
1. Borrow money or issue senior securities, except that each Fund may
borrow from banks or 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 such Fund's
total assets at the time of its borrowing. A Fund will not purchase
securities while its borrowings (including reverse repurchase agreements)
exceed 5% of its total assets.
2. Make loans, except that each Fund may purchase or hold debt
instruments and lend portfolio securities in accordance with its investment
objective and policies, and may enter into repurchase agreements.
3. Invest more than 5% of total assets in securities of issuers which,
together with any predecessors, have a record of less than three years of
continuous operation.
The Tennessee Fund will not:
1. Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if at the end of each fiscal quarter, (a) more than 5%
of the value of the Fund's total assets (taken at current value) would be
invested in such issuer (except that up to 50% of the value of the Fund's
total assets may be invested without regard to such 5% limitation), and (b)
more than 25% of its total assets (taken at current value) would be
invested in securities of a single issuer. There is no limit to the
percentage of assets that may be invested in U.S. Treasury bills, notes, or
other obligations 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, such nongovernmental user.
2. Purchase any securities which would cause more than 25% of the
value of the Fund's total assets (taken at current value) to be invested in
industrial development revenue bonds which are based, directly or
indirectly, on the credit of private issuers in any one industry.
3. Borrow money or issue senior securities, except that the Fund may
borrow from banks or 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. The Fund will not purchase securities while its
borrowings (including reverse repurchase agreements) exceed 5% of its total
assets.
4. Make loans, except that the Fund may purchase or hold debt
instruments and lend portfolio securities in accordance with its investment
objectives and policies, and may enter into repurchase agreements.
Each of the Government Securities Fund and the Growth Fund will not:
1. Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of such Fund's total assets would be invested in such issuer, or such
Fund would hold more than 10% of any class of securities of the issuer,
except that up to 25% of the value of a Fund's total assets may be invested
without regard to such limitations. There is no limit to the percentage of
assets that may be invested in U.S. Treasury bills, notes, or other
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
2. Purchase any securities which would cause more than 25% of the
value of such Fund's total assets at the time of purchase to be invested in
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 obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and repurchase agreements secured by
obligations of the U.S. Government, its agencies or instrumentalities; (b)
wholly owned finance companies will be considered to be in the industries
of their parents if their activities are
27
<PAGE> 28
primarily related to financing the activities of their 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.
3. Borrow money or issue senior securities, except that each Fund may
borrow from banks or enter into reverse repurchase agreements or dollar
roll agreements for temporary purposes in amounts up to 10% of the value of
its total assets at the time of such borrowing, and except as permitted
pursuant to appropriate exemptions from the 1940 Act. A Fund will not
purchase securities while its borrowings (including reverse repurchase
agreements and dollar roll agreements) exceed 5% of its total assets.
4. Make loans, except that each Fund may purchase or hold debt
instruments and lend portfolio securities in accordance with its investment
objective and policies, make time deposits with financial institutions, and
enter into repurchase agreements.
The following additional investment restrictions, as to a particular Fund,
may be changed without the vote of a majority of the outstanding Shares of such
Fund. The Money Market Fund may not:
1. Purchase or otherwise acquire any security if, as a result, more
than 10% of its net assets would be invested in securities that are
illiquid.
Each of the Value, Fixed Income, Tennessee, Government Securities and
Growth Funds will not:
1. Purchase or otherwise acquire any security, if, as a result, more
than 15% of its net assets would be invested in securities that are
illiquid.
For purposes of this investment restriction, illiquid securities include
securities which are not readily marketable and repurchase agreements with
maturities in excess of seven days.
In addition to the above investment restrictions, each Fund is subject to
certain other investment restrictions set forth under "INVESTMENT OBJECTIVES AND
POLICIES -- Investment Restrictions" in the Funds' Statement of Additional
Information.
Irrespective of fundamental investment restriction number 1 above for the
Money Market Fund, and pursuant to Rule 2a-7 under the 1940 Act, the Money
Market Fund will, with respect to 100% of its total assets, limit its investment
in the securities of any one issuer in the manner provided by such Rule, which
limitations are referred to above under the caption "INVESTMENT OBJECTIVES AND
POLICIES -- The Money Market Fund."
VALUATION OF SHARES
The net asset value of the Money Market Fund is determined and its Shares
are priced as of 12:00 noon (Eastern time) and the close of regular trading on
the New York Stock Exchange (the "Exchange") (generally 4:00 p.m. Eastern time)
on each Business Day of the Money Market Fund. The net asset value of each of
the other Funds is determined and their Shares are priced as of the close of
regular trading on the Exchange on each Business Day. The time or times at which
the Shares of a Fund are priced are hereinafter referred to as the "Valuation
Time" or "Valuation Times," as the case may be. A "Business Day" of a Fund is a
day on which the Exchange is open for trading and any other day (other than a
day on which no Shares of that Fund are tendered for redemption and no order to
purchase any Shares of that Fund is received) during which there is sufficient
trading in portfolio instruments such that such Fund's net asset value per share
might be materially affected. The Exchange will not be open in observance of the
following holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value per
share for purposes of pricing purchases and redemptions is calculated by
dividing the value of all securities and other assets belonging to a Fund, less
the liabilities charged to that Fund, by the number of that Fund's outstanding
Shares.
The net asset value per share for each of the Funds, other than the Money
Market Fund, will fluctuate as the value of the investment portfolio of a Fund
changes.
28
<PAGE> 29
The assets in the Money Market Fund are valued based upon the amortized
cost method which the Trustees of the Group believe fairly reflects the
market-based net asset value per share. Pursuant to the rules and regulations of
the Commission regarding the use of the amortized cost method, the Money Market
Fund will maintain a dollar-weighted average portfolio maturity of 90 days or
less. Although the Group seeks to maintain the Money Market Fund's net asset
value per share at $1.00, there can be no assurance that net asset value will
not vary.
The portfolio securities in each of the other Funds for which market
quotations are readily available are valued based upon their current available
prices in the principal market in which such securities normally are traded.
Unlisted securities for which market quotations are readily available are valued
at such market values. Other securities, including restricted securities and
other securities for which market quotations are not readily available, and
other assets are valued at fair value by the Adviser under procedures
established by, and under the supervision of the Group's Board of Trustees.
Securities may be valued by an independent pricing service approved by the
Group's Board of Trustees. Investments in debt securities with remaining
maturities of 60 days or less may be valued based upon the amortized cost
method. For further information about valuation of investments, see "NET ASSET
VALUE" in the Statement of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in each Fund are sold on a continuous basis by the Group's
distributor, BISYS (the "Distributor"). The principal office of the Distributor
is 3435 Stelzer Road, Columbus, Ohio 43219. If you wish to purchase Shares,
telephone the Group at (800) 874-8376.
PURCHASES OF SHARES
Shares may be purchased through procedures established by the Distributor
in connection with the requirements of qualified accounts maintained by or on
behalf of certain persons ("Customers") by the Adviser or its correspondent or
affiliated banks (collectively, the "Banks"). These procedures may include
instructions under which a Customer's account is "swept" automatically no less
frequently than weekly and amounts in excess of a minimum amount agreed upon by
the Bank and the Customer are invested by the Distributor in Shares of a
particular Fund, depending upon the type of the Customer's account and/or the
instructions of the Customer.
Shares of the Funds sold to the Banks acting in a fiduciary, advisory,
custodial, agency, or other similar capacity on behalf of Customers will
normally be held of record by the Banks. With respect to Shares of the Funds so
sold, it is the responsibility of the particular Bank to transmit purchase or
redemption orders to the Distributor and to deliver federal funds for purchase
on a timely basis. Beneficial ownership of Shares will be recorded by the Banks
and reflected in the account statements provided by the Banks to Customers. A
Bank will exercise voting authority for those Shares for which it is granted
authority by the Customer.
Investors may also purchase Shares of a Fund by completing and signing an
Account Registration Form and mailing it, together with a check (or other
negotiable bank draft or money order) in at least the minimum initial purchase
amount, payable to the appropriate Fund, to the Riverside Capital Funds,
Department L-1406, Columbus, Ohio 43260-1406. Subsequent purchases of Shares of
that Fund may be made at any time by mailing a check (or other negotiable bank
draft or money order) payable to the Group, to the above address.
If an Account Registration Form has been previously received by the Group,
investors may also purchase Shares by wiring funds to the Fund's custodian.
Prior to wiring any such funds and in order to ensure that wire orders are
invested promptly, investors must call the Group at (800) 874-8376 to obtain
instructions regarding the bank account number into which the funds should be
wired and other pertinent information.
Shares of each Fund are purchased at the net asset value per share (see
"VALUATION OF SHARES") next determined after receipt by the Distributor, its
agents or broker-dealers with whom it has an
29
<PAGE> 30
agreement of an order in good form to purchase Shares plus any applicable sales
charge as described below. Purchases of Shares of a Fund will be effected only
on a Business Day (as defined in "VALUATION OF SHARES") of that Fund.
An order to purchase Shares of the Money Market Fund will be deemed to have
been received by the Distributor only when federal funds with respect thereto
are available to the Money Market Fund's custodian for investment. Federal funds
are monies credited to a bank's account with a Federal Reserve Bank. Payment for
an order to purchase Shares of the Money Market Fund which is transmitted by
federal funds wire will be available the same day for investment by the Money
Market Fund's custodian, if received prior to the last Valuation Time (see
"VALUATION OF SHARES"). Payments transmitted by other means (such as by check
drawn on a member of the Federal Reserve System) will normally be converted into
federal fund within two banking days after receipt. The Group strongly
recommends that investors of substantial amounts use federal funds to purchase
Shares. Shares of the Money Market Fund purchased before 12:00 noon, Eastern
Time, begin earning dividends on the same Business Day. Shares of the Money
Market Fund purchased after 12:00 noon, Eastern Time, begin earning dividends on
the next Business Day. All Shares of the Money Market Fund continue to earn
dividends through the day before their redemption.
In the case of orders for the purchase of Shares of the other Funds placed
through a broker-dealer, the applicable public offering price will be the net
asset value as so determined (plus any applicable sales charge), but only if the
broker-dealer receives the order and transmits it to the Distributor prior to
the Valuation Time for that day. The broker-dealer is responsible for
transmitting such orders by the Valuation Time. If the broker-dealer fails to do
so, the investor's right to that day's closing price must be settled between the
investor and the broker-dealer. If the broker-dealer receives the order after
the Valuation Time for that day, the price will be based on the net asset value
determined as of the Valuation Time for the next day.
MINIMUM INVESTMENT
Except as otherwise discussed below under "Auto Invest Plan," the minimum
investment is $1,000 for the initial purchase of Shares of a Fund by an investor
and $50 for subsequent purchases of Shares of that Fund. The subsequent purchase
minimum may be waived if purchases are made in connection with an Individual
Retirement Account ("IRA") and both the initial and subsequent minimum
investments may be waived if purchases are made in connection with a payroll
deduction plan.
Depending upon the terms of a particular Customer's account, the Banks or
their affiliates may charge a Customer account fees for automatic investment and
other cash management services provided in connection with investment in a Fund.
Information concerning these services and any charges will be provided by the
Banks. This Prospectus should be read in conjunction with any such information
received from the Banks or their affiliates.
Each Fund reserves the right to reject any order for the purchase of its
Shares in whole or in part, including purchases made with foreign checks and
third party checks not originally made payable to the order of the investor.
Every Shareholder will receive a confirmation of each new transaction in
his or her account, which will also show the total number of Shares owned by the
Shareholder and the number of Shares being held in safekeeping by the Transfer
Agent for the account of the Shareholder. Reports of purchases and redemptions
of Shares by Banks on behalf of their Customers will be sent by the Banks to
their Customers. Shareholders may rely on these statements in lieu of
certificates. Certificates representing Shares will not be issued.
RIVERSIDE CAPITAL INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
A Riverside Capital IRA enables individuals, even if they participate in an
employer-sponsored retirement plan, to establish their own retirement program.
Riverside Capital IRA contributions may be tax-deductible and earnings are tax
deferred. Under the Tax Reform Act of 1986, the tax deductibility of IRA
contributions is restricted or eliminated for individuals who participate in
certain employer pension plans and
30
<PAGE> 31
whose annual income exceeds certain limits. Existing IRAs and future
contributions up to the IRA maximums, whether deductible or not, still earn
income on a tax-deferred basis.
All Riverside Capital IRA distribution requests must be made in writing to
the Distributor. Any deposits to a Riverside Capital IRA must distinguish the
type and year of the contributions.
For more information on the Riverside Capital IRAs call the Group at (800)
874-8376. Investment in shares of a tax-exempt fund, including the Tennessee
Fund, would not be appropriate for a Riverside Capital IRA. Shareholders are
advised to consult a tax adviser on Riverside Capital IRA contribution and
withdrawal requirements and restrictions and whether an investment in the
Tennessee Fund would be appropriate.
AUTO INVEST PLAN
The Riverside Capital Funds Auto Invest Plan enables Shareholders to make
regular monthly or quarterly purchases of Shares of a Fund through automatic
deduction from their bank accounts, provided that the Shareholder's bank is a
member of the Federal Reserve and the Automated Clearing House (ACH) system.
With Shareholder authorization the Transfer Agent will deduct the amount
specified (subject to the applicable minimums) from the Shareholder's bank
account which will automatically be invested in Shares of the designated Fund at
the public offering price on the date of such deduction. The required minimum
initial investment when opening an account using the Auto Invest Plan is $100;
the minimum amount for subsequent investments is $50. To participate in the Auto
Invest Plan, Shareholders should complete the appropriate section of the Account
Registration Form or a supplemental sign-up form which can be acquired by
calling the Group at (800) 874-8376. For a Shareholder to change the Auto Invest
instructions, the request must be made in writing to the Group at: 3435 Stelzer
Road, Columbus, Ohio 43219.
The Group may eliminate or change the Auto Invest Plan at any time or from
time to time without notice thereof.
SALES CHARGES
The public offering price of Shares of each of the Funds, other than the
Money Market Fund, equals net asset value plus a sales charge in accordance with
the tables below. BISYS receives this sales charge as Distributor and reallows a
portion of it as dealer discounts and brokerage commissions. However, the
Distributor, in its sole discretion may pay certain dealers all or part of the
portion of the sales charge it receives. The broker or dealer who receives a
reallowance in excess of 90% of the sales charge may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933.
There is no sales charge imposed by the Money Market Fund in connection
with the purchase of its shares.
VALUE AND GROWTH FUNDS
<TABLE>
<CAPTION>
DEALER
DISCOUNTS AND
BROKERAGE
SALES CHARGE AS SALES CHARGE AS COMMISSIONS AS
AMOUNT OF TRANSACTION AT % OF NET AMOUNT % OF PUBLIC % OF PUBLIC
PUBLIC OFFERING PRICE INVESTED OFFERING PRICE OFFERING PRICE
- ------------------------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C>
Less than $100,000................... 4.71% 4.50% 4.05%
$100,000 but less than $250,000...... 3.63 3.50 3.15
$250,000 but less than $500,000...... 2.56 2.50 2.25
$500,000 but less than $1,000,000.... 1.52 1.50 1.35
$1,000,000 but less than
$2,000,000......................... 0.50 0.50 0.45
$2,000,000 or more................... 0 0 0*
</TABLE>
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<PAGE> 32
FIXED INCOME AND TENNESSEE FUNDS
<TABLE>
<CAPTION>
DEALER
DISCOUNTS AND
BROKERAGE
SALES CHARGE AS SALES CHARGE AS COMMISSIONS AS
AMOUNT OF TRANSACTION AT % OF NET AMOUNT % OF PUBLIC % OF PUBLIC
PUBLIC OFFERING PRICE INVESTED OFFERING PRICE OFFERING PRICE
- ------------------------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C>
Less than $100,000................... 3.09% 3.00% 2.70%
$100,000 but less than $250,000...... 2.56 2.50 2.25
$250,000 but less than $500,000...... 2.04 2.00 1.80
$500,000 but less than $1,000,000.... 1.01 1.00 0.90
$1,000,000 but less than
$2,000,000......................... 0.50 0.50 0.45
$2,000,000 or more................... 0 0 0*
</TABLE>
GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
DEALER
DISCOUNTS AND
BROKERAGE
SALES CHARGE AS SALES CHARGE AS COMMISSIONS AS
AMOUNT OF TRANSACTION AT % OF NET AMOUNT % OF PUBLIC % OF PUBLIC
PUBLIC OFFERING PRICE INVESTED OFFERING PRICE OFFERING PRICE
- ------------------------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C>
Less than $250,000................... 2.04% 2.00% 1.80%
$250,000 but less than $500,000...... 1.52 1.50 1.35
$500,000 but less than $1,000,000.... 1.01 1.00 0.90
$1,000,000 but less than
$2,000,000......................... 0.50 0.50 0.45
$2,000,000 or more................... 0 0 0*
</TABLE>
- ------------------------------
* Brokers or dealers will be paid a fee of 0.25% on purchases of $2 million or
more if the assets on which the 0.25% is paid remain in the Funds, other than
the Money Market Fund, for one year. Such fee, however, will not be paid on
purchases that otherwise are entitled to a sales charge waiver as described
below. If all of the assets on which the 0.25% fee is paid do not remain in
one of the Funds, other than the Money Market Fund, for a period of one
uninterrupted year, the broker or dealer will be required to refund this fee
to the Distributor.
From time to time dealers who receive dealer discounts and brokerage
commissions from the Distributor may reallow all or a portion of such dealer
discounts and brokerage commissions to other dealers or brokers. The
Distributor, at its expense, will also provide additional compensation to
dealers in connection with sales of Shares of any of the Funds. Such
compensation will include financial assistance to dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising campaigns regarding one of more funds of the Group, and/or
other dealer-sponsored special events. In some instances, this compensation will
be made available only to certain dealers whose representatives have sold a
significant amount of such Shares. Compensation will include payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Compensation will also include the following types of non-cash compensation
offered through sales contests: (1) vacation trips, including the provision of
travel arrangements and lodging at vacation resorts, (2) tickets for
entertainment events (such as concerts, cruises and sporting events) and (3)
merchandise (such as clothing, trophies, clocks and pens). Dealers may not use
sales of a Fund's Shares to qualify for this compensation to the extent such may
be prohibited by the laws of any state or any self-regulatory agency, such as
the NASD. None of the aforementioned compensation is paid for by any Fund or its
Shareholders.
SALES CHARGE WAIVERS
The Distributor may waive sales charges for the purchase of Shares of a
Fund by or on behalf of (1) purchasers for whom NCB, the Adviser, banks, trust
companies, savings and loan associations and credit unions or one of their
affiliates acts in a fiduciary, advisory, agency, custodial (other than
individual retirement accounts), or similar capacity, (2) employees and retired
employees (including spouses, children and parents of employees and retired
employees) of NCB, the Adviser, BISYS and any affiliates thereof, (3) purchasers
32
<PAGE> 33
pursuant to the terms of a payroll deduction plan, (4) Trustees of the Group,
(5) directors of NCB, the Adviser and any affiliates thereof, (6) brokers,
dealers and agents who have a sales agreement with the Distributor, and their
employees (and their spouses and children under the age of 21), and (7) orders
placed on behalf of other investment companies distributed by The BISYS Group,
Inc. or its affiliated companies. The Distributor may change or eliminate the
foregoing waivers at any time. The Distributor may also periodically waive all
or a portion of the sales charge for all investors with respect to a Fund.
CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, investors have the
privilege of combining concurrent purchases of a Fund and one or more of the
other funds of the Group sold with a sales charge and advised by the Adviser
("Riverside Load Funds"). For example, if a shareholder concurrently purchases
Shares in the Value Fund at the total public offering price of $50,000 and
Shares in the Tennessee Fund at the total public offering price of $50,000, the
sales charge would be that applicable to a $100,000 purchase as shown in the
appropriate table above. This privilege, however, may be modified or eliminated
at any time or from time to time by the Group without notice thereof.
LETTER OF INTENT
An investor may obtain a reduced sales charge by means of a written Letter
of Intent which expresses the intention of such investor to purchase Shares of a
Fund at a designated total public offering price within a designated 13-month
period. Each purchase of Shares under a Letter of Intent will be made at the net
asset value plus the sales charge applicable at the time of such purchase to a
single transaction of the total dollar amount indicated in the Letter of Intent.
A Letter of Intent may include purchases of Shares made not more than 90 days
prior to the date such investor signs a Letter of Intent; however, the 13-month
period during which the Letter of Intent is in effect will begin on the date of
the earliest purchase to be included. This program may be modified or eliminated
at any time or from time to time by the Group without notice. For further
information about letters of intent, interested investors should contact the
Group at (800) 874-8376.
A Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow (while remaining registered in the name of
the investor) to secure payment of the higher sales charge applicable to the
Shares actually purchased if the full amount indicated is not purchased, and
such escrowed Shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends on escrowed Shares, whether paid in cash or
reinvested in additional Shares, are not subject to escrow. The escrowed Shares
will not be available for disposal by the investor until all purchases pursuant
to the Letter of Intent have been made or the higher sales charge has been paid.
When the full amount indicated has been purchased, the escrow will be released.
An adjustment will be made to reflect any reduced sales charge applicable to
Shares purchased during the 90-day period prior to the date the Letter of Intent
was entered into at the conclusion of the 13-month period and in the form of
additional Shares credited to the Shareholder's account at the then current
public offering price applicable to a single purchase of the total amount of the
total purchases. Additionally, if the total purchases within the 13-month period
exceed the amount specified, a similar adjustment will be made to reflect
further reduced sales charges applicable to such purchases.
RIGHT OF ACCUMULATION
Pursuant to the right of accumulation, investors are permitted to purchase
Shares of a Fund at the public offering price applicable to the total of (a) the
total public offering price of the Shares of the Riverside Load Fund then being
purchased plus (b) an amount equal to the then current net asset value of the
purchaser's combined holdings of the Shares of all of the Riverside Load Funds.
The "purchaser's combined holdings" described in the preceding sentence shall
include the combined holdings of the purchaser, the purchaser's spouse and
children under the age of 21 and the purchaser's retirement plan accounts. To
receive the applicable public offering price pursuant to the right of
accumulation, Shareholders must, at the time of purchase, give the Transfer
Agent sufficient information to permit confirmation of qualification. This right
of
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<PAGE> 34
accumulation, however, may be modified or eliminated at any time or from time to
time by the Group without notice.
EXCHANGE PRIVILEGE
For investors who were Shareholders of the Funds prior to November 1, 1994,
Shares of a Riverside Load Fund may be exchanged without payment of any fees or
sales charge for Shares of any of the other Riverside Load Funds at respective
net asset values. For investors who become Shareholders of the Funds on or after
November 1, 1994, Shares of a Riverside Load Fund may be exchanged for Shares of
any of the other Riverside Load Funds at respective net asset values upon the
payment of a sales charge equal to the difference, if any, between the sales
charge payable upon purchase of Shares of such Riverside Load Fund and the sales
charge previously paid on the Fund Shares to be exchanged. Provided further,
that with respect to every exchange, the amount to be exchanged must meet the
applicable minimum investment requirements and the exchange is made in states
where it is legally authorized. When Shares of the Money Market Fund are
exchanged for Shares of a Riverside Load Fund, the applicable sales load will be
assessed, unless such Shares to be exchanged were acquired through a previous
exchange for Shares on which a sales charge was paid. Under such circumstances,
the Shareholder must notify the Group that a sales charge was originally paid
and provide the Group with sufficient information to permit confirmation of the
Shareholder's right not to pay a sales charge.
An exchange is considered a sale of Shares for federal income tax purposes.
However, a Shareholder may not include any sales charge on Shares of a Fund as a
part of the cost of those Shares for purposes of calculating the gain or loss
realized on an exchange of those Shares within 90 days of their purchase.
This exchange privilege is not intended to afford Shareholders a way to
speculate on short-term movements in the market. Accordingly, in order to
prevent excessive use of the exchange privilege that may potentially disrupt the
management of the Funds and increase transaction costs, the Group has
established a policy of limiting the number of exchanges by a Shareholder to
four during any one calendar year. The Group may at any time modify or terminate
the foregoing exchange privileges. The Group, however, will give shareholders 60
days' advance written notice of any such modification.
A Shareholder wishing to exchange his or her Shares may do so by contacting
the Group at (800) 874-8376 or by providing written instructions to the Group.
Any Shareholder who wishes to make an exchange should obtain and review the
current prospectus of the Fund in which he or she wishes to invest before making
the exchange. For a discussion of risks associated with unauthorized telephone
exchanges, see "Redemption by Telephone" below.
REDEMPTION OF SHARES
Shares may ordinarily be redeemed by mail or by telephone. However, all or
part of a Customer's Shares may be redeemed in accordance with instructions and
limitations pertaining to his or her account at a Bank. For example, if a
Customer has agreed with a Bank to maintain a minimum balance in his or her
account with the Bank, and the balance in that account falls below that minimum,
the Customer may be obliged to redeem, or the Bank may redeem on behalf of the
Customer, all or part of the Customer's Shares of a Fund to the extent necessary
to maintain the required minimum balance.
REDEMPTION BY MAIL
A written request for redemption must be received by the Group, at the
address shown on the front page of this Prospectus, in order to honor the
request. The Transfer Agent will require a signature guarantee by an eligible
guarantor institution. The signature guarantee requirement will be waived if the
following conditions apply: (1) the redemption check is payable to the
Shareholder(s) of record, and (2) the redemption check is mailed to the
Shareholder(s) at the address of record or mailed or wired to a commercial bank
account previously designated on the Account Registration Form. There is no
charge for having redemption proceeds mailed to a designated bank account. To
change the address to which a redemption check is to be mailed, a written
request therefor must be received by the Transfer Agent. In connection with such
request, the Transfer
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<PAGE> 35
Agent will require a signature guarantee by an eligible guarantor institution.
For purposes of this policy, the term "eligible guarantor institution" shall
include banks, brokers, dealers, credit unions, securities exchanges and
associations, clearing agencies and savings associations as those terms are
defined in the Securities Exchange Act of 1934. The Transfer Agent reserves the
right to reject any signature guarantee if (1) it has reason to believe that the
signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
REDEMPTION BY TELEPHONE
If a Shareholder has so designated on the Account Registration Form, a
Shareholder may request a redemption of his or her Shares by telephoning the
Group and having the payment of redemption requests sent electronically directly
to a domestic commercial bank account previously designated by the Shareholder
on the Account Registration Form. A Shareholder may also have such payment
mailed directly to the Shareholder at the Shareholder's address as recorded by
the Transfer Agent; however, this option may be suspended for a period of 10
days following a telephonic address change. Under most circumstances, such
payments will be transmitted on the next Business Day following receipt of a
valid request for redemption. Such wire redemption requests may be made by the
Shareholder by telephone to the Transfer Agent. The Group may reduce the amount
of a wire redemption payment by the then-current wire redemption charge of the
Funds' custodian. There is currently no charge for having payment of redemption
requests mailed or sent electronically to a designated bank account. For
telephone redemptions, call the Group at (800) 874-8376.
Neither the Funds nor their service providers will be liable for any loss,
damages, expense or cost arising out of any telephone redemption effected in
accordance with a Fund's telephone redemption procedures, acting upon
instructions reasonably believed to be genuine. Each Fund will employ procedures
designed to provide reasonable assurance that instructions by telephone are
genuine; if these procedures are not followed, such Fund or its service
providers may be liable for any losses due to unauthorized or fraudulent
instructions. These procedures include recording all phone conversations,
sending confirmations to Shareholders within 72 hours of the telephone
transaction, verification of account name and account number or tax
identification number, and sending redemption proceeds only to the address of
record or to a previously authorized bank account. If, due to temporary adverse
conditions, Shareholders are unable to effect telephone transactions,
Shareholders may also mail the redemption request to the Group at the address
shown on the front page of this Prospectus.
AUTO WITHDRAWAL PLAN
The Auto Withdrawal Plan enables Shareholders of a Fund, with an account
balance in such Fund of $5,000 or more, to make regular monthly or quarterly
redemptions of Shares. With Shareholder authorization, the Transfer Agent will
automatically redeem Shares at the net asset value on the dates of the
withdrawal and have a check in the amount specified mailed to the Shareholder.
The required minimum withdrawal is $100 quarterly. To participate in the Auto
Withdrawal Plan, Shareholders should call (800) 874-8376 for more information.
Purchases of additional Shares, including use of the Auto Invest Plan,
concurrent with withdrawals may be disadvantageous to certain Shareholders
because of tax liabilities and sales charges. For a Shareholder to change the
Auto Withdrawal instructions, the request must be made in writing to the Group.
PAYMENTS TO SHAREHOLDERS
Redemption orders are effected at the net asset value per share next
determined after the Shares are properly tendered for redemption, as described
above. Payment to Shareholders for Shares redeemed will be made within seven
days after receipt by the Distributor of the request for redemption. However,
with respect to the Money Market Fund, to the greatest extent possible, such
Fund will attempt to honor requests from Shareholders for same day payments upon
redemption of Shares if the request for redemption is received by the
Distributor before 12:00 noon, Eastern Time, on a Business Day or, if the
request for redemption is received after 12:00 noon, Eastern Time, to honor
requests for payment on the next Business Day. With respect to each of the other
Funds, to the greatest extent possible, such Funds will attempt to honor
requests
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<PAGE> 36
from Shareholders for next day payments upon redemption of Shares if the request
for redemption is received by the Distributor before the Valuation Time, on a
Business Day or, if the request for redemption is received after the Valuation
Time, to honor requests for payment on the second Business Day. Each Fund will
attempt to so honor redemption requests unless it would be disadvantageous to
that Fund or the Shareholders of that Fund to sell or liquidate portfolio
securities in an amount sufficient to satisfy requests for payments in that
manner.
At various times, the Group may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Group may delay
the forwarding of proceeds for up to 15 days or more until payment has been
collected for the purchase of such Shares. With respect to Shares of the Money
Market Fund, during the period of any such delay, such Shares to be redeemed
would continue to receive daily dividends as declared until execution of the
redemption. The Group intends to pay cash for all Shares redeemed, but under
abnormal conditions which make payment in cash unwise, the Group may make
payment wholly or partly in portfolio securities at their then market value
equal to the redemption price. In such cases, an investor may incur brokerage
costs in converting such securities to cash.
Due to the relatively high cost of handling small investments, each Fund
reserves the right to redeem, at net asset value, the Shares of that Fund of any
Shareholder if, because of redemptions of Shares by or on behalf of the
Shareholder (but not as a result of a decrease in the market price of such
Shares, the deduction of any sales charge or the establishment of an account
with less than $1,000 using the Auto Invest Plan or pursuant to a payroll
deduction plan), the account of such Shareholder has a value of less than
$1,000. Accordingly, an investor purchasing Shares of a Fund in only the minimum
investment amount may be subject to such involuntary redemption if he or she
thereafter redeems some of his or her Shares. Before a Fund exercises its right
to redeem such Shares and to send the proceeds to the Shareholder, the
Shareholder will be given notice that the value of the Shares in his or her
account is less than the minimum amount and will be allowed 60 days to make an
additional investment in an amount which will increase the value of the account
to at least $1,000.
See "ADDITIONAL PURCHASE AND REDEMPTION INFORMATION" and "NET ASSET VALUE"
in the Statement of Additional Information for examples of when the Group may
suspend the right of redemption or redeem shares involuntarily in light of the
Group's responsibilities under the 1940 Act.
DIVIDENDS AND TAXES
DIVIDENDS
The net income of the Money Market Fund is declared daily and such
dividends are generally paid monthly. For the Money Market Fund, dividends are
paid periodically in cash, generally on the first Business Day of the month, but
may be paid on the last Business Day of the preceding month.
A dividend for each of the other Funds is declared monthly at the close of
business on the day of declaration consisting of an amount of accumulated
undistributed net income of that Fund as determined necessary or appropriate by
the appropriate officers of the Group. Such dividend is generally paid monthly.
Shareholders will automatically receive all income dividends and capital gains
distributions in additional full and fractional Shares of that particular Fund
at the net asset value as of the date of payment, unless the Shareholder elects
to receive dividends or distributions in cash. Such election, or any revocation
thereof, must be made in writing to the Transfer Agent at 3435 Stelzer Road,
Columbus, Ohio 43219, and will become effective with respect to dividends and
distributions having record dates after its receipt by the Transfer Agent.
Distributable net realized capital gains for each Fund are distributed at
least annually. Dividends are paid in cash not later than seven Business Days
after a Shareholder's complete redemption of his or her Shares in a Fund.
If a Shareholder elects to receive distributions in cash, and checks (1)
are returned and marked as "undeliverable" or (2) remain uncashed for six
months, the Shareholder's cash election will be changed automatically and future
dividend and capital gains distributions will be reinvested in that Fund at the
per
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<PAGE> 37
share net asset value determined as of the date of payment of the distribution.
In addition, any undeliverable checks or checks that remain uncashed for six
months will be canceled and will be reinvested in that Fund at the per share net
asset value determined as of the date of cancellation.
FEDERAL TAXES
General. Each of the Funds is treated as a separate entity for federal
income tax purposes and intends to qualify as a "regulated investment company"
under the Code for so long as such qualification is in the best interest of that
Fund's Shareholders. Qualification as a regulated investment company under the
Code requires, among other things, that the regulated investment company
distribute to its shareholders at least 90% of its investment company taxable
income. Each Fund contemplates declaring as dividends all or substantially all
of that Fund's investment company taxable income (before deduction of dividends
paid).
A non-deductible 4% excise tax is imposed on regulated investment companies
that do not distribute in each calendar year (regardless of whether they
otherwise have a non-calendar taxable year) an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
for the one-year period ending on October 31 of such calendar year. If
distributions during a calendar year were less than the required amount, that
Fund would be subject to a nondeductible 4% excise tax on the deficiency.
It is expected that each Fund will distribute annually to Shareholders all
or substantially all of that Fund's net ordinary income and net realized capital
gains and that such distributed net ordinary income and distributed net realized
capital gains will be taxable income to Shareholders for federal income tax
purposes, even if paid in additional Shares of the Fund and not in cash. The
dividends-received deduction for corporations will apply to the aggregate of
such ordinary income distributions in the same proportion as the aggregate
dividends eligible for the dividends deduction, if any, received by the Fund
bear to its gross income. Since all of the Money Market Fund's and the Fixed
Income Fund's net investment income is expected to be derived from earned
interest and capital gains, it is anticipated that no part of any distribution
from such Funds will be eligible for the dividends received deduction for
corporation. The Money Market Fund also does not expect to realize any long-term
capital gains and, therefore, does not foresee paying any "capital gains
dividends" as described in the Code.
Distribution by a Fund of the excess of net long-term capital gain over net
short-term capital loss is taxable to Shareholders as long-term capital gain in
the year in which it is received, regardless of how long the Shareholder has
held the Shares. Such distributions are not eligible for the dividends-received
deduction.
If the net asset value of a Share is reduced below the Shareholder's cost
of that Share by the distribution of income or gain realized on the sale of
securities, the distribution, from a practical stand point, is a return of
invested principal, although taxable as described above.
Prior to purchasing Shares, the impact of dividends or capital gains
distributions which are expected to be declared or have been declared, but have
not been paid, should be carefully considered. Any such dividends or capital
gains distributions paid shortly after a purchase of Shares prior to the record
date will have the effect of reducing the per share net asset value of the
Shares by the amount of the dividends or distributions. All or a portion of such
dividends or distributions, although in effect a return of capital, is subject
to tax.
Additional information regarding federal taxes is contained in the
Statement of Additional Information under the heading "ADDITIONAL
INFORMATION -- Additional Tax Information." However, the information contained
in this Prospectus and the additional material in the Statement of Additional
Information are only brief summaries of some of the important tax considerations
generally affecting the Funds and their Shareholders. Accordingly, potential
investors are urged to consult their tax advisers concerning the application of
federal, state and local taxes as such laws and regulations affect their own tax
situation.
Shareholders will be advised at least annually as to the federal and state
income tax consequences of distributions made to them during the year.
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<PAGE> 38
The Tennessee Fund. The Tennessee Fund will distribute substantially all
of its net investment income and net capital gains to its Shareholders.
Dividends derived from interest earned on Exempt Securities constitute
"exempt-interest dividends" when designated as such by the Tennessee Fund and
will be excludable from gross income for federal income tax purposes. However,
exempt-interest dividends attributable to certain municipal obligations issued
on or after August 8, 1986, to finance certain private activities will be
treated as a tax preference item in computing the alternative minimum tax. Also,
a portion of all other interest excluded from gross income for federal income
tax purposes earned by a corporation may be subject to the alternative minimum
tax as a result of the inclusion in alternative minimum taxable income of 75% of
the excess of adjusted current earnings over alternative minimum taxable income.
Distributions, if any, derived from capital gains will generally be taxable
to Shareholders as capital gains for federal income tax purposes to the extent
so designated by the Tennessee Fund. Dividends, if any, derived from sources
other than interest excluded from gross income for federal income tax purposes
and capital gains will be taxable to Shareholders as ordinary income for federal
income tax purposes whether or not reinvested in additional Shares. Shareholders
not subject to federal income tax on their income will not, of course, be
required to pay federal income tax on any amounts distributed to them. The
Tennessee Fund anticipates that substantially all of its dividends will be
excluded from gross income for federal income tax purposes. The Tennessee Fund
will notify each Shareholder annually of the tax status of all distributions.
If a Shareholder receives an exempt-interest dividend with respect to any
Share and such Share is held by the Shareholder for six months or less, any loss
on the sale or exchange of such Share will be disallowed to the extent of the
amount of such exempt-interest dividend. In certain limited instances, the
portion of Social Security benefits that may be subject to federal income
taxation, may be affected by the amount of tax-exempt interest income, including
exempt-interest dividends, received by a Shareholder.
Interest on indebtedness incurred or continued by a Shareholder to purchase
or carry Shares of the Tennessee Fund is not deductible for federal income taxes
assuming the Tennessee Fund distributes exempt-interest dividends during the
Shareholder's taxable year. It is anticipated that distributions from the
Tennessee Fund will not be eligible for the dividends received deduction for
corporations.
STATE TAXES -- THE TENNESSEE FUND
Tennessee imposes a limited income tax, known as the "Hall Income Tax," on
certain interest and dividend income. The Hall Income Tax statutes, amended
effective for dividends received after January 1, 1992, provide that, as set
forth below, no tax will be levied on dividends from a regulated investment
company qualified as such under the Code, provided a part of such investment
company's portfolio is invested in bonds or securities of the United States
government or any agency or instrumentality thereof or in bonds of the State of
Tennessee or any county, municipality or political subdivision thereof
(including any agency, board, authority or commission of any of the foregoing).
In the opinion of Messrs. Burch, Porter and Johnson, Tennessee tax counsel to
the Tennessee Fund, so long as the Tennessee Fund qualifies as a "regulated
investment company" under the Code, dividends, whether paid as distributions of
cash, other property or additional Shares, by the Tennessee Fund to a resident
of Tennessee, will be exempt from the Hall Income Tax, as amended, in proportion
to the income received by the Tennessee Fund attributable to interest on
Tennessee Exempt Securities. The balance of the dividends, including any
dividends attributable to capital gains, will be subject to the Hall Income Tax.
In addition, in a letter dated August 14, 1992, from the Commissioner of
the Tennessee Department of Revenue, the Commissioner stated his position that
mutual fund distributions attributable to fund investments in Puerto Rican bonds
are exempt from the Hall Income Tax.
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MANAGEMENT OF THE GROUP
TRUSTEES OF THE GROUP
Overall responsibility for management of the Group rests with its Board of
Trustees. Unless so required by the Group's Declaration of Trust or By-Laws or
by Ohio law, at any given time all of the Trustees may not have been elected by
the shareholders of the Group. The Group will be managed by the Trustees in
accordance with the laws of Ohio governing business trusts. The Trustees, in
turn, elect the officers of the Group to supervise its day-to-day operations.
The Trustees of the Group receive fees and are reimbursed for their
expenses in connection with each meeting of the Board of Trustees they attend.
However, no officer or employee of BISYS Fund Services Inc., the sole general
partner of BISYS, or BISYS Fund Services Ohio, Inc. receives any compensation
from the Group for acting as a Trustee of the Group. The officers of the Group
receive no compensation directly from the Group for performing the duties of
their offices. BISYS receives fees from the Group for acting as Administrator
and under the Distribution Plan discussed below, may receive fees under the
Administrative Services Plan discussed below, and may retain all or a portion of
any sales load imposed upon purchases of Shares. BISYS Fund Services Ohio, Inc.
receives fees from each of the Funds for acting as Transfer Agent and for
providing certain fund accounting services.
INVESTMENT ADVISER
National Bank of Commerce, One Commerce Square, Memphis, Tennessee 38150,
is the investment adviser of each Fund and has served as such since each Fund's
inception. The Adviser is a wholly owned subsidiary of National Commerce
Bancorporation ("NCB"). The Adviser and its affiliates also administer, on
behalf of their clients, assets which as of September 30, 1996, totalled $3.9
billion, and of which approximately $989 million are managed in a variety of
balanced, equity and fixed income portfolios. The Adviser has over 120 years of
banking experience and as of June 30, 1996, had over $3.9 billion in assets.
Subject to the general supervision of the Board of Trustees of the Group
and in accordance with the investment objectives and restrictions of the Funds,
the Adviser manages each Fund, makes decisions with respect to and places orders
for all purchases and sales of its portfolio securities, and maintains each
Fund's records relating to such purchases and sales.
Alfred H. Jordan has been primarily responsible for the day-to-day
management of the Fixed Income Fund's, the Tennessee Fund's and the Government
Securities Fund's portfolios since the commencement of such Funds' operations.
As of February 15, 1995, Alan Catmur assumed primary responsibility for the
day-to-day management of the Value Fund's portfolio. Since the commencement of
the Growth Fund's operations, Jay Brooks has been responsible for the day-to-day
management of such Fund's portfolio.
Mr. Jordan has been an employee of the Adviser and a fixed income portfolio
manager for Commerce Capital Management, Inc., an affiliate of the Adviser
("CCMI"), since 1987, and is currently President of CCMI.
Since 1991, Mr. Catmur has been an equity analyst and portfolio manager of
the Adviser and has served as a member of its Equity Investment Committee. Prior
to 1991, Mr. Catmur serviced retail and institutional accounts at Robinson
Humphrey Company, Inc., an Atlanta investment banking firm.
Mr. Brooks has been an employee of the Adviser since February, 1994, and
has been President of Brooks, Montague & Associates, an investment advisory firm
and an affiliate of the Adviser, since 1986.
For the services provided and expenses assumed pursuant to its investment
advisory agreements with the Group, the Adviser receives a fee from each of the
Funds, computed daily and paid monthly, at the following rates: with respect to
the Money Market Fund, the annual rate of thirty-five one-hundredths of one
percent (.35%) of such Fund's average daily net assets; with respect to the
Value Fund, the annual rate equal to the lesser of (a) a fee computed at the
annual rate of one percent (1.00%) of the first $50 million of such Fund's
average daily net assets and seventy-five one-hundredths of one percent (0.75%)
of such Fund's remaining
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<PAGE> 40
average daily net assets or (b) such other fee as may be agreed upon in writing
by the Group and the Adviser; with respect to each of the Fixed Income Fund and
the Tennessee Fund, an annual rate equal to the lesser of a fee at the annual
rate of sixty-five one-hundredths of one percent (0.65%) of such Fund's average
daily net assets, or such other fee as may be agreed upon in writing by the
Group and the Adviser; with respect to the Government Securities Fund, the
annual rate of fifty one-hundredths of one percent (0.50%) of such Fund's
average daily net assets; and with respect to the Growth Fund, the annual rate
of one percent (1.00%) of the first $50 million of such Fund's average daily net
assets and seventy-five one-hundredths of one percent (0.75%) of such Fund's
remaining average daily net assets.
The Adviser may periodically voluntarily reduce all or a portion of its
advisory fee with respect to a Fund to increase the net income of that Fund
available for distribution as dividends. The Adviser may not seek reimbursement
of such voluntarily reduced fees at a later date. The reduction of such fee will
cause the yield and total return of that Fund to be higher than they would
otherwise be in the absence of such a reduction.
ADMINISTRATOR AND DISTRIBUTOR
BISYS is the administrator for each Fund and also acts as each Fund's
principal underwriter and distributor (the "Administrator" or the "Distributor,"
as the context indicates). BISYS and its affiliated companies, including BISYS
Fund Services Ohio, Inc., are wholly owned by The BISYS Group, Inc., a
publicly-held company which is a provider of information processing, loan
servicing and 401(k) administration and recordkeeping services to and through
banking and other financial organizations.
The Administrator generally assists in all aspects of a Fund's
administration and operation. For expenses assumed and services provided as
administrator pursuant to its management and administration agreement with the
Group, the Administrator receives a fee from each Fund equal to the lesser of a
fee computed daily and paid periodically, calculated at an annual rate of twenty
one-hundredths of one percent (.20%) of that Fund's average daily net assets or
such other fee as may be agreed upon in writing by the Group and the
Administrator. The Administrator may periodically voluntarily reduce all or a
portion of its administration fee with respect to a Fund to increase the net
income of such Fund available for distribution as dividends. The Administrator
may not seek reimbursement of such reduced fees at a later date. The voluntary
reduction of such fee will cause the yield and total return of that Fund to be
higher than they would otherwise be in the absence of such a fee reduction.
While the combined fees of the Adviser and the Administrator with respect
to the Value, Fixed Income, Tennessee and Growth Funds are higher than similar
fees paid by most mutual funds, the Board of Trustees believes such fees to be
fair and reasonable and to be comparable to the fees paid by many funds having
similar investment objectives and policies.
The Distributor acts as agent for each of the Funds in the distribution of
their Shares and, in such capacity, solicits orders for the sale of Shares,
advertises, and pays the costs of advertising, office space and its personnel
involved in such activities. The Distributor receives no compensation under its
Distribution Agreement with the Group, but receives compensation under the
Distribution and Shareholder Service Plan described below and may retain all or
a portion of any sales charge imposed upon the purchase of Shares. See "HOW TO
PURCHASE AND REDEEM SHARES -- Sales Charges."
EXPENSES
The Adviser and the Administrator each bear all expenses in connection with
the performance of their services as investment adviser and administrator,
respectively, other than the cost of securities (including brokerage
commissions, if any) purchased for a Fund.
DISTRIBUTION PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Group has adopted a
Distribution and Shareholder Service Plan (the "Plan"), under which each Fund is
authorized to pay or reimburse BISYS, as Distributor, a periodic amount
calculated at an annual rate not to exceed twenty-five one-hundredths of one
percent (.25%)
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of the average daily net asset value of that Fund. Such amount may be used by
BISYS to pay banks (including the Adviser), broker-dealers, and other
institutions (a "Participating Organization") for distribution and/or
shareholder service assistance pursuant to an agreement between BISYS and the
Participating Organization. Under the Plan, a Participating Organization may
include BISYS, its subsidiaries, and its affiliates.
As authorized by the Plan, BISYS has entered into Rule 12b-1 Agreements
with Commerce Investment Corporation, a wholly owned subsidiary of the Adviser
("C.I.C."), to provide certain distribution and shareholder services in
connection with the distribution of the Shares of each of the Funds including,
but not limited to, maintaining Shareholder relations, answering questions about
the Funds and distributing prospectuses to persons other than Shareholders of
the Funds. In consideration of such services BISYS has agreed to pay C.I.C. a
monthly fee, computed at the annual rate of .25% of the average aggregate net
asset value of Shares held during the period in accounts for which C.I.C.
provided services under such Agreement. BISYS will be compensated by each Fund
in an amount equal to its payments to C.I.C. under the Rule 12b-1 Agreement with
respect to that Fund. Such fee may exceed the actual costs incurred by C.I.C. in
providing such services.
The Group has also entered into Rule 12b-1 Agreements with BISYS pursuant
to which BISYS has agreed to provide certain distribution and shareholder
support services to the Funds and their Shareholders, including, but not limited
to, maintaining Shareholder relations, advertising and marketing the Shares of
the Funds, answering questions about the Funds, distributing prospectuses to
persons other than Shareholders of the Funds, and providing such other services
as a Fund may reasonably request. In consideration of such services, the Group
has agreed to pay BISYS a monthly fee, computed at the annual rate of .25% of
the average aggregate net asset value of Shares held during the period in client
accounts for which BISYS has provided services under this Rule 12b-1 Agreement.
Such fee may exceed the actual costs incurred by BISYS in providing such
services.
In addition, BISYS may enter into, from time to time, other Rule 12b-1
Agreements with selected dealers pursuant to which such dealers will provide
certain services in connection with the distribution of a Fund's Shares such as
those described above.
ADMINISTRATIVE SERVICES PLAN
The Group has adopted an Administrative Services Plan (the "Services Plan")
pursuant to which each Fund is authorized to pay compensation to banks and other
financial institutions (each a "Service Organization"), which may include the
Adviser, its correspondent and affiliated banks, and BISYS, which agree to
provide certain ministerial, record keeping and/or administrative support
services for their customers or account holders (collectively, "customers") who
are the beneficial or record owner of Shares of that Fund. In consideration for
such services, a Service Organization receives a fee from a Fund, computed daily
and paid monthly, at an annual rate of up to .25% of the average daily net asset
value of Shares of that Fund owned beneficially or of record by such Service
Organization's customers for whom the Service Organization provides such
services.
The servicing agreements adopted under the Services Plan (the "Servicing
Agreements") require the Service Organizations receiving such compensation to
perform certain ministerial, record keeping and/or administrative support
services with respect to the beneficial or record owners of Shares of the Funds,
such as processing dividend and distribution payments from the Fund on behalf of
customers, providing periodic statements to customers showing their positions in
the Shares of the Fund, providing sub-accounting with respect to Shares
beneficially owned by such customers and providing customers with a service that
invests the assets of their accounts in Shares of the Fund pursuant to specific
or pre-authorized instructions.
As authorized by the Services Plan, the Group has entered into Servicing
Agreements with the Adviser pursuant to which the Adviser has agreed to provide
certain administrative support services in connection with Shares of the Funds
owned of record or beneficially by its customers. Such administrative support
services may include, but are not limited to, (i) processing dividend and
distribution payments from a Fund on behalf of customers; (ii) providing
periodic statements to its customers showing their positions in the Shares;
41
<PAGE> 42
(iii) arranging for bank wires; (iv) responding to routine customer inquiries
relating to services performed by the Adviser; (v) providing sub-accounting with
respect to the Shares beneficially owned by the Adviser's customers or the
information necessary for sub-accounting; (vi) if required by law, forwarding
shareholder communications from a Fund (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to its customers; (vii) aggregating and processing purchase, exchange,
and redemption requests from customers and placing net purchase, exchange, and
redemption orders for customers; and (viii) providing customers with a service
that invests the assets of their account in the Shares pursuant to specific or
pre-authorized instructions. In consideration of such services, the Group, on
behalf of each Fund, has agreed to pay the Adviser a monthly fee, computed at
the annual rate of twenty-five one-hundredths of one percent (.25%) of the
average aggregate net asset value of Shares of that Fund held during the period
by customers for whom the Adviser has provided services under the Servicing
Agreement.
BANKING LAWS
The Adviser believes that it possesses the legal authority to perform the
investment advisory services for each Fund contemplated by its investment
advisory agreement with the Group and administrative support services
contemplated by the servicing agreements with the Group, as described in this
Prospectus, without violation of applicable banking laws and regulations, and
has so represented in its investment advisory agreement and its servicing
agreements with the Group. C.I.C. believes that it possesses the legal authority
to perform its distribution services as set forth in the Rule 12b-1 Agreements
with BISYS, as described above, without violation of applicable banking laws and
regulations, and has so represented in such Rule 12b-1 Agreements. Future
changes in Federal or state statutes and regulations relating to permissible
activities of banks or bank holding companies and their subsidiaries and
affiliates as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations could change the
manner in which the Adviser and C.I.C. could continue to perform such services
for the Funds. See "MANAGEMENT OF THE GROUP -- Glass-Steagall Act" in the
Statement of Additional Information for further discussion of applicable law and
regulations.
GENERAL INFORMATION
DESCRIPTION OF THE GROUP AND ITS SHARES
The Group was organized as an Ohio business trust on April 25, 1988. The
Group consists of sixteen funds, each having its own class of shares. Each share
represents an equal proportionate interest in a fund with other shares of the
same fund, and is entitled to such dividends and distributions out of the income
earned on the assets belonging to that fund as are declared at the discretion of
the Trustees (see "Miscellaneous" below). The other funds of the Group are The
KeyPremier Prime Money Market Fund, The KeyPremier Pennsylvania Municipal Bond
Fund, The KeyPremier Established Growth Fund, The KeyPremier Intermediate Term
Income Fund, 1st Source Monogram U.S. Treasury Obligations Money Market Fund,
1st Source Monogram Diversified Equity Fund, 1st Source Monogram Income Equity
Fund, 1st Source Monogram Special Equity Fund, 1st Source Monogram Income Fund
and 1st Source Monogram Intermediate Tax-Free Bond Fund.
Shareholders are entitled to one vote for each dollar of value invested and
a proportionate fractional vote for any fraction of a dollar invested, and will
vote in the aggregate and not by series except as otherwise expressly required
by law. For example, Shareholders of each Fund will vote in the aggregate with
other shareholders of the Group with respect to the election of trustees.
However, Shareholders of a Fund will vote as a fund, and not in the aggregate
with other shareholders of the Group, for purposes of approval of that Fund's
investment advisory agreement and the Plan.
Overall responsibility for the management of the Funds is vested in the
Board of Trustees of the Group. See "MANAGEMENT OF THE GROUP -- Trustees of the
Group." Individual Trustees are elected by the shareholders of the Group and may
be removed by the Board of Trustees or shareholders in accordance with the
provisions of the Declaration of Trust and By-Laws of the Group and Ohio law.
See "ADDITIONAL INFORMATION -- Miscellaneous" in the Statement of Additional
Information for further information.
42
<PAGE> 43
An annual or special meeting of shareholders to conduct necessary business
is not required by the Declaration of Trust, the 1940 Act or other authority
except, under certain circumstances, to elect Trustees, amend the Declaration of
Trust, the investment advisory agreement, the Plan or a Fund's fundamental
policies and to satisfy certain other requirements. To the extent that such a
meeting is not required, the Group does not intend to have an annual or special
meeting.
The Group has represented to the Commission that the Trustees will call a
special meeting of shareholders for purposes of considering the removal of one
or more Trustees upon written request therefor from shareholders holding not
less than 10% of the outstanding votes of the Group. At such a meeting, a quorum
of shareholders (constituting a majority of votes attributable to all
outstanding shares of the Group), by majority vote, has the power to remove one
or more Trustees.
As of October 4, 1996, the Adviser possessed, on behalf of its underlying
accounts, voting or investment power with respect to more than 25% of the
outstanding Shares of each of the Funds and therefore may be presumed to control
each of the Funds within the meaning of the 1940 Act.
CUSTODIAN
National City Bank serves as the custodian for each of the Funds.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219,
serves as the Funds' transfer agent pursuant to a Transfer Agency Agreement with
the Group and receives a fee for such services. BISYS Fund Services Ohio, Inc.
also provides certain accounting services for each Fund pursuant to a Fund
Accounting Agreement and receives a fee for such services equal to the greater
of (a) a fee computed at an annual rate of 0.03% of that Fund's average daily
net assets on (b) the annual fee of $30,000 ($40,000 with respect to the
Tennessee Fund). See "MANAGEMENT OF THE GROUP -- Transfer Agency and Fund
Accounting Services" in the Statement of Additional Information for further
information.
While BISYS Fund Services Ohio, Inc. is a distinct legal entity from BISYS
(the Group's administrator and distributor), BISYS Fund Services Ohio, Inc. is
considered to be an affiliated person of BISYS under the 1940 Act due to, among
other things, the fact that BISYS Fund Services Ohio, Inc. is owned by the same
entity that owns BISYS.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual reports
audited by independent public accountants.
As used in this Prospectus and in the Statement of Additional Information,
"assets belonging to a fund" means the consideration received by the fund upon
the issuance or sale of shares in that fund, together with all income, earnings,
profits, and proceeds derived from the investment thereof, including any
proceeds from the sale, exchange, or liquidation of such investments, and any
funds or amounts derived from any reinvestment of such proceeds, and any general
assets of the Group not readily identified as belonging to a particular fund
that are allocated to the fund by the Group's Board of Trustees. The Board of
Trustees may allocate such general assets in any manner it deems fair and
equitable. Determinations by the Board of Trustees of the Group as to the timing
of the allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a Fund are conclusive.
As used in this Prospectus and in the Statement of Additional Information,
a "vote of a majority of the outstanding Shares" of a Fund means the affirmative
vote, at a meeting of Shareholders duly called, of the lesser of (a) 67% or more
of the votes of Shareholders of that Fund present at a meeting at which the
holders of more than 50% of the votes attributable to Shareholders of record of
that Fund are represented in person or by proxy, or (b) the holders of more than
50% of the outstanding votes of Shareholders of that Fund.
Inquiries regarding any of the Funds may be directed in writing to the
Group at 3435 Stelzer Road, Columbus, Ohio 43219, or by calling toll free (800)
874-8376.
43
<PAGE> 44
INVESTMENT ADVISER
National Bank of Commerce
One Commerce Square
Memphis, Tennessee 38150
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services Limited Partnership
3435 Stelzer Road
Columbus, Ohio 43219
LEGAL COUNSEL
Baker & Hostetler
65 East State Street
Columbus, Ohio 43215
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
<PAGE> 45
Rule 497(c)
File Nos. 33-21489
811-5545
Riverside Capital Money Market Fund
Riverside Capital Value Equity Fund
Riverside Capital Fixed Income Fund
Riverside Capital Tennessee Municipal Obligations Fund
Riverside Capital Low Duration Government Securities Fund
Riverside Capital Growth Fund
Each an Investment Portfolio of
THE SESSIONS GROUP
Statement of Additional Information
October 31, 1996
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the prospectus (the "Prospectus") of Riverside Capital Money
Market Fund (the "Money Market Fund"), Riverside Capital Value Equity Fund (the
"Value Fund"), Riverside Capital Fixed Income Fund (the "Fixed Income Fund"),
Riverside Capital Tennessee Municipal Obligations Fund (the "Tennessee Fund"),
Riverside Capital Low Duration Government Securities Fund (the "Government
Securities Fund") and Riverside Capital Growth Fund (the "Growth Fund") (the
Money Market Fund, the Value Fund, the Fixed Income Fund, the Tennessee Fund,
the Government Securities Fund and the Growth Fund are hereinafter collectively
referred to as the "Funds" and individually as a "Fund"), dated the date hereof.
The Funds are six funds of The Sessions Group (the "Group"). This Statement of
Additional Information is incorporated in its entirety into the Prospectus.
Copies of the Prospectus may be obtained by writing the Group at 3435 Stelzer
Road, Columbus, Ohio 43219, or by telephoning toll free (800) 874-8376.
<PAGE> 46
TABLE OF CONTENTS
Page
----
THE SESSIONS GROUP ................................................. B-1
INVESTMENT OBJECTIVES AND POLICIES ................................. B-1
Additional Information on Portfolio Instruments .............. B-1
Investment Restrictions ...................................... B-3
Portfolio Turnover ........................................... B-8
NET ASSET VALUE .................................................... B-18
Valuation of the Money Market Fund ........................... B-19
Valuation of the Other Funds ................................. B-20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ..................... B-20
MANAGEMENT OF THE GROUP ............................................ B-20
Trustees and Officers ........................................ B-20
Investment Adviser ........................................... B-23
Portfolio Transactions ....................................... B-25
Glass-Steagall Act ........................................... B-27
Administrator ................................................ B-28
Expenses ..................................................... B-31
Distributor .................................................. B-31
Administrative Services Plan ................................. B-34
Custodian .................................................... B-35
Transfer Agency and Fund Accounting Services ................. B-35
Auditors ..................................................... B-37
Legal Counsel ................................................ B-37
ADDITIONAL INFORMATION ............................................. B-37
Description of Shares ........................................ B-37
Vote of a Majority of the Outstanding Shares ................. B-39
Additional Tax Information ................................... B-39
Seven-Day Yield of the Money Market Fund ..................... B-45
Yields of the Other Funds .................................... B-46
Tax-Free vs. Taxable Income .................................. B-47
Calculation of Total Return .................................. B-48
Distribution Rates ........................................... B-49
Performance Comparisons ...................................... B-49
Miscellaneous ................................................ B-50
FINANCIAL STATEMENTS ............................................... B-53
APPENDIX ........................................................... A-1
- i -
<PAGE> 47
STATEMENT OF ADDITIONAL INFORMATION
THE SESSIONS GROUP
The Sessions Group (the "Group") is an open-end management investment
company which currently offers sixteen separate investment portfolios, six of
which are described in this Statement of Additional Information. Five of the
portfolios described herein are diversified portfolios and the one other is a
non-diversified portfolio. The five diversified portfolios are Riverside Capital
Money Market Fund (the "Money Market Fund"), Riverside Capital Value Equity Fund
(the "Value Fund"), Riverside Capital Fixed Income Fund (the "Fixed Income
Fund"), Riverside Capital Low Duration Government Securities Fund (the
"Government Securities Fund") and Riverside Capital Growth Fund (the "Growth
Fund"), and the one non-diversified portfolio is Riverside Capital Tennessee
Municipal Obligations Fund (the "Tennessee Fund") (the Money Market Fund, the
Value Fund, the Fixed Income Fund, the Government Securities Fund, the Growth
Fund and the Tennessee Fund are hereinafter collectively referred to as the
"Funds" and individually as a "Fund").
Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectus of the Funds.
Capitalized terms not defined herein are defined in such Prospectus. No
investment in Shares of a Fund should be made without first reading the
Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on Portfolio Instruments
The following policies supplement the investment objective and policies of
each Fund as set forth in the Prospectus for such Fund.
Bank Obligations. Each of Funds may invest in bank obligations such as
bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically
drawn by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Bankers' acceptances
invested in by the Funds will be those guaranteed by domestic and foreign banks
having, at the time of investment, capital, surplus, and undivided profits in
excess of $100,000,000 (as of the date of their most recently published
financial statements).
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified
<PAGE> 48
return. Certificates of deposit and demand and time deposits will be those of
domestic and foreign banks and savings and loan associations, if (a) at the time
of investment the depository institution has capital, surplus, and undivided
profits in excess of $100,000,000 (as of the date of its most recently published
financial statements), or (b) the principal amount of the instrument is insured
in full by the Federal Deposit Insurance Corporation.
The Money Market Fund, the Value Fund, the Fixed Income Fund, the
Government Securities Fund and the Growth Fund may each also invest in
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; Yankee Certificates of Deposit, which are
certificates of deposit issued by a U.S. branch of a foreign bank denominated in
U.S. dollars and held in the United States; Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar denominated deposits in a foreign branch of a U.S. bank or
a foreign bank; and Canadian Time Deposits, which are basically the same as ETDs
except they are issued by Canadian offices of major Canadian banks.
Commercial Paper. Commercial paper consists of unsecured promissory notes
issued by corporations. Except as noted below with respect to variable amount
master demand notes, issues of commercial paper normally have maturities of less
than nine months and fixed rates of return.
The Money Market Fund will purchase commercial paper consisting of issues
rated at the time of purchase by one or more appropriate nationally recognized
statistical rating organizations ("NRSRO") (e.g., Standard & Poor's Corporation
and Moody's Investors Service, Inc.) in one of the two highest rating categories
for short-term debt obligations. The Money Market Fund may also invest in
commercial paper that is not rated but that is determined by the Adviser, under
guidelines established by the Group's Board of Trustees, to be of comparable
quality to instruments that are rated high quality by an NRSRO that is neither
controlling, controlled by, or under common control with the issuer of, or any
issuer, guarantor, or provider of credit support for, the instruments. For a
description of the rating symbols of the NRSROs, see the Appendix. The Money
Market Fund may also invest, subject to the foregoing quality criteria, in
Canadian Commercial Paper, which is commercial paper issued by a Canadian
corporation or a Canadian counterpart of a U.S. corporation ("CCP"), and in
Europaper, which is U.S. dollar denominated commercial paper of a foreign
issuer.
The Value Fund, the Fixed Income Fund and the Tennessee Fund may invest in
commercial paper which need not be rated by any NRSRO or, if rated, may be rated
in any rating category. The Government
B-2
<PAGE> 49
Securities Fund and the Growth Fund may invest in commercial paper which need
not be rated by an NRSRO or, if rated, is rated in any of the highest three
rating categories assigned by NRSROs. In general, investment in lower-rated
instruments is more risky than investment in instruments in higher-rated
categories. The Value Fund, the Fixed Income Fund, the Tennessee Fund and the
Growth Fund may also invest in CCP and in Europaper, subject to their respective
quality criteria for commercial paper as described above.
Variable Amount Master Demand Notes. Variable amount master demand notes,
in which the Money Market Fund, the Value Fund, the Fixed Income Fund, the
Government Securities Fund and the Growth Fund may invest, are unsecured demand
notes that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate according to the terms of the instrument.
Because master demand notes are direct lending arrangements between a Fund and
the issuer, they are not normally traded. Although there is no secondary market
in the notes, a Fund may demand payment of principal and accrued interest at any
time within 30 days. While such notes are not typically rated by credit rating
agencies, variable amount master demand notes (the issuers of which are normally
manufacturing, retail, financial and other business concerns) must be determined
by the Adviser to be of comparable quality to commercial paper in which such
Fund may invest. The Adviser will consider the earning power, cash flow, and
other liquidity ratios of the issuers of such notes and will continuously
monitor their financial status and ability to meet payment on demand. In
determining average weighted portfolio maturity, a variable amount master demand
note will be deemed to have a maturity equal to the earlier of the period of
time remaining until the next interest rate adjustment or the period of time
remaining until the principal amount can be recovered from the issuer through
demand.
Foreign Investment. Investments in securities issued by foreign branches
of U.S. banks, foreign banks, or other foreign issuers, including ADRs and
securities purchased on foreign securities exchanges, may subject the Funds to
investment risks that differ in some respects from those related to investment
in obligations of U.S. domestic issuers or in U.S. securities markets. Such
risks include future adverse political and economic developments, possible
seizure, nationalization, or expropriation of foreign investments, less
stringent disclosure requirements, the possible establishment of exchange
controls or taxation at the source, or the adoption of other foreign
governmental restrictions. A Fund will acquire such securities only when the
Adviser believes the risks associated with such investments are minimal.
B-3
<PAGE> 50
U.S. Government Obligations. Each Fund may invest in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others 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 agencies or
instrumentalities if it is not obligated to do so by law.
Exempt Securities. As stated in the Prospectus, the assets of the
Tennessee Fund will be primarily invested in Exempt Securities. Under normal
market conditions, at least 80% of the net assets of the Tennessee Fund will be
invested in Exempt Securities and 65% of such Fund's net assets will be invested
in Tennessee Exempt Securities. To the extent that suitable Exempt Securities
may not be available and the Tennessee Fund is unable to comply with such 80%
test, for temporary purposes the Tennessee Fund may invest in municipal
securities from other states that are otherwise eligible for investment by the
Tennessee Fund. Such other municipal securities therefore will be comparable
to Exempt Securities except that the interest thereon will not be exempt from
Tennessee state income taxes.
Exempt Securities include debt obligations issued by governmental entities
to obtain funds for various public purposes, such as 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 other
public institutions and facilities. Private activity bonds that are issued by or
on behalf of public authorities to finance various privately-operated facilities
are included within the term Exempt Securities if the interest paid thereon is
exempt from both Tennessee income taxes and federal taxes, although such
interest may be treated as a preference item for purposes of the federal
alternative minimum tax.
Among other types of Exempt Securities, the Tennessee Fund may purchase
short-term General Obligation Notes, Tax Anticipation Notes, Bond Anticipation
Notes, Revenue Anticipation Notes, Project 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 Tennessee Fund may invest in other types of tax-exempt instruments, such as
municipal bonds, private activity bonds, and pollution control bonds.
Project Notes are issued by a state or local housing agency and are sold
by the Department of Housing and Urban Development. While the issuing agency has
the primary obligation with respect to its Project Notes, they are also secured
by the full faith and credit of the United States through agreements with the
issuing authority which provide that, if required, the federal government
B-4
<PAGE> 51
will lend the issuer an amount equal to the principal of and interest on the
Project Notes.
As described in the Prospectus, the two principal classifications of
Exempt Securities consist of "general obligation" and "revenue" issues. The
Tennessee Fund may also acquire "moral obligation" issues, which are normally
issued by special purpose authorities. There are, of course, variations in the
quality of Exempt Securities, both within a particular classification and
between classifications, and the yields on Exempt Securities depend upon a
variety of factors, including 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. Ratings represent the
opinions of an NRSRO as to the quality of Exempt Securities. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality, and Exempt Securities with the same maturity, interest rate and rating
may have different yields, while Exempt Securities of the same maturity and
interest rate with different ratings may have the same yield. Subsequent to
purchase, an issue of Exempt Securities may cease to be rated or its rating may
be reduced below the minimum rating required for purchase. The Adviser will
consider such an event in determining whether the Tennessee Fund should continue
to hold the obligation.
An issuer's obligations under its Exempt 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 Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
the 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 Exempt Securities may be materially
adversely affected by litigation or other conditions.
Variable and Floating Rate Notes. The Money Market Fund, the Tennessee
Fund, the Government Securities Fund and the Growth Fund may acquire variable
and floating rate notes, subject to such Fund's investment objectives, policies
and restrictions. A variable rate note is one whose terms provide for the
adjustment of its interest rate on set dates and which, upon such adjustment,
can reasonably be expected to have a market value that approximates its
amortized cost. A floating rate note is one whose terms provide for the
adjustment of its interest rate whenever a specified interest rate changes and
which, at any time, can reasonably be expected to have a market value that
approximates its amortized cost. Such notes are frequently not rated by credit
rating agencies; however, unrated variable and floating rate notes purchased by
such Funds will be
B-5
<PAGE> 52
determined by the Adviser under guidelines established by the Group's Board of
Trustees to be of comparable quality at the time of purchase to rated
instruments eligible for purchase under that particular Fund's investment
policies. In making such determinations, the Adviser will consider the earning
power, cash flow and other liquidity ratios of the issuers of such notes (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. Although there may be no
active secondary market with respect to a particular variable or floating rate
note purchased by a Fund, the Fund may attempt to resell the note at any time to
a third party. The absence of an active secondary market, however, could make it
difficult for a Fund to dispose of a variable or floating rate note in the event
the issuer of the note defaulted on its payment obligations and the Fund could,
as a result or for other reasons, suffer a loss to the extent of the default. To
the extent that there exists no readily available market for such note and a
Fund is not entitled to receive the principal amount of a note within seven
days, such a note will be treated as an illiquid security for purposes of
calculation of such Fund's limitation on investments in illiquid securities, as
set forth in the respective Fund's investment restrictions. Variable or floating
rate notes may be secured by bank letters of credit.
Variable or floating rate notes invested in by the Money Market Fund may
have maturities of more than 397 days, as follows:
1. An instrument that is issued or guaranteed as to principal or interest
by the United States Government or any instrumentality thereof which has a
variable rate of interest readjusted no less frequently than every 762 days will
be deemed by the Money Market Fund to have a maturity equal to the period
remaining until the next readjustment of the interest rate.
2. A variable rate note, the principal amount of which is scheduled in
accordance with the terms of the instrument to be paid unconditionally in 397
calendar days or less, will be deemed by the Money Market Fund to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
3. A variable rate note that is subject to a demand feature will be deemed
by the Money Market Fund to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will be deemed
by the Money Market Fund to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
B-6
<PAGE> 53
As used above, a note is "subject to a demand feature" where the Money
Market Fund is entitled to receive the principal amount of the note either at
any time on no more than thirty days' notice or at specific intervals not
exceeding 397 days and upon no more than 30 days' notice.
Restricted Securities. Securities in which the Fixed Income and Tennessee
Funds may invest include securities issued by corporations without registration
under the Securities Act of 1933, as amended (the "1933 Act"), such as
securities issued in reliance on the so-called "private placement" exemption
from registration which is afforded by Section 4(2) of the 1933 Act ("Section
4(2) securities"). Section 4(2) securities are restricted as to disposition
under the Federal securities laws, and generally are sold to institutional
investors such as the Funds who agree that they are purchasing the securities
for investment and not with a view to public distribution. Any resale must also
generally be made in an exempt transaction. Section 4(2) securities are normally
resold to other institutional investors through or with the assistance of the
issuer or investment dealers. Any such restricted securities will be considered
to be illiquid for purposes of a Fund's limitations on investments in illiquid
securities unless, pursuant to procedures adopted by the Board of Trustees of
the Group, the Adviser has determined such securities to be liquid because such
securities are eligible for resale under Rule 144A under the 1933 Act and are
readily saleable. The Fixed Income Fund and the Tennessee Fund will each limit
its investment in Section 4(2) securities to not more than 5% of its net assets.
Compliance with such limitation will be measured as of the time of purchase.
Options Trading. Each of the Funds, other than the Money Market Fund, may
purchase put and call options. A put option gives the purchaser the right to
sell the underlying security at the stated exercise price at any time prior to
the expiration date of the option, regardless of the market price of the
security. A call option gives the purchaser of the option the right to buy, and
a writer has the obligation to sell, the underlying security 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
consideration for undertaking the obligations under the option contract. Put and
call options purchased by the Funds will be valued at the last sale price, or in
the absence of such a price, at the mean between bid and asked price.
When a Fund writes a 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 as a deferred credit.
The amount of the deferred
B-7
<PAGE> 54
credit 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 mean between bid and asked price. 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 a loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold)
and the deferred credit related to such option will be eliminated. If an option
is exercised, the Fund may deliver 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.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreements with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium guarantees and security, are set by negotiation of the parties.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, such Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. A Fund will engage in OTC option transactions only with
Counterparties that the Adviser considers to present minimal credit risks under
guidelines to be established by the Group's Board of Trustees. To the extent
that there is no readily available market for any such OTC options, such options
and portfolio securities "covering" the amount of such Fund's obligation
pursuant to an OTC option sold by it (the cost of the sell-back plus the
in-the-money amount, if any) are deemed to be illiquid, and are subject to such
Fund's limitation on investing in illiquid securities.
Puts. The Tennessee Fund may also acquire "puts" with respect to Exempt
Securities held in its portfolio. A put is a right to sell a specified security
(or securities) within a specified period of time at a specified exercise price.
The Tennessee Fund may sell, transfer, or assign a put only in conjunction with
the sale, transfer, or assignment of the underlying security or securities.
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<PAGE> 55
The amount payable to the Tennessee Fund upon its exercise of a "put" is
normally (i) the Tennessee Fund's acquisition cost of the Exempt Securities
(excluding any accrued interest which the Tennessee Fund paid on the
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Tennessee Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period.
Puts may be acquired by the Tennessee Fund to facilitate the liquidity of
its portfolio assets. Puts may also be used to facilitate the reinvestment of
the Tennessee Fund's assets at a rate of return more favorable than that of the
underlying security. Puts may, under certain circumstances, also be used to
shorten the maturity of underlying variable rate or floating rate securities for
purposes of calculating the remaining maturity of those securities.
The Tennessee Fund expects that it will generally acquire puts only where
the puts are available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Tennessee Fund may pay
for puts either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to the puts (thus reducing the yield to
maturity otherwise available for the same securities).
The Tennessee Fund intends to enter into puts only with dealers, banks,
and broker-dealers which, in the Adviser's opinion, present minimal credit
risks.
When-Issued Securities. As discussed in the Prospectus, each of the Funds,
other than the Money Market Fund, may purchase securities on a "when-issued"
basis (i.e., for delivery beyond the normal settlement date at a stated price
and yield). When such a Fund agrees to purchase securities on a "when-issued"
basis, the Fund's custodian will set aside cash or liquid portfolio securities
equal to the amount of the commitment in a separate account. Normally, the
Fund's custodian will set aside portfolio securities to satisfy the purchase
commitment, and in such a case, the Fund may be required subsequently to place
additional assets in the separate account in order to assure that the value of
the account remains equal to the amount of the Fund's commitment. It may be
expected that the Fund's net assets will fluctuate to a greater degree when it
sets aside portfolio securities to cover such purchase commitments than when it
sets aside cash. In addition, because a Fund will set aside cash or liquid
portfolio securities to satisfy its purchase commitments in the manner described
above, such Fund's liquidity and the ability of the Adviser to manage it might
be affected in the event its commitments to purchase "when- issued" securities
ever exceeded 25% of the value of its total assets. Under normal market
conditions, however, a Fund's
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commitment to purchase "when-issued" or "delayed-delivery" securities will not
exceed 25% of the value of its total assets.
When a Fund engages in "when-issued" transactions, it relies on the seller
to consummate the trade. Failure of the seller to do so may result in such
Fund's incurring a loss or missing the opportunity to obtain a price considered
to be advantageous. Such Funds will engage in "when-issued" or "delayed
delivery" transactions only for the purpose of acquiring portfolio securities
consistent with the Funds' investment objectives and policies and not for
investment leverage. If the Tennessee Fund sells a "when- issued" or
"delayed-delivery" security before delivery, any gain would not be tax-exempt.
Mortgage-Related Securities. Each of the Value Fund, the Fixed Income
Fund, the Government Securities Fund and the Growth Fund may, consistent with
its investment objective and policies, invest in mortgage-related securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
Mortgage-related securities, for purposes of the Prospectus and this
Statement of Additional Information, represent pools of mortgage loans assembled
for sale to investors by various governmental agencies such as the Government
National Mortgage Association and government-related organizations such as the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation, as well as by nongovernmental issuers such as commercial banks,
savings and loan institutions, mortgage bankers and private mortgage insurance
companies. Although certain mortgage-related securities are guaranteed by a
third party or otherwise similarly secured, the market value of the security,
which may fluctuate, is not so secured. If a Fund purchases a mortgage-related
security at a premium, that portion may be lost if there is a decline in the
market value of the security whether resulting from changes in interest rates or
prepayments in the underlying mortgage collateral. As with other
interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true, since in periods of declining interest rates the mortgages
underlying the securities are prone to prepayment, thereby shortening the
average life of the security and shortening the period of time over which income
at the higher rate is received. Conversely, when interest rates are rising, the
rate of prepayment tends to decrease, thereby lengthening the average life of
the security and lengthening the period of time over which income at the lower
rate is received. For these and other reasons, a mortgage-related security's
average maturity may be shortened or lengthened as a result of interest rate
fluctuations and, therefore, it is not possible to predict accurately the
security's return to such Funds. In addition, regular payments received in
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respect of mortgage-related securities include both interest and principal. No
assurance can be given as to the return the Funds will receive when these
amounts are reinvested.
The Fixed Income Fund may invest up to 10% of its net assets in
mortgage-related securities which are collateralized mortgage obligations
structured on pools of mortgage pass-through certificates or mortgage loans.
Mortgage-related securities will be purchased only if rated in the three highest
bond rating categories assigned by one or more appropriate NRSROs, or, if
unrated, which the Adviser deems to be of comparable quality.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities issued by
the Government National Mortgage Association ("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- related securities issued by the Federal National Mortgage Association
("FNMA") include FNMA Guaranteed Mortgage Pass-Through Certificates (also known
as "Fannie Maes") which are solely the obligations of the FNMA and are not
backed by or entitled to the full faith and credit of the United States. The
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-related securities issued by the Federal Home
Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation
Certificates (also known as "Freddie Macs" or "PCs"). The FHLMC is a corporate
instrumentality of the United States, created pursuant to an Act of Congress,
which is owned entirely by Federal Home Loan Banks. Freddie Macs are not
guaranteed by the United States or by any Federal Home Loan Banks 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. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the 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.
Repurchase Agreements. Securities held by each of the Funds may be subject
to repurchase agreements. Under the terms of a
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repurchase agreement, a Fund would acquire securities from banks and registered
broker-dealers which the Adviser deems creditworthy under guidelines approved by
the Group's Board of Trustees, subject to the seller's agreement to repurchase
such securities at a mutually agreed-upon date and price. The repurchase price
would generally equal 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 underlying portfolio securities. The seller under a repurchase agreement
will be required to maintain continually the value of collateral held pursuant
to the agreement at not less than the repurchase price (including accrued
interest). This requirement will be continually monitored by the Adviser. If the
seller were to default on its repurchase obligation or become insolvent, the
Fund holding such obligation would suffer a loss to the extent that the proceeds
from a sale of the underlying portfolio securities were less than the repurchase
price under the agreement, or to the extent that the disposition of such
securities by the Fund were delayed pending court action. Additionally, there is
no controlling legal precedent confirming that a Fund would be entitled, as
against a claim by such seller or its receiver or trustee in bankruptcy, to
retain the underlying securities, although the Group believes that, under the
regular procedures normally in effect for custody of a Fund's securities subject
to repurchase agreements and under federal laws, a court of competent
jurisdiction would rule in favor of the Group if presented with the question.
Securities subject to repurchase agreements will be held by that Fund's
custodian or another qualified custodian or in the Federal Reserve/Treasury
book-entry system. Repurchase agreements are considered to be loans by a Fund
under the 1940 Act.
Reverse Repurchase Agreements. As discussed in the Prospectus, each of the
Funds may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with that Fund's investment restrictions.
Pursuant to such agreements, a Fund would sell portfolio securities to financial
institutions such as banks and broker-dealers, and agree to repurchase the
securities at a mutually agreed-upon date and price. Each Fund intends to enter
into reverse repurchase agreements only to avoid otherwise selling securities
during unfavorable market conditions to meet redemptions. At the time a Fund
enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets such as U.S. Government securities or other liquid,
high grade debt securities consistent with the Fund's investment restrictions
having a value equal to the repurchase price (including accrued interest), and
will subsequently continually monitor the account to ensure that such equivalent
value is maintained at all times. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price at which a Fund is
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obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by a Fund under the 1940 Act.
Guaranteed Investment Contracts. The Money Market Fund and the Fixed
Income Fund may each invest in guaranteed investment contracts ("GICs") issued
by insurance companies. Pursuant to such contracts, a Fund makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the deposit fund on a monthly basis guaranteed
interest which is based on an index. The GICs provide that this guaranteed
interest will not be less than a certain minimum rate. The insurance company may
assess periodic charges against a GIC for expense and service costs allocable to
it, and the charges will be deducted from the value of the deposit fund. The
Money Market Fund and the Fixed Income Fund will only purchase a GIC when the
Adviser has determined that the GIC presents minimal credit risks to that Fund
and is of comparable quality to instruments that are rated high quality by a
nationally recognized statistical rating organization having the characteristics
described above. Because such Funds may not receive the principal amount of a
GIC from the insurance company on seven days' notice or less, the GIC is
considered an illiquid investment, and, together with other instruments in the
Fund which are not readily marketable, will not exceed such Fund's limitation on
its investments in illiquid securities. The Money Market Fund will not purchase
a GIC with a term of more than one year. In determining average weighted
portfolio maturity, a GIC will be deemed to have a maturity equal to the earlier
of the period of time remaining until the next readjustment of the guaranteed
interest rate or the period of time before the Fund can receive the principal
upon demand.
Investment Restrictions
Each Fund's investment objective is a fundamental policy and may not be
changed without a vote of the holders of a majority of such Fund's outstanding
Shares. In addition, the following investment restrictions may be changed with
respect to a particular Fund only by a vote of the majority of the outstanding
Shares of that Fund (as defined under "ADDITIONAL INFORMATION - Vote of a
Majority of the Outstanding Shares").
In addition to the investment restrictions set forth in the Prospectus,
each of the Money Market Fund, the Value Fund, the Fixed Income Fund and the
Tennessee Fund may not:
1. Purchase securities on margin, except, with respect to the Value Fund,
the Fixed Income Fund and the Tennessee Fund, for use of short-term credit
necessary for clearance of purchases of portfolio securities;
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2. Engage in any short sales;
3. Underwrite the securities issued by other persons, except to the extent
that a Fund may be deemed to be an underwriter under certain securities laws in
the disposition of "restricted securities" acquired in accordance with such
Fund's investment objectives and policies; and
4. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities are not prohibited by this
restriction).
In addition, the Money Market Fund may not:
1. Purchase or sell commodities, commodity contracts (including futures
contracts), or oil, gas or mineral exploration or development programs (although
investments in marketable securities of companies engaged in such activities are
not prohibited by this restriction);
2. Write or purchase put or call options;
3. Invest in any issuer for purposes of exercising control or management;
4. Purchase or retain securities of any issuer if the officers or Trustees
of the Group or the officers or directors of its investment adviser owning
beneficially more than one-half of 1% of the securities of such issuer together
own beneficially more than 5% of such securities;
5. Invest more than 10% of total assets in the securities of issuers which
together with any predecessors have a record of less than three years of
continuous operation.
Each of the Value Fund and the Fixed Income Fund may not:
1. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus of the Funds;
2. Purchase participations or direct interests in oil, gas or other
mineral exploration or development programs (although investments by such Funds
in marketable securities of companies engaged in such activities are not
prohibited in this restriction);
3. Purchase or retain the securities of an issuer if, to the knowledge of
the Fund's management, the officers or trustees of the Group, and the officers
or directors of the investment adviser, who each owns beneficially more than .5%
of the outstanding securities
B-14
<PAGE> 61
of such issuer, together own beneficially more than 5% of such securities;
4. Invest more than 5% of total assets in puts, calls, straddles, spreads
or any combination thereof; and
5. Invest more than 5% of net assets in warrants valued at the lower of
cost or market; provided that included within that amount, but not to exceed 2%
of net assets, may be warrants which are not listed on the New York or American
Stock Exchange. For the purposes of this restriction, warrants acquired in units
or attached to securities are deemed to be without value.
The Tennessee Fund may not:
1. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus of such Fund.
Each of the Government Securities Fund and the Growth Fund may not:
1. Purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases of portfolio securities and except as may
be necessary to make margin payments in connection with derivative securities
transactions;
2. Underwrite the securities issued by other persons, except to the extent
that a Fund may be deemed to be an underwriter under certain securities laws in
the disposition of "restricted securities";
3. Purchase or sell commodities or commodity contracts, except to the
extent disclosed in the current Prospectus of the Fund; and
4. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities and securities secured by
real estate or interests therein are not prohibited by this restriction).
The following additional investment restrictions may be changed without
the vote of a majority of the outstanding Shares of a Fund.
The Money Market Fund may not:
1. Invest in securities of other investment companies, except as such
securities may be acquired as part of a merger, consolidation, reorganization,
or acquisition of assets; and
2. Buy common stocks or voting securities.
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Each of the Equity Fund and the Fixed Income Fund may not:
1. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, and (b)
such Fund may invest in other investment companies, including other funds for
which the investment adviser acts as adviser, as specified in their respective
prospectuses, if, at the time of purchase (i) the acquiring Fund will own no
more than 3% of the shares of the investment company selling such shares, (ii)
the value of the investment company shares acquired, when aggregated with the
value of other shares of such investment company held by the acquiring Fund,
does not exceed 5% of the total assets of the acquiring Fund, and (iii) the
value of the investment company shares acquired, when aggregated with the value
of any other shares of investment companies held by the acquiring Fund, does not
exceed 10% of the total assets of the acquiring Fund.
The Tennessee Fund, the Government Securities Fund and the Growth Fund may
not:
1. Purchase participations or direct interests in oil, gas or other
mineral exploration or development programs (although investments by such Fund
in marketable securities of companies engaged in such activities are not
prohibited in this restriction);
2. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, and (b)
to the extent permitted by the 1940 Act, or pursuant to any exemptions
therefrom; and
3. Purchase or retain the securities of an issuer if the officers or
trustees of the Group, or the officers or directors of the Adviser, who each
owns beneficially more than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities.
Finally, each of the Government Securities Fund and the Growth Fund may
not:
1. Engage in any short sales;
2. Invest more than 10% of total assets in the securities of the issuers,
which together with any predecessors, have a record of less than three years of
continuous operation; and
3. Mortgage or hypothecate the Fund's assets in excess of one third of the
Fund's total assets.
The Group, on behalf of each of the Government Securities Fund and the
Growth Fund, has represented to the Arkansas Securities Department that each
such Fund will: (1) limit its investments to
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no more than 10% of the Fund's total assets in the securities of issuers which
are restricted as to disposition, other than restricted securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933; (2) limit its
investments to no more than 5% of the Fund's total assets (other than
obligations issued or guaranteed by the U.S Government or any foreign
government, their agencies or instrumentalities) in securities of issuers which
at the time of purchase had been in operation for less than three years (for
this purpose, the period of operation of any issuer shall include the period of
operation of any predecessor or unconditional guarantor of such issuer); and (3)
limit its investments to no more than 5% of the Fund's total assets in initial
margin deposits and premiums on options (including without limitation puts,
calls, straddles, spreads or any combination thereof).
In addition, the Group, on behalf of each of the Government Securities
Fund and the Growth Fund, has represented to the Texas State Securities Board
that each such Fund will not invest more than 5% of its net assets in warrants
valued at the lower of cost or market, provided, that included within that
amount, but not to exceed 2% of net assets, may be warrants which are not listed
on the New York or American Stock Exchanges. For purposes of this restriction,
warrants acquired in units or attached to securities are deemed to be without
value.
In addition, the Group has represented to the Texas State Securities Board
on behalf of each of the Money Market Fund, the Government Securities Fund and
the Growth Fund that such Funds will not invest in oil, gas or mineral leases or
purchase or sell real property (including limited partnership interests, but
excluding readily marketable securities of companies which invest in real
estate). The Group intends to comply with these representations with respect to
a Fund for so long as such representations are required by the State of Texas.
If any percentage restriction or requirement described above is satisfied
at the time of investment, a later increase or decrease in such percentage
resulting from a change in asset value will not constitute a violation of such
restriction or requirement. However, should a change in net asset value or other
external events cause a Fund's investments in illiquid securities, repurchase
agreements with maturities in excess of seven days and other instruments in such
Fund which are not readily marketable to exceed the limit set forth in such
Fund's Prospectus for its investment in illiquid securities, the Fund will act
to cause the aggregate amount of such securities to come within such limit as
soon as reasonably practicable. In such an event, however, such
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Fund would not be required to liquidate any portfolio securities where the Fund
would suffer a loss on the sale of such securities.
Portfolio Turnover
The portfolio turnover rate for each of the Funds is calculated by
dividing the lesser of a Fund's purchases or sales of portfolio securities for
the year by the monthly average value of the portfolio securities. The
calculation excludes all securities whose remaining maturities at the time of
acquisition were one year or less.
Because the Money Market Fund intends to invest entirely in securities
with maturities of less than one year and because the Commission requires such
securities to be excluded from the calculation of portfolio turnover rate, the
portfolio turnover with respect to the Money Market Fund is expected to be zero
percent for regulatory purposes. The portfolio turnover rates for each of the
other Funds for the fiscal years ended June 30, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Value Fund 27.89% 35.64%
Fixed Income Fund 363.84 223.29
Tennessee Fund 60.76 62.59
Government Securities
Fund 20.87 34.47
Growth Fund 31.22 29.36
</TABLE>
The portfolio turnover rate may vary greatly from year to year as well as
within a particular year, and may also be affected by cash requirements for
redemptions of Shares. High portfolio turnover rates will generally result in
higher transaction costs, including brokerage commissions, to a Fund and may
result in additional tax consequences to a Fund's Shareholders. Portfolio
turnover will not be a limiting factor in making investment decisions.
The portfolio turnover rate for the Fixed Income Fund increased during the
fiscal year ended June 30, 1996, from the prior fiscal year due to the
Adviser's change of focus towards more U.S. Government agency securities and a
change in the Fixed Income Fund's average duration.
NET ASSET VALUE
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As indicated in the Prospectus, the net asset value of each Fund is
determined and the Shares of each Fund are priced as of the Valuation Time or
Times (in the case of the Money Market Fund) on each Business Day of that Fund.
A "Business Day" of a Fund is a day on which the New York Stock Exchange is open
for trading and any other day (other than a day on which no Shares of that Fund
are tendered for redemption and no order to purchase any Shares of that Fund is
received) during which there is sufficient trading in portfolio instruments that
such Fund's net asset value per share might be materially affected. The New York
Stock Exchange will not open in observance of the following holidays: New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
Valuation of the Money Market Fund
The Money Market Fund has elected to use the amortized cost method of
valuation pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an
instrument at its cost initially and thereafter assuming a constant amortization
to maturity of any discount or premium, 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 the Money Market Fund would receive if it sold the instrument.
The value of securities in the Money Market Fund can be expected to vary
inversely with changes in prevailing interest rates.
Pursuant to Rule 2a-7, the Money Market Fund will maintain a
dollar-weighted average portfolio maturity appropriate to the Money Market
Fund's objective of maintaining a stable net asset value per share, provided
that the Money Market Fund will not purchase any security with a remaining
maturity of more than 397 days (thirteen months) (securities subject to
repurchase agreements may bear longer maturities) nor maintain a dollar-weighted
average portfolio maturity which exceeds 90 days. The Group's Board of Trustees
has also undertaken to establish procedures reasonably designed, taking into
account current market conditions and the investment objective of the Money
Market Fund, to stabilize the net asset value per share of the Money Market Fund
for purposes of sales and redemptions at $1.00. These procedures include review
by the Trustees, at such intervals as they deem appropriate, to determine the
extent, if any, to which the net asset value per share of the Money Market Fund
calculated by using available market quotations deviates from $1.00 per Share.
In the event such deviation exceeds one-half of one percent, Rule 2a-7 requires
that the Board of Trustees promptly consider what action, if any, should be
initiated. If the Trustees believe that the extent of any deviation from the
Money Market Fund's $1.00 amortized cost price per Share may result in material
dilution or other unfair results to new or existing investors, they will take
such steps as they
B-19
<PAGE> 66
consider 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, reducing the number of
the Money Market Fund's outstanding Shares without monetary consideration, or
utilizing a net asset value per share determined by using available market
quotations.
Valuation of the Other Funds
Investments in securities for which market quotations are readily
available are valued based upon their current available prices in the principal
market in which such securities are normally traded. Unlisted securities for
which market quotations are readily available are valued at such market value.
Securities and other assets for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures established by and under the general supervision of the
Trustees of the Group. Short-term securities (i.e., with maturities of 60 days
or less) are valued at either amortized cost or original cost plus accrued
interest, which approximates current value.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each of the Funds are sold on a continuous basis by BISYS, and
BISYS has agreed to use appropriate efforts to solicit all purchase orders. In
addition to purchasing Shares directly from BISYS, Shares may be purchased
through procedures established by BISYS in connection with the requirements of
accounts at the Adviser or the Adviser's affiliated entities (collectively,
"Entities"). Customers purchasing Shares of the Funds may include officers,
directors, or employees of the Adviser or the Entities.
The Group may suspend the right of redemption or postpone the date of
payment for Shares during any period when (a) trading on the New York Stock
Exchange (the "Exchange") is restricted by applicable rules and regulations of
the Commission, (b) the Exchange is closed for other than customary weekend and
holiday closings, (c) the Commission has by order permitted such suspension, or
(d) an emergency exists as a result of which (i) disposal by the Group of
securities owned by it is not reasonably practical, or (ii) it is not reasonably
practical for the Group to determine the fair value of its net assets.
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MANAGEMENT OF THE GROUP
Trustees and Officers
Overall responsibility for management of the Group rests with its Board of
Trustees. The Trustees elect the officers of the Group to supervise actively its
day-to-day operations.
The names of the Trustees and officers of the Group, their addresses, and
principal occupations during the past five years are as follows:
Position(s) Held Principal Occupation
Name and Address With the Group During Past 5 Years
- ---------------- ---------------- --------------------
Walter B. Grimm* Chairman, From June, 1992 to
3435 Stelzer Road President and present, employee of
Columbus, Ohio 43219 Trustee BISYS Fund Services
Age: 51 Limited Partnership
(formerly The Winsbury
Company); from July, 1981
to June, 1992, President
of Leigh Investments
Consulting (investment
firm).
Nancy E. Converse* Trustee and Since July, 1990,
3435 Stelzer Road Secretary employee of BISYS Fund
Columbus, Ohio 43219 Services Limited
Age: 47 Partnership (formerly The
Winsbury Company) or
BISYS Fund Services Ohio,
Inc. (formerly The
Winsbury Service
Corporation).
Maurice G. Stark Trustee Consultant; from 1979 to
7662 Cloister Drive December, 1994, Vice
Columbus, Ohio 43235 President-Finance and
Age: 61 Chief Financial Officer,
Battelle Memorial
Institute (scientific
research and development
service corporation).
James H. Woodward, Ph.D. Trustee Since July 1991,
The University of North Chancellor of The
Carolina at Charlotte
Charlotte, NC 28223
B-21
<PAGE> 68
Age: 56 University of North
Carolina at Charlotte.
Chalmers P. Wylie Trustee From April, 1993 to
754 Stonewood Court present, of Counsel with
Columbus, Ohio 43235 Emens, Kegler, Brown,
Age: 75 Hill & Ritter (law firm);
from January, 1993 to
present, Adjunct
Professor at The Ohio
State University; from
January, 1967 to January,
1993, Member of the
United States House of
Representatives for the
15th District.
J. David Huber Vice President Since January, 1996,
3435 Stelzer Road President of BISYS Fund
Columbus, Ohio 43219 Services Limited
Age: 50 Partnership; from June,
1987 to December, 1995,
employee of BISYS Fund
Services Limited
Partnership (formerly The
Winsbury Company); from
September, 1988 to
present, Vice President
of BISYS Fund Services
Ohio, Inc. (formerly The
Winsbury Service
Corporation).
William J. Tomko Vice President From April, 1987 to
3435 Stelzer Road present, employee of
Columbus, Ohio 43219 BISYS Fund Services
Age: 37 Limited Partnership
(formerly The Winsbury
Company).
Stephen G. Mintos Treasurer From January, 1987 to
3435 Stelzer Road present, employee of
Columbus, Ohio 43219 BISYS Fund Services
Age: 42 Limited Partnership
(formerly The Winsbury
Company).
R. Jeffrey Young Assistant From October 1993 to
3435 Stelzer Road Secretary present, employee of
Columbus, Ohio 43219 BISYS Fund Services
Age: 31 Limited Partnership or
BISYS Fund Services Ohio,
Inc.; from April, 1989 to
October, 1993, employee
of The Heebink Group.
Alaina V. Metz Assistant From June, 1995 to
3435 Stelzer Road Secretary present, employee of
Columbus, Ohio 43219 BISYS Fund Services
Age: 29 Limited Partnership;
prior to June, 1995,
supervisor at Alliance
Capital Management, L.P.
(investment management
firm).
B-22
<PAGE> 69
- -------------------
*Mr. Grimm and Ms. Converse are each considered to be an "interested
person" of the Group as defined in the 1940 Act.
As of the date of this Statement of Additional Information, the Group's
officers and trustees, as a group, own less than 1% of any Fund's Shares.
No officer or employee of BISYS or BISYS Fund Services Ohio, Inc. receives
any compensation from the Group for acting as trustee of the Group. The officers
of the Group receive no compensation directly from the Group for performing the
duties of their offices. BISYS receives fees from the Funds for acting as
Administrator and pursuant to the Distribution and Shareholder Service Plan
described below, may receive fees pursuant to the Administrative Services Plan
described below, and may retain all or a portion of any sales charge imposed
upon the purchase of Shares of the Riverside Load Funds. BISYS Fund Services
Ohio, Inc. receives fees from the Funds for acting as transfer agent and for
providing certain fund accounting services. Messrs. Grimm, Huber, Mintos, Tomko
and Young, Ms. Converse and Ms. Metz are employees of BISYS.
The following table sets forth information regarding all compensation paid
by the Group to its Trustees for their services as trustees during the fiscal
year ended June 30, 1996. The Group has no pension or retirement plans.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Total Compensation
Name and Position Compensation From the Group
With the Group From the Group and the Fund Complex*
- ----------------- -------------- ---------------------
<S> <C> <C>
Walter B. Grimm $ 0 $ 0
Trustee
Nancy E. Converse $ 0 $ 0
Trustee
Maurice G. Stark $7,772.17 $7,772.17
Trustee
Michael M. VanBuskirk(1) $7,772.17 $7,772.17
Trustee
James E. Woodward, Ph.D. $ 0 $ 0
Trustee
Chalmers P. Wylie $7,772.17 $7,772.17
Trustee
</TABLE>
B-23
<PAGE> 70
- ---------------
*For purposes of this Table, Fund Complex means one or more mutual funds,
including the Funds, which have a common investment adviser or affiliated
investment advisers or which hold themselves out to the public as being related.
(1) Mr. VanBuskirk resigned his position as a trustee of the Group
effective May 3, 1996.
Ms. Converse and Dr. Woodward were elected trustees of the Group on June
28, 1996.
Investment Adviser
Investment advisory and management services are provided to the Funds of
the Group by National Bank of Commerce (the "Adviser"), pursuant to an
Investment Advisory Agreement dated as of July 19, 1988 (with respect to the
Money Market Fund), an Investment Advisory Agreement dated as of September 20,
1991 (with respect to the Equity Fund and the Fixed Income Fund), an Investment
Advisory Agreement dated as of October 27, 1992 (with respect to the Tennessee
Fund), and an Investment Advisory Agreement dated as of April 5, 1994, as
amended as of June 3, 1994 (with respect to the Government Securities Fund and
the Growth Fund) (collectively, the "Investment Advisory Agreement").
Under the Investment Advisory Agreement, the Adviser has agreed to provide
investment advisory services as described in the Prospectus of the Funds. For
the services provided and expenses assumed pursuant to the Investment Advisory
Agreement, (1) the Money Market Fund pays the Adviser a fee computed daily and
paid monthly, at the annual rate of thirty-five one-hundredths of one percent
(.35%) of the average daily net assets of the Money Market Fund; (2) the Value
Fund pays the Adviser a fee equal to the lesser of (a) a fee computed daily and
paid monthly, at an annual rate of one percent (1.00%) of the first $50 million
of the Value Fund's average daily net assets and seventy-five one-hundredths of
one percent (.75%) of the Value Fund's remaining average daily net assets or (b)
such other fee as may be agreed upon in writing by the Adviser and the Group;
(3) each of the Fixed Income Fund and the Tennessee Fund pays the Adviser a fee
equal to the lesser of (a) a fee computed daily and paid monthly, at an annual
rate, calculated as a percentage of the average daily net-assets of that Fund of
sixty-five one-hundredths of one percent (.65%) or (b) such other fee as may be
agreed upon in writing by the Adviser and the Group; (4) the Government
Securities Fund pays the Adviser a fee, computed daily and paid monthly, at the
annual rate of fifty one-hundredths of one percent (.50%) of the average daily
net assets of the Government Securities Fund; and (5) the Growth Fund pays the
Adviser a fee, computed daily and paid monthly, at an annual rate of one percent
(1.00%) of the first $50 million of the Growth Fund's average daily net assets
and seventy-five
B-24
<PAGE> 71
one-hundredths of one percent (.75%) of the Growth Fund's remaining average
daily net assets. The Adviser has in the past and may in the future periodically
voluntarily reduce all or a portion of its advisory fee with respect to a Fund
to increase the net income of that Fund available for distribution as dividends.
For the fiscal years ended June 30, 1996, 1995 and 1994, the Adviser
earned and voluntarily waived the amounts indicated below with respect to its
investment advisory services to the indicated Funds pursuant to the Investment
Advisory Agreement:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995 1994
---- ---- ----
Fees Fees Fees Fees Fees Fees
Earned Waived Earned Waived Earned Waived
-------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund $524,476 -- $549,669 -- $450,877 --
Value Fund 747,594 -- 719,870 -- 689,179 $180,464
Fixed Income
Fund 223,976 -- 268,630 -- 280,642 82,013
Tennessee Fund 129,939 $127,577 127,967 $127,967 139,026 139,026
Government Securities
Fund(1) 38,565 38,565 41,005 41,005 7,280 7,280
Growth Fund(1) 284,790 188,588 118,392 118,392 11,389 11,389
</TABLE>
- ---------------
(1) Commenced operations April 18, 1994.
Unless sooner terminated, the Investment Advisory Agreement continues in
effect from year to year, for successive annual periods ending on March 31, if,
as to each Fund, such continuance is approved at least annually by the Group's
Board of Trustees or by vote of a majority of the outstanding Shares of the
relevant Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Funds' Prospectus), and a majority of the Trustees who are not parties to the
Investment Advisory Agreement or interested persons (as defined in the 1940 Act)
of any party to the Investment Advisory Agreement by votes cast in person at a
meeting called for such purpose. The Investment Advisory Agreement is terminable
as to a Fund at any time on 60 days' written notice without penalty by the
Trustees, by vote of a majority of the outstanding Shares of that Fund, or by
the Adviser. The Investment Advisory Agreement also terminates
B-25
<PAGE> 72
automatically in the event of any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by a
Fund in connection with the performance of the Investment Advisory 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 reckless disregard by the Adviser of its
duties and obligations thereunder.
To offset capital losses incurred by the Money Market Fund during the
fiscal year ended June 30, 1995, during the fiscal year ended June 30, 1996, the
Adviser voluntarily contributed $124,984 of its investment advisory fees to the
Money Market Fund. In addition, during the fiscal year ended June 30, 1995, the
Adviser contributed $628,737 to the Money Market Fund. Such contribution
consisted of $97,370 of investment advisory fees and $531,367 representing the
difference between the carrying value and the market value of certain securities
purchased by the Adviser from the Money Market Fund.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement, the Adviser determines,
subject to the general supervision of the Board of Trustees of the Group and in
accordance with each Fund's investment objective and restrictions, which
securities are to be purchased and sold by a Fund, and which brokers are to be
eligible to execute such Fund's portfolio transactions. Purchases and sales of
portfolio securities with respect to the Money Market Fund, the Fixed Income
Fund, the Tennessee Fund and the Government Securities Fund usually are
principal transactions in which portfolio securities are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters of portfolio securities generally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. Transactions in the over-the-counter market
are generally principal transactions with dealers. With respect to the
over-the-counter market, the Group, where possible, will deal directly with
dealers who make a market in the securities involved except in those
circumstances where better price and execution are available elsewhere.
Allocation of transactions, including their frequency, to various brokers
and dealers is determined by the Adviser in its best judgment and in a manner
deemed fair and reasonable to Share-
B-26
<PAGE> 73
holders. The primary consideration is prompt execution of orders in an effective
manner at the most favorable price. Subject to this consideration, brokers and
dealers who provide supplemental investment research to the Adviser may receive
orders for transactions on behalf of the Funds. 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 the Adviser by the Funds. Such
information may be useful to the Adviser in serving both the Funds and other
clients and, conversely, supplemental information obtained by the placement of
business of other clients may be useful to the Adviser in carrying out its
obligations to the Funds.
While the Adviser generally seeks competitive commissions, the Group
may not necessarily pay the lowest commission available on each brokerage
transaction, for reasons discussed above. For the fiscal years ended June 30,
1996, 1995 and 1994, the Group paid in brokerage commissions on behalf of the
Value Fund of approximately $133,509, $171,045 and $430,855, respectively; for
the fiscal years ended June 30, 1996 and 1995, and the fiscal period ended June
30, 1994, paid on behalf of the Growth Fund approximately $43,315, $32,075 and
$9,368, respectively, and for the fiscal year ended June 30, 1995, paid on
behalf of the Fixed Income Fund approximately $2,500 in brokerage commissions.
During the past three fiscal years, no brokerage commissions were paid by the
Group on behalf of the Money Market Fund, the Fixed Income Fund, the Tennessee
Fund or the Government Securities Fund. In addition, the Adviser, on behalf of
the Value Fund, may direct brokerage transactions to (1) Interstate Johnson
Lane in return for the provision of portfolio management software and various
news service subscriptions, including Barrons, Bloomberg, Morningstar and Value
Line Institutional and (2) Frank Russell in return for chart and graph
services. For the fiscal year ended June 30, 1996, the amount of such
transactions and related commissions on behalf of the Value Fund were
$18,247,862 and $59,555, respectively. Such brokerage transactions are
subject to the requirements as to price and execution as described above.
Except as otherwise disclosed to the Shareholders of the Funds and as
permitted by applicable laws, rules and regulations, the Group will not, on
behalf of the Funds, execute portfolio transactions through, acquire portfolio
securities issued by, make savings deposits in, or enter into repurchase or
reverse repurchase agreements with the Adviser, BISYS, or their affiliates, and
will not give preference to the Adviser's correspondents with respect to such
transactions, securities, savings deposits, repurchase agreements, and reverse
repurchase agreements.
Investment decisions for each Fund are made independently from those for
the other funds of the Group or any other investment company or account managed
by the Adviser. Any such other fund, investment company or account may also
invest in the same securities as the Group on behalf of 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 fund of the Group, investment company or account,
the transaction will be averaged as to price and available investments will be
allocated as to amount in a manner which the Adviser believes to be equitable to
the Fund(s) 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 by a Fund. To the extent
B-27
<PAGE> 74
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 the other Funds or
for other investment companies or accounts in order to obtain best execution. As
provided by the Investment Advisory Agreement, in making investment
recommendations for the Funds, the Adviser will not inquire or take into
consideration whether an issuer of securities proposed for purchase or sale by
the Group is a customer of the Adviser, its parent or its subsidiaries or
affiliates and, in dealing with its customers, the Adviser, its parent,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Funds or any other fund of the
Group.
None of the Funds during the fiscal year ended June 30, 1996, held
securities of its regular brokers or dealers, as defined in Rule 10b-1 under
the 1940 Act, or their parent companies.
Glass-Steagall Act
In 1971, the United States Supreme Court held in Investment Company
Institute v. Camp that the Federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a mutual fund for
the collective investment of managing agency accounts. Subsequently, the Board
of Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981, the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non- bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
B-28
<PAGE> 75
The Adviser believes that it possesses the legal authority to perform the
services for the Funds contemplated by the Prospectus, this Statement of
Additional Information, the Investment Advisory Agreement and the Servicing
Agreement without violation of applicable statutes and regulations. Commerce
Investment Corporation believes that it possesses the legal authority to perform
the services for the Funds as set forth in the Rule 12b-1 Agreement with BISYS,
as described below, without violation of applicable statutes and regulations.
Future changes in either Federal or state statutes and regulations relating to
the permissible activities of banks or bank holding companies and the
subsidiaries or affiliates of those entities, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent or restrict the Adviser or Commerce Investment
Corporation from continuing to perform such services for the Group. In addition,
current state securities laws on the issue of the registration of banks as
brokers or dealers may differ from the interpretation of federal law, and banks
and financial institutions may be required to register as dealers pursuant to
the laws of a specific state. Depending upon the nature of any changes in the
services which could be provided by the Adviser or Commerce Investment
Corporation, the Board of Trustees of the Group would review the Group's
relationship with the Adviser or Commerce Investment Corporation, as the case
may be, and consider taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit or
restrict the proposed activities of the Adviser, Commerce Investment Corporation
and/or the Adviser's affiliated and correspondent banks in connection with
Customer purchases of Shares of any of the Funds, those banks might be required
to alter materially or discontinue the services offered by them to Customers. It
is not anticipated, however, that any change in the Group's method of operations
would affect its net asset value per share or result in financial losses to any
Customer.
Administrator
BISYS serves as administrator (the "Administrator") to the Funds pursuant
to a Management and Administration Agreement dated August 23, 1990, as amended
October 27, 1992 (with respect to the Money Market Fund, the Value Fund, the
Fixed Income Fund and the Tennessee Fund) and a Management and Administration
Agreement dated April 5, 1994, as amended June 3, 1994 (with respect to the
Government Securities Fund and the Growth Fund (collectively, the
"Administration Agreement"). The Administrator assists in supervising all
operations of each Fund (other than those performed by the Adviser under the
Investment Advisory Agreement, by National City Bank under the Custodial
Services Agreement and by BISYS Fund Services Ohio, Inc. under the Transfer
Agency Agreement and Fund Accounting Agreements). The Administrator is a
broker-dealer
B-29
<PAGE> 76
registered with the Commission, and is a member of the National Association of
Securities Dealers, Inc. The Administrator provides financial services to
institutional clients.
Under the Administration Agreement, the Administrator has agreed to
maintain office facilities; furnish statistical and research data, clerical,
certain bookkeeping services and stationery and office supplies; prepare the
periodic reports to the Commission on Form N-SAR or any replacement forms
therefor; compile data for, prepare for execution by the Funds and file all of
the Funds' federal and state tax returns and required tax filings other than
those required to be made by the Funds' custodian and Transfer Agent; prepare
compliance filings pursuant to state securities laws with the advice of the
Group's counsel; assist to the extent requested by the Group with the Group's
preparation of its Annual and Semi-Annual Reports to Shareholders and its
Registration Statement (on Form N-1A or any replacement therefor); compile data
for, prepare and file timely Notices to the Commission required pursuant to Rule
24f-2 under the 1940 Act; keep and maintain the financial accounts and records
of each Fund, including calculation of daily expense accruals; determine the
actual variance from $1.00 of the Money Market Fund's net asset value per share;
and generally assist in all aspects of the Funds' operations other than those
performed by the Adviser under the Investment Advisory Agreement, by National
City Bank under the Custodial Services Agreement and by BISYS Fund Services
Ohio, Inc. under the Transfer Agency Agreement and Fund Accounting Agreements.
Under the Administration Agreement, the Administrator may delegate all or any
part of its responsibilities thereunder.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement,
equal (a) with respect to the Money Market, Value, Fixed Income and Tennessee
Funds, to the lesser of (i) a fee calculated daily and paid periodically, at the
annual rate equal to twenty one-hundredths of one percent (.20%) of that Fund's
average daily net assets or (ii) such other fee as may be agreed upon in writing
by the Group and the Administrator, and (b) with respect to the Government
Securities and Growth Funds, to a fee, calculated daily and paid periodically,
at the annual rate equal to twenty one-hundredths of one percent (.20%) of that
Fund's average daily net assets.
For the fiscal years ended June 30, 1996, 1995 and 1994, the Administrator
earned and voluntarily waived the amounts indicated below with respect to its
administrative services to the indicated Funds:
B-30
<PAGE> 77
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995 1994
---- ---- ----
Fees Fees Fees Fees Fees Fees
Earned Waived Earned Waived Earned Waived
-------- ------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund $299,701 -- $314,096 -- $257,644 $1,112
Value Fund 166,025 -- 158,632 -- 150,302 --
Fixed Income
Fund 68,916 -- 82,655 -- 85,948 --
Tennessee Fund 39,991 -- 39,375 -- 42,777 846
Government
Securities
Fund(1) 15,426 $ 3,856 16,402 $5,393 2,912 1,477
Growth Fund(1) 56,958 14,290 23,678 7,277 2,278 1,156
</TABLE>
(1) Commenced operations April 18, 1994.
Unless sooner terminated as provided therein, the Administration
Agreement, with respect to the Government Securities Fund and the Growth Fund,
has an initial term expiring on March 31, 1999, and with respect to each of the
other Funds, the Administration Agreement, by its terms, has been renewed until
March 31, 1998. The Administration Agreement thereafter, respectively, shall be
renewed automatically for successive five-year terms, unless written notice not
to renew is given by the nonrenewing party to the other party at least 60 days
prior to the expiration of the then-current term. The Administration Agreement
is terminable with respect to a particular Fund only upon mutual agreement of
the parties to the Administration Agreement and for cause (as defined in the
Administration Agreement) by the party alleging cause, on not less than 60 days'
notice by the Group's Board of Trustees or by the Administrator.
The Administration Agreement provides that the Administrator shall not be
liable for any error of judgment or mistake of law or any loss suffered by
either Fund in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
the Administrator of its obligations and duties thereunder.
B-31
<PAGE> 78
Expenses
If total expenses borne by any of the Funds in any fiscal year exceed
expense limitations imposed by applicable state securities regulations, the
Adviser and the Administrator will reimburse that Fund by the amount of such
excess in proportion to their respective fees. As of the date of this Statement
of Additional Information, the most restrictive expense limitation applicable to
the Funds limits each Fund's aggregate annual expenses, including management and
advisory fees but excluding interest, taxes, brokerage commissions and certain
other expenses, to 2 1/2% of the first $30 million of a Fund's average net
assets, 2% of the next $70 million of such Fund's average net assets, and 1/2%
of such Fund's remaining average net assets. Any expense reimbursements will be
estimated daily and reconciled and paid on a monthly basis. Fees imposed upon
customer accounts by the Adviser or its affiliated or correspondent banks for
cash management services would not be included within Fund expenses for purposes
of any such expense limitation.
Distributor
BISYS serves as agent for each of the Funds in the distribution of its
Shares pursuant to a Distribution Agreement dated October 1, 1993, as amended as
of June 3, 1994 (the "Distribution Agreement"). Unless otherwise terminated, the
Distribution Agreement remains in effect from year to year for successive annual
periods ending March 31 if approved at least annually (i) by the Group's Board
of Trustees or by the vote of a majority of the outstanding shares of the Group,
and (ii) by the vote of a majority of the Trustees of the Group who are not
parties to the Distribution Agreement or interested persons (as defined in the
1940 Act) of any party to the Distribution Agreement, cast in person at a
meeting called for the purpose of voting on such approval. The Distribution
Agreement may be terminated in the event of any assignment, as defined in the
1940 Act.
In its capacity as Distributor, BISYS solicits orders for the sale of
Shares, advertises and pays the costs of advertising, office space and the
personnel involved in such activities. BISYS receives no compensation under the
Distribution Agreement with the Group, but may retain all or a portion of the
sales charge imposed upon sales of Shares of each of the Funds, other than the
Money Market Fund. For the three fiscal years ended June 30, 1996, 1995 and
1994, commissions paid to BISYS under the Distribution Agreement with respect to
the sale of Shares of such Funds, after discounts to dealers, were $5,030,
$27,404 and $16,062, respectively. For the years ended June 30, 1996, 1995 and
1994, $4,090, $10,212 and $88,354,
B-32
<PAGE> 79
respectively, were reallowed by BISYS to Commerce Investment Corporation.
As described in the Prospectus, the Group has adopted a Distribution and
Shareholder Service Plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act
under which each Fund is authorized to pay BISYS for payments it makes to banks,
including the Adviser, other institutions and broker-dealers, and for expenses
BISYS and any of its affiliates or subsidiaries incur (with all of the foregoing
organizations being referred to as "Participating Organizations") for providing
distribution or shareholder service assistance. Payments to such Participating
Organizations may be made pursuant to agreements entered into with BISYS. The
Plan authorizes each Fund to make payments to BISYS in an amount not in excess,
on an annual basis, of 0.25% of the average daily net asset value of that Fund.
As required by Rule 12b-1, the Plan was approved by the Shareholders of each of
the Funds and by the Board of Trustees, including a majority of the Trustees who
are not interested persons of any of the Funds and who have no direct or
indirect financial interest in the operation of the Plan (the "Independent
Trustees"). The Plan may be terminated as to a Fund by vote of a majority of the
Independent Trustees, or by vote of majority of the outstanding Shares of that
Fund. Any change in the Plan that would materially increase the distribution
cost to a Fund requires Shareholder approval. The Trustees review quarterly a
written report of such costs and the purposes for which such costs have been
incurred. The Plan may be amended by vote of the Trustees including a majority
of the Independent Trustees, cast in person at a meeting called for that
purpose. For so long as the Plan is in effect, selection and nomination of those
Trustees who are not interested persons of the Group shall be committed to the
discretion of such disinterested persons. All agreements with any person
relating to the implementation of the Plan may be terminated at any time on 60
days' written notice without payment of any penalty, by vote of a majority of
the Independent Trustees or by a vote of the majority of the outstanding Shares
of the Fund. The Plan will continue in effect for successive one-year periods,
provided that each such continuance is specifically approved (i) by the vote of
a majority of the Independent Trustees, and (ii) by a vote of a majority of the
entire Board of Trustees cast in person at a meeting called for that purpose.
The Board of Trustees has a duty to request and evaluate such information as may
be reasonably necessary for them to make an informed determination of whether
the Plan should be implemented or continued. In addition the Trustees in
approving the Plan must determine that there is a reasonable likelihood that the
Plan will benefit each Fund and its Shareholders.
The Board of Trustees of the Group believes that the Plan is in the best
interests of each Fund since it encourages Fund growth and maintenance of Fund
assets. As a Fund grows in size, certain
B-33
<PAGE> 80
expenses, and therefore total expenses per Share, may be reduced and overall
performance per Share may be improved.
As authorized by the Plan, BISYS has entered into Rule 12b-1 Agreements
with Commerce Investment Corporation, a wholly owned subsidiary of the Adviser
("C.I.C."), to provide certain distribution and shareholder services in
connection with the distribution of the Shares of each of the Funds including,
but not limited to, maintaining Shareholder relations, answering questions about
the Funds and distributing prospectuses to persons other than Shareholders of
the Funds. In consideration of such services BISYS has agreed to pay C.I.C. a
monthly fee, computed at the annual rate of .25% of the average aggregate net
asset value of Shares held during the period in accounts for which C.I.C
provided services under such agreement. BISYS will be compensated by each Fund
in an amount equal to its payments to C.I.C. under the Rule 12b-1 Agreement with
respect to that Fund.
The Group has also entered into Rule 12b-1 Agreements with BISYS pursuant
to which BISYS has agreed to provide certain distribution and shareholder
support services to each of the Funds and their Shareholders, including, but not
limited to, advertising and marketing the Shares of the Funds, maintaining
Shareholder relations, answering questions about the Funds, distributing
prospectuses to persons other than Shareholders of the Funds, and providing such
other services as a Fund may reasonably request. In consideration of such
services, the Group has agreed to pay BISYS a monthly fee, computed at the
annual rate of .25% of the average aggregate net asset value of Shares held
during the period in client accounts for which BISYS has provided services under
this Rule 12b-1 Agreement. Such fee may exceed the actual costs incurred by
BISYS in providing such services.
In addition, BISYS has entered into and may enter into, from time to time,
other Rule 12b-1 Agreements with selected dealers pursuant to which such dealers
will provide certain services in connection with the distribution of a Fund's
Shares including, but not limited to, those discussed above.
For the fiscal year ended June 30, 1996, the Group, on behalf of the
Funds, incurred the following amounts pursuant to the Plan for payments made by
BISYS to C.I.C. and for payments made by the Group to BISYS for certain
administrative and shareholder support services as more fully described above:
B-34
<PAGE> 81
<TABLE>
<CAPTION>
Payments Made Payments Made
Fund to BISYS to CIC
---- ------------- -------------
<S> <C> <C>
Money Market Fund $176,724 $3,289
Value Fund 57,568 1,071
Fixed Income Fund 22,979 427
Tennessee Fund 30,829 570
Government Securities Fund 6,110 109
Growth Fund 15,515 288
</TABLE>
Administrative Services Plan
As described in the Prospectus, the Group has also adopted an
Administrative Services Plan (the "Services Plan") under which each Fund is
authorized to pay certain financial institutions, including the Adviser, its
correspondent and affiliated banks, and BISYS (a "Service Organization"), to
provide certain ministerial, record keeping, and administrative support services
to their customers who own of record or beneficially Shares in a Fund. Payments
to such Service Organizations are made pursuant to Servicing Agreements between
the Group and the Service Organization. The Services Plan authorizes each Fund
to make payments to Service Organizations in an amount, on an annual basis, of
up to 0.25% of the average daily net asset value of that Fund. The Services Plan
has been approved by the Board of Trustees of the Group, including a majority of
the Trustees who are not interested persons of the Group (as defined in the 1940
Act) and who have no direct or indirect financial interest in the operation of
the Services Plan or in any Servicing Agreements thereunder (the "Disinterested
Trustees"). The Services Plan may be terminated as to a Fund by a vote of a
majority of the Disinterested Trustees. The Trustees review quarterly a written
report of the amounts expended pursuant to the Services Plan and the purposes
for which such expenditures were made. The Services Plan may be amended by a
vote of the Trustees, provided that any material amendments also require the
vote of a majority of the Disinterested Trustees. For so long as the Services
Plan is in effect, selection and nomination of those Disinterested Trustees
shall be committed to the discretion of the Group's Disinterested Trustees. All
Servicing Agreements may be terminated at any time without the payment of any
penalty by a vote of a majority of the Disinterested Trustees. The Services Plan
will continue in effect for successive one-year periods, provided that each such
continuance is specifically approved by a majority of the Board of Trustees,
including a majority of the Disinterested Trustees.
As authorized by the Services Plan, the Group has entered into a Servicing
Agreement with the Adviser pursuant to which the Adviser has agreed to provide
certain administrative support services in connection with Shares of the Funds
owned of record or beneficially by its customers. Such administrative support
services may
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<PAGE> 82
include, but are not limited to, (i) processing dividend and distribution
payments from a Fund on behalf of customers; (ii) providing periodic statements
to its customers showing their positions in the Shares; (iii) arranging for bank
wires; (iv) responding to routine customer inquiries relating to services
performed by the Adviser; (v) providing sub-accounting with respect to the
Shares beneficially owned by the Adviser's customers or the information
necessary for sub-accounting; (vi) if required by law, forwarding shareholder
communications from a Fund (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
its customers; (vii) aggregating and processing purchase, exchange, and
redemption requests from customers and placing net purchase, exchange, and
redemption orders for customers; and (viii) providing customers with a service
that invests the assets of their account in the Shares pursuant to specific or
pre-authorized instructions. In consideration of such services, the Group, on
behalf of each Fund, has agreed to pay the Adviser a monthly fee, computed at
the annual rate of .25% of the average aggregate net asset value of Shares of
that Fund held during the period by customers for whom the Adviser has provided
services under the Servicing Agreement.
For the fiscal year ended June 30, 1996, the Group incurred the following
amounts on behalf of the designated Fund for payments made to the Adviser
pursuant to the Services Plan: the Money Market Fund -- $231,497; the Value Fund
- -- $185,066; the Fixed Income Fund -- $77,654; the Tennessee Fund -- $28,369;
the Government Securities Fund -- $15,468; and the Growth Fund -- $66,698. Such
fees reflect the voluntary fee reductions made by the Adviser with respect to
each of the Funds.
Custodian
National City Bank, 1900 East 9th Street, Cleveland, Ohio 44114 serves as
custodian (the "Custodian") to the Funds pursuant to the Custodial Services
Agreement dated as of March 1, 1995. The Custodian's responsibilities include
safeguarding and controlling the Funds' cash and securities, handling the
receipt and delivery of securities, and collecting interest and dividends on the
Funds' investments.
Transfer Agency and Fund Accounting Services
BISYS Fund Services Ohio, Inc. serves as transfer agent and dividend
disbursing agent (the "Transfer Agent") for all of the Funds pursuant to the
Transfer Agency Agreement dated September 1, 1992, as amended as of May 1, 1994.
Pursuant to such Agreement, the Transfer Agent, among other things, performs the
following services in connection with each Fund's shareholders of record:
maintenance of shareholder records for each of the Group's
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<PAGE> 83
shareholders of record; processing shareholder purchase and redemption orders;
processing transfers and exchanges of shares of the Group on the shareholder
files and records; processing dividend payments and reinvestments; and
assistance in the mailing of shareholder reports and proxy solicitation
materials. For such services the Transfer Agent receives a fee based on the
number of shareholders of record. For the three fiscal years ended June 30,
1996, 1995 and 1994, the Transfer Agent received the following fees from the
Group for services as transfer agent for the Funds:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995 1994
---- ---- ----
Fees Fees Fees
Earned Earned Earned
------- ------- -------
<S> <C> <C> <C>
Money Market Fund $30,704 $24,708 $20,055
Value Fund 39,661 36,068 25,092
Fixed Income
Fund 23,980 23,115 19,464
Tennessee Fund 21,959 21,103 18,740
Government Securities
Fund(1) 20,039 19,676 4,811
Growth Fund(1) 23,662 20,339 4,800
</TABLE>
(1) Commenced operations April 18, 1994.
In addition, BISYS Fund Services Ohio, Inc. provides certain fund
accounting services to the Funds pursuant to a Fund Accounting Agreement dated
February 4, 1993. BISYS Fund Services Ohio, Inc. receives a fee from each Fund
for such services equal to the greater of (a) a fee computed at an annual rate
of three one-hundredths of one percent (.03%) of that Fund's average daily net
assets, or (b) the annual fee of $30,000 ($40,000 with respect to the Tennessee
Fund). Under such Agreement, BISYS Fund Services Ohio, Inc. maintains the
accounting books and records for each Fund, including journals containing an
itemized daily record of all purchases and sales of portfolio securities, all
receipts and disbursements of cash and all other debits and credits, general and
auxiliary ledgers reflecting all asset, liability, reserve, capital, income and
expense accounts, including interest accrued and interest received, and other
required separate ledger accounts; maintains a monthly trial balance of all
ledger accounts; performs certain accounting services for the Fund, including
calculation of
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<PAGE> 84
the net asset value per share, calculation of the dividend and capital gain
distributions, if any, and of yield, reconciliation of cash movements with the
Fund's custodian, affirmation to the Fund's custodian of all portfolio trades
and cash settlements, verification and reconciliation with the Fund's custodian
of all daily trade activity; provides certain reports; obtains dealer
quotations, prices from a pricing service or matrix prices on all portfolio
securities in order to mark the portfolio to the market; and prepares an interim
balance sheet, statement of income and expense, and statement of changes in net
assets for each Fund.
For the fiscal years ended June 30, 1996, 1995 and 1994, BISYS Fund
Services Ohio, Inc. received the fees indicated below with respect to its fund
accounting services to the indicated Funds:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
Fund 1996 1995 1994
- ---- ---- ---- ----
<S> <C> <C> <C>
Money Market Fund $45,640 $47,114 $36,284
Value Fund 31,181 30,902 31,025
Fixed Income
Fund 34,256 35,829 36,290
Tennessee Fund 49,248 48,522 48,498
Government Securities(1)
Fund 31,276 30,000 7,858
Growth Fund(1) 31,461 30,695 6,600
</TABLE>
(1) Commenced operations April 18, 1994.
Auditors
The financial statements of each of the Funds as of June 30, 1996, and for
the periods indicated therein, appearing in this Statement of Additional
Information have been audited by KPMG Peat Marwick LLP, Two Nationwide Plaza,
Columbus, Ohio 43215, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report and on the authority of such firm
as experts in auditing and accounting.
Legal Counsel
Baker & Hostetler, 65 East State Street, Columbus, Ohio 43215 is counsel
to the Group and will pass upon the legality of the Shares offered hereby.
ADDITIONAL INFORMATION
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<PAGE> 85
Description of Shares
The Group is an Ohio business trust. The Group was organized on April 25,
1988, and the Group's Declaration of Trust was filed with the Secretary of State
of Ohio on April 25, 1988. The Declaration of Trust authorizes the Board of
Trustees to issue an unlimited number of shares, which are shares of beneficial
interest, without par value. The Group presently has sixteen series of shares,
one of which represents interests in the Money Market Fund, one of which
represents interests in the Value Fund, one of which represents interests in the
Fixed Income Fund, one of which represents interests in the Tennessee Fund, one
of which represents interests in the Government Securities Fund and one of which
represents interests in the Growth Fund. The other ten series are The KeyPremier
Prime Obligations Money Market Fund, The KeyPremier Pennsylvania Municipal Bond
Fund, The KeyPremier Established Growth Fund, The KeyPremier Intermediate Term
Income Fund, 1st Source Monogram U.S. Treasury Obligations Money Market Fund,
1st Source Monogram Diversified Equity Fund, 1st Source Monogram Income Equity
Fund, 1st Source Monogram Special Equity Fund, 1st Source Monogram Income Fund
and 1st Source Monogram Intermediate Tax-Free Bond Fund. The Group's Declaration
of Trust authorizes the Board of Trustees to divide or redivide any unissued
shares of the Group into one or more additional series by setting or changing in
any one or more respects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends, qualifications,
and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such conversion
or exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus and this Statement of
Additional Information, the Shares will be fully paid and non-assessable. In the
event of a liquidation or dissolution of the Group, shareholders of a fund are
entitled to receive the assets available for distribution belonging to that
fund, and a proportionate distribution, based upon the relative asset values of
the respective funds, of any general assets not belonging to any particular fund
which are available for distribution.
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 Group shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each fund affected by the matter. For purposes of determining whether the
approval of a majority of the outstanding shares of a fund will be required in
connection with a matter, a fund will be deemed to be affected by a matter
unless it is clear that the interests of each fund in the matter are identical,
or that the matter does not
B-39
<PAGE> 86
affect any interest of the fund. Under Rule 18f-2, the approval of an investment
advisory agreement or any change in investment policy would be effectively acted
upon with respect to a fund only if approved by a majority of the outstanding
shares of such fund. However, Rule 18f-2 also provides that the election of
Trustees may be effectively acted upon by shareholders of the Group voting
without regard to series.
As of October 4, 1996, the Adviser, either directly or through CCMI, owned
of record and beneficially 68.32% and 51.56%, respectively, of the outstanding
Shares of the Money Market Fund; 92.67% and 92.67%, respectively, of the
outstanding Shares of the Value Fund; 92.81% and 92.81%, respectively, of the
outstanding Shares of the Fixed Income Fund; 80.50% and 80.50%, respectively, of
the outstanding Shares of the Tennessee Fund; 99.44% and 99.44%, respectively of
the outstanding Shares of the Government Securities Fund; and 95.51% and 95.51%,
respectively, of the outstanding Shares of the Growth Fund. In addition, as of
such date, the Adviser owned of record and beneficially more than 25% of the
total outstanding shares of the Group. Therefore, as of such date the Adviser
may be presumed to control each of the Funds and the Group, and as a result of
such control, the Adviser may have the power to approve the Investment Advisory
Agreement for each of the Funds and to control any other matters submitted to
the Shareholders of the Funds or shareholders of the Group as a whole, including
the election of trustees.
As of October 4, 1996, Northern Trust Company, FBO Metropolitan Employee
Benefit Board, P. O. Box 92956, Chicago, Illinois 60675, owned beneficially 22%
of the outstanding Shares of the Money Market Fund; and Mary M. Walker, 2724
Lombardy, Memphis, Tennessee 38111, owned beneficially 5.4% of the outstanding
Shares of the Tennessee Fund. To the knowledge of the Group, there are no other
beneficial owners of 5% or more of the outstanding Shares of any of the Funds as
of such date.
Vote of a Majority of the Outstanding Shares
As used in the Prospectus and this Statement of Additional Information, a
"vote of a majority of the outstanding Shares" of a Fund means the affirmative
vote, at a meeting of Shareholders duly called, of the lesser of (a) 67% or more
of the votes of Shareholders of that Fund present at a meeting at which the
holders of more than 50% of the votes attributable to Shareholders of record of
that Fund are represented in person or by proxy, or (b) the holders of more than
50% of the outstanding votes of Shareholders of that Fund.
B-40
<PAGE> 87
Additional Tax Information
Each of the Funds is treated as a separate entity for federal income tax
purposes and intends to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code") for so long as such
qualification is in the best interest of that Fund's shareholders. In order to
qualify as a regulated investment company, each Fund must, among other things:
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities, or currencies; derive less than
30% of its gross income from the sale or other disposition of stock, securities,
options, future contracts or foreign currencies held less than three months; and
diversify its investments within certain prescribed limits. In addition, to
utilize the tax provisions specially applicable to regulated investment
companies, each Fund must distribute to its Shareholders at least 90% of its
investment company taxable income for the year. In general, a Fund's investment
company taxable income will be its taxable income subject to certain adjustments
and excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year.
A non-deductible 4% excise tax is imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
for the one-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the next calendar year. If
distributions during a calendar year were less than the required amount, a Fund
would be subject to a non-deductible excise tax equal to 4% of the deficiency.
Although each Fund expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all federal income taxes, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located, or
in which it is otherwise deemed to be conducting business, a Fund may be subject
to the tax laws of such states or localities. In addition, if for any taxable
year a Fund does not qualify for the special tax treatment afforded regulated
investment companies, all of its taxable income will be subject to federal tax
at regular corporate rates (without any deduction for distributions to its
Shareholders). In such event, dividend distributions would be taxable to
Shareholders to the extent of earnings and profits, and would be eligible for
the dividends received deduction for corporations.
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<PAGE> 88
It is expected that each Fund will distribute annually to Shareholders all
or substantially all of the Fund's net ordinary income and net realized capital
gains and that such distributed net ordinary income and distributed net realized
capital gains will be taxable income to Shareholders for federal income tax
purposes, even if paid in additional Shares of the Fund and not in cash.
Distribution by a Fund of the excess of net long-term capital gain over
net short-term capital loss is taxable to Shareholders as long-term capital gain
in the year in which it is received, regardless of how long the Shareholder has
held the Shares. Such distributions are not eligible for the dividends-received
deduction.
Federal taxable income of individuals is subject to graduated tax rates of
15%, 28%, 31%, 36% and 39.6%. Further, the marginal tax rate may be in excess of
39.6%, because adjustments reduce or eliminate the benefit of the personal
exemption and itemized deductions for individuals with gross income in excess of
certain threshold amounts.
Capital gains of individuals are subject to tax at the same rates
applicable to ordinary income; however, the tax rate on long-term capital gains
of individuals cannot exceed 28%. Capital losses may be used to offset capital
gains. In addition, individuals may deduct up to $3,000 of net capital loss each
year to offset ordinary income. Excess net capital loss may be carried forward
and deducted in future years.
Federal taxable income of corporations in excess of $75,000 up to $10
million is subject to a 34% tax rate; however, because the benefit of lower tax
rates on a corporation's taxable income of less than $75,000 is phased out for
corporations with income in excess of $100,000 but lower than $335,000, a
maximum marginal tax rate of 39% may result. Federal taxable income of
corporations in excess of $10 million is subject to a tax rate of 35%. Further,
a corporation's federal taxable income in excess of $15 million is subject to an
additional tax equal to 3% of taxable income over $15 million, but not more than
$100,000.
Capital gains of corporations are subject to tax at the same rates
applicable to ordinary income. Capital losses may be used only to offset capital
gains and excess net capital loss may be carried back three years and forward
five years.
Certain corporations are entitled to a 70% dividends received deduction
for distributions from certain domestic corporations. Each Fund will designate
the portion of any distributions which qualify for the 70% dividends received
deduction. The amount so designated may not exceed the amount received by the
Fund for its taxable year that qualifies for the dividends received deduction.
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<PAGE> 89
Because all of the Government Obligations Fund's net investment income is
expected to be derived from earned interest, it is anticipated that no
distributions from that Fund will qualify for the 70% dividends received
deduction.
Foreign taxes may be imposed on a Fund by foreign countries with respect
to its income from foreign securities. Since less than 50% in value of any one
Fund's total assets at the end of its fiscal year are expected to be invested in
stocks or securities of foreign corporations, such Fund will not be entitled
under the Code to pass through to its Shareholders their pro rata share of the
foreign taxes paid by the Fund. These taxes will be taken as a deduction by such
Fund.
The Tennessee Fund. The Tennessee Fund is not intended to constitute a
balanced investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Tennessee 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,
since such plans and accounts are generally tax-exempt and, therefore, would not
gain any additional benefit from all or a portion of the Tennessee Fund's
dividends being tax-exempt and such dividends would be ultimately taxable to the
beneficiaries when distributed to them. In addition, the Tennessee Fund may not
be appropriate investments for entities which are "substantial users," or
"related persons" thereof, of facilities financed by private activity bonds held
by the Tennessee Fund.
The Code permits a regulated investment company which invests in Exempt
Securities to pay to its Shareholders "exempt-interest dividends," which are
excluded from gross income for federal income tax purposes, if at the close of
each quarter of its taxable year at least 50% of its total assets consist of
Exempt Securities.
An exempt-interest dividend is any dividend or part thereof (other than a
capital gain dividend) paid by the Tennessee Fund that is derived from interest
received by the Tennessee Fund that is excluded from gross income for federal
income tax purposes, net of certain deductions, provided the dividend is
designated as an exempt-interest dividend in a written notice mailed to
Shareholders not later than sixty days after the close of the Tennessee Fund's
taxable year. The percentage of the total dividends paid by the Tennessee Fund
during any taxable year that qualifies as exempt- interest dividends will be the
same for all Shareholders of the Tennessee Fund receiving dividends during such
year. Exempt- interest dividends shall be treated by the Tennessee Fund's
Shareholders as items of interest excludable from their gross income for Federal
income tax purposes under Section 103(a) of the Code. However, a Shareholder is
advised to consult his tax adviser
B-43
<PAGE> 90
with respect to whether exempt-interest dividends retain the exclusion under
Section 103(a) of the Code if such Shareholder is a "substantial user" or a
"related person" to such user under Section 147(a) of the Code with respect to
any of the Exempt Securities held by the Tennessee Fund. If a Shareholder
receives an exempt-interest dividend with respect to any Share and such Share is
held by the Shareholder for six months or less, any loss on the sale or exchange
of such Share shall be disallowed to the extent of the amount of such
exempt-interest dividend.
In general, interest on indebtedness incurred or continued by a
Shareholder to purchase or carry Shares is not deductible for federal income tax
purposes if the Tennessee Fund distributes exempt-interest dividends during the
Shareholder's taxable year. A Shareholder of the Tennessee Fund that is a
financial institution may not deduct interest expense attributable to
indebtedness incurred or continued to purchase or carry Shares of the Tennessee
Fund if the Tennessee Fund distributes exempt-interest dividends during the
Shareholder's taxable year. Certain federal income tax deductions of property
and casualty insurance companies holding Shares of the Tennessee Fund and
receiving exempt-interest dividends may also be adversely affected. In certain
limited instances, the portion of Social Security benefits received by a
Shareholder which may be subject to federal income tax may be affected by the
amount of tax-exempt interest income, including exempt-interest dividends
received by Shareholders of the Tennessee Fund.
In the event the Tennessee Fund realizes long-term capital gains, such
Fund intends to distribute any realized net long-term capital gains annually. If
the Tennessee Fund distributes such gains, such Fund will have no tax liability
with respect to such gains, and the distributions will be taxable to
Shareholders as long-term capital gains regardless of how long the Shareholders
have held their Shares. Any such distributions will be designated as a capital
gain dividend in a written notice mailed by the Tennessee Fund to the
Shareholders not later than sixty days after the close of the Tennessee Fund's
taxable year. It should be noted, however, that capital gains are taxed like
ordinary income except that net capital gains of individuals are subject to a
maximum federal income tax rate of 28%. Net capital gains are the excess of net
long-term capital gains over net short-term capital losses. Any net short-term
capital gains are taxed at ordinary income tax rates. If a Shareholder receives
a capital gain dividend with respect to any Share and then sells the Share
before he has held it for more than six months, any loss on the sale of the
Share is treated as long-term capital loss to the extent of the capital gain
dividend received.
Interest earned on certain municipal obligations issued on or after August
8, 1986, to finance certain private activities will be
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<PAGE> 91
treated as a tax preference item in computing the alternative minimum tax. It is
likely that exempt-interest dividends received by Shareholders from the
Tennessee Fund will also be treated as tax preference items in computing the
alternative minimum tax to the extent that distributions by the Tennessee Fund
are attributable to such obligations. Also, a portion of all other interest
excluded from gross income for federal income tax purposes earned by a
corporation may be subject to the alternative minimum tax as a result of the
inclusion in alternative minimum taxable income of 75% of the excess of adjusted
current earnings and profits over pre-book alternative minimum taxable income.
Adjusted current earnings and profits would include exempt-interest dividends
distributed by the Tennessee Fund to corporate Shareholders. For individuals the
alternative minimum tax rate is 26% on alternative minimum taxable income up to
$175,000 and 28% on the excess of $175,000; for corporations the alternative
minimum tax rate is 20%.
For taxable years of corporations beginning before 1996, the Superfund
Revenue Act of 1986 imposes an additional tax (which is deductible for federal
income tax purposes) on a corporation at a rate of 0.12 of one percent on the
excess over $2,000,000 of such corporation's "modified alternative minimum
taxable income", which would include a portion of the exempt-interest dividends
distributed by the Tennessee Fund to such corporation. In addition,
exempt-interest dividends distributed to certain foreign corporations doing
business in the United States could be subject to a branch profits tax imposed
by Section 884 of the Code.
Distributions of exempt-interest dividends by the Tennessee Fund may be
subject to state and local taxes even though a substantial portion of such
distributions may be derived from interest on obligations which, if received
directly, would be exempt from such taxes. The Tennessee Fund will report to its
Shareholders annually after the close of its taxable year the percentage and
source, on a state-by-state basis, of interest income earned on municipal
obligations held by the Tennessee Fund during the preceding year. Shareholders
are advised to consult their tax advisers concerning the application of state
and local taxes.
As indicated in the Prospectus, the Tennessee Fund may acquire rights
regarding specified portfolio securities under puts. See "INVESTMENT OBJECTIVES
AND POLICIES -- Additional Information on Portfolio Instruments - Puts" in this
Statement of Additional Information. The policy of the Tennessee Fund is to
limit its acquisition of puts to those under which it will be treated for
federal income tax purposes as the owner of the Exempt Securities acquired
subject to the put and the interest on the Exempt Securities will be tax-exempt
to it. Although the Internal Revenue Service has issued a published ruling that
provides some guidance regarding the tax consequences of the purchase of puts,
there is
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currently no guidance available from the Internal Revenue Service that
definitively establishes the tax consequences of many of the types of puts that
the Tennessee Fund could acquire under the 1940 Act. Therefore, although the
Tennessee Fund will only acquire a put after concluding that it will have the
tax consequences described above, the Internal Revenue Service could reach a
different conclusion.
Although the Tennessee Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business, the
Tennessee Fund may be subject to the tax laws of such states or localities. In
addition, if for any taxable year the Tennessee Fund does not qualify for the
special tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal tax at regular corporate rates
(without any deduction for distributions to its Shareholders). In such event,
dividend distributions would be taxable to Shareholders to the extent of
earnings and profits, and would be eligible for the dividends received deduction
for corporations.
Income itself exempt from Federal income taxation may be considered in
addition to taxable income when determining whether Social Security payments
received by a Shareholder are subject to federal income taxation.
General. Each Fund may be required by federal law to withhold and remit to
the U.S. Treasury 31% of taxable dividends, if any, and capital gain
distributions to any Shareholder, and the proceeds of redemption or the values
of any exchanges of Shares of a Fund, if such Shareholder (1) fails to furnish
the Fund with a correct taxpayer identification number, (2) under-reports
dividend or interest income, or (3) fails to certify to the Fund that he or she
is not subject to such withholding. An individual's taxpayer identification
number is his or her Social Security number.
Information set forth in the Prospectus and this Statement of Additional
Information which relates to Federal taxation is only a summary of some of the
important Federal tax considerations generally affecting purchasers of Shares of
a Fund. No attempt has been made to present a detailed explanation of the
Federal income tax treatment of a Fund or its Shareholders and this discussion
is not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of Shares of a Fund are urged to consult their tax advisers with
specific reference to their own tax situation. In addition, the tax discussion
in the Prospectus and this Statement of Additional Information is based on tax
laws and regulations which are in effect on the date of the Prospectus and
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<PAGE> 93
this Statement of Additional Information; such laws and regulations may be
changed by legislative or administrative action.
Information as to the federal income tax status of all distributions will
be mailed annually to each Shareholder.
Seven-Day Yield of the Money Market Fund
For the seven-day period ended June 30, 1996, the Money Market Fund's
seven-day yield and seven-day effective yield were 4.40% and 4.50%,
respectively. For the 30-day period ended June 30, 1996, the yield and effective
yield for the Money Market Fund were 4.42% and 4.51%, respectively. The
standardized seven-day yield for the Money Market Fund is computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical preexisting account in the Money Market Fund having a balance of
one Share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from Shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7). The net
change in the account value of the Money Market Fund includes the value of
additional Shares purchased with dividends from the original Share, dividends
declared on both the original Share and any such additional Shares, and all
fees, other than nonrecurring account or sales charges, that are charged to all
Shareholder accounts in proportion to the length of the base period and assuming
the Money Market Fund's average account size. The capital changes to be excluded
from the calculation of the net change in account value are realized gains and
losses from the sale of securities and unrealized appreciation and depreciation.
The 30-day yield is calculated as described above except that the base period is
30 days rather than seven days.
The effective yield for the Money Market Fund is computed by compounding
the base period return, as calculated above, by adding 1 to the base period
return raising the sum to a power equal to 365 divided by seven and subtracting
1 from the result.
Yields of the Other Funds
As summarized in the Prospectus under the heading "PERFORMANCE
INFORMATION," yields of the Funds will be computed by annualizing net investment
income per share for a recent 30-day period and dividing that amount by a Fund
Share's maximum offering price (reduced by any undeclared earned income expected
to be paid
B-47
<PAGE> 94
shortly as a dividend) on the last trading day of that period. Net investment
income will reflect amortization of any market value premium or discount of
fixed income securities (except for obligations backed by mortgages or other
assets) and may include recognition of a pro rata portion of the stated dividend
rate of dividend paying portfolio securities. The yield of each of these Funds
will vary from time to time depending upon market conditions, the composition of
the particular Fund's portfolio and operating expenses of the Group allocated to
each Fund. These factors and possible differences in the methods used in
calculating yield should be considered when comparing a Fund's yield to yields
published for other investment companies and other investment vehicles. Yield
should also be considered relative to changes in the value of a Fund's Shares
and to the relative risks associated with the investment objectives and policies
of each of the Funds.
In addition, with respect to the Tennessee Fund, tax equivalent yields
will be computed by dividing that portion of such Fund's yield (as computed
above) which is tax-exempt by one minus a stated income tax rate and adding that
result to that portion, if any, of the yield of that Fund which is not
tax-exempt.
For the 30-day period ended June 30, 1996, the yields for the Fixed Income
Fund, the Tennessee Fund, and the Government Securities Fund were 6.58%, 7.56%,
and 5.36%, respectively, assuming the imposition of the maximum sales charge,
and 6.79%, 7.79%, and 5.47%, respectively, excluding the effect of a sales
charge. If the fee waivers and/or expense reimbursements described above and in
the Prospectus had not been in place, the yields for the Fixed Income Fund, the
Tennessee Fund and the Government Securities Fund, assuming the imposition of
the maximum sales charge, would have been 6.38%, 6.76% and 4.62%, respectively,
and 6.58%, 6.76% and 4.62%, respectively, excluding the effect of a sales
charge. For the same period, the tax equivalent yields for the Tennessee Fund,
assuming a 39.6% federal tax rate, were 12.52%, assuming the imposition of the
maximum sales charge, and 12.90%, excluding the effect of a sales charge, and
without the fee waivers and/or expense reimbursements, such tax equivalent
yields would have been 11.19% and 11.54%, respectively.
The 30-day yields and tax equivalent yields for the Tennessee Fund as
reported above for the 30-day period ended June 30, 1996, are abnormally high
and are not representative of the yields for such Fund during the year ended
June 30, 1996. While these yields have been calculated properly according to
the rules of the Securities and Exchange Commission, the Tennessee Fund
experienced a substantial one-time payment of interest on a defaulted security
during that 30-day period which resulted in the temporarily high level of
income for such Fund.
Tax-Free vs. Taxable Income
The table below show the effect, as of the date hereof, of the tax status
of bonds on the tax equivalent yield received by their holders under the regular
Federal income tax and the Tennessee Hall Income tax laws. They give the
approximate yield a taxable security must earn for residents of Tennessee, at
various income brackets to produce after-tax yields equivalent to those of tax
exempt bonds yielding varying rates from 4% to 10%. This table,
B-48
<PAGE> 95
however, does not reflect the phase out of itemized deductions for certain high
income taxpayers.
<TABLE>
<S> <C> <C> <C> <C> <C>
Single Return $0 - $24,000 $24,001 - $ 58,151 - $121,301 - $263,751 -
58,150 121,300 263,750
Joint Return $0 - $40,100 $40,101 - $ 96,901 - $147,701 - $263,751 -
96,900 147,700 263,750
If your combined
federal and state
tax bracket is... 20.10% 32.32% 35.14% 39.84% 43.22%
And you have a Then you'll be earning the
tax-exempt invest- equivalent of a taxable
ment yielding... investment yielding...
4.00% 5.01% 5.91% 6.17% 6.65% 7.05%
4.50% 5.63% 6.65% 6.94% 7.48% 7.93%
5.00% 6.26% 7.39% 7.71% 8.31% 8.81%
5.50% 6.88% 8.13% 8.48% 9.14% 9.69%
6.00% 7.51% 8.87% 9.25% 9.97% 10.57%
6.50% 8.14% 9.60% 10.02% 10.80% 11.45%
7.00% 8.76% 10.34% 10.79% 11.64% 12.33%
7.50% 9.39% 11.08% 11.56% 12.47% 13.21%
8.00% 10.01% 11.82% 12.33% 13.30% 14.09%
8.50% 10.64% 12.56% 13.11% 14.13% 14.97%
9.00% 11.26% 13.30% 13.88% 14.90% 15.85%
9.50% 11.89% 14.04% 14.65% 15.79% 16.73%
10.00% 12.52% 14.78% 15.42% 16.62% 17.61%
</TABLE>
Calculation of Total Return
As summarized in the Prospectus under the heading "PERFORMANCE
INFORMATION," average annual total return is a measure of the change in value of
an investment in a Fund over the period covered, which assumes any dividends or
capital gains distributions are reinvested in the Fund immediately rather than
paid to the investor in cash. Average annual total return will be calculated by:
(1) adding to the total number of Shares purchased by a hypothetical $1,000
investment in that Fund (less the maximum sales charge, if any) all additional
Shares which would have been purchased if all dividends and distributions paid
or distributed during the period had been immediately reinvested; (2)
calculating the value of the hypothetical initial investment of $1,000 as of the
end of the period by multiplying the total number of Shares owned at the end of
the period by the net asset value per share on the last trading day of the
period; (3) assuming redemption at the end of the period; and (4) dividing this
account value for the hypothetical investor by the initial $1,000 investment and
annualizing the result for periods of less than one year. Each Fund, however,
may also advertise aggregate total return in addition to average annual total
return. Aggregate total return is a measure of the change in
B-49
<PAGE> 96
value of an investment in a Fund over the relevant period and is calculated
similarly to average annual total return except that the result is not
annualized.
For the one year and five year periods ended June 30, 1996, and the
respective periods from commencement of operations to June 30, 1996, the average
annual returns with the maximum sales charge and without the maximum sales
charges for the Funds were as follows:
<TABLE>
<CAPTION>
With Maximum Without Maximum
------------ ---------------
Sales Charge Sales Charge
------------ ------------
Since Since
----- -----
Fund 1 Year 5 Year Inception 1 Year 5 Year Inception
---- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund(1) 4.75% 4.75%
Value Fund(2) 15.04% -- 12.41% 20.50% -- 13.52%
Fixed Income Fund(2) -2.02% -- 3.49% 1.05% -- 4.17%
Tennessee Fund(3) 1.57% -- 3.64% 4.67% -- 4.51%
</TABLE>
B-50
<PAGE> 97
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Government Securities 1.11% -- 4.04% 3.21% -- 4.97%
Fund(4)
Growth Fund(4) 14.08% -- 16.54% 19.44% -- 18.98%
</TABLE>
(1) Commenced operations July 25, 1988.
(2) Commenced operations October 31, 1991.
(3) Commenced operations November 4, 1992.
(4) Commenced operations April 15, 1994.
Distribution Rates
Each of the Funds, other than the Money Market Fund, may from time to time
advertise current distribution rates which are calculated in accordance with the
method disclosed in the Prospectus. For the fiscal year ended June 30, 1996, the
distribution rates, including the maximum sales load and capital gains; the
distribution rates, excluding the effect of capital gains but including a sales
load; and the distribution rates, excluding the effect of both capital gains and
a sales load, for the Value Fund, the Fixed Income Fund, the Tennessee Fund, the
Government Securities Fund and the Growth Fund, respectively, were as follows:
<TABLE>
<CAPTION>
Excluding Capital
Including Maximum Gains But Excluding Both
Sales Load and Including Maximum Capital Gains and
Fund Capital Gains Sales Load Maximum Sales Load
---- ----------------- ----------------- ------------------
<S> <C> <C> <C>
Value Fund 4.13% .91% .95%
Fixed Income Fund 6.69% 6.69% 6.90%
Tennessee Fund 5.22% 5.22% 5.38%
Government
Securities Fund 5.25% 5.25% 5.36%
Growth Fund 2.98% 1.29% 1.35%
</TABLE>
Performance Comparisons
Investors may judge the performance of the Funds by comparing them to the
performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies
B-51
<PAGE> 98
through various mutual fund or market indices such as those prepared by Dow
Jones & Co., Inc. and Standard & Poor's Corporation and to data prepared by
Lipper Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds. Comparisons may also be made to
indices or data published in Money Magazine, Forbes, Barron's, The Wall Street
Journal, Morningstar, Inc., Ibbotson Associates, CDA/Wiesenberger, The New York
Times, Business Week, U.S.A. Today and local periodicals. In addition to
performance information, general information about these Funds that appears in a
publication such as those mentioned above may be included in advertisements,
sales literature and reports to shareholders. The Funds may also include in
advertisements and reports to shareholders information discussing the
performance of the Adviser in comparison to other investment advisers and to
other banking institutions.
From time to time, the Group may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation, the power of compounding and the benefits of dollar
cost averaging); (2) discussions of general economic trends; (3) presentations
of statistical data to supplement such discussions; (4) descriptions of past or
anticipated portfolio holdings for one or more of the Funds within the Group;
(5) descriptions of investment strategies for one or more of such Funds; (6)
descriptions or comparisons of various investment products, which may or may not
include the Funds; (7) comparisons of investment products (including the Funds)
with relevant market or industry indices or other appropriate benchmarks; (8)
discussions of fund rankings or ratings by recognized rating organizations; and
(9) testimonials describing the experience of persons that have invested in one
or more of the Funds. The Group may also include calculations, such as
hypothetical compounding examples, which describe hypothetical investment
results in such communications. Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund. In addition, the Tennessee Fund may include in its advertisements charts
comparing various tax-free yields to taxable yield equivalents at different
income levels.
Current yields or total return will fluctuate from time to time and are
not necessarily representative of future results. Accordingly, a Fund's yield or
total return may not provide for comparison with bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and total
return are functions of a Fund's quality, composition and maturity, as well as
expenses allocated to such Fund. Fees imposed upon Customer accounts by the
Adviser or its affiliated or correspondent banks for cash management services
will reduce a Fund's effective yield and total return to Customers.
Miscellaneous
Individual Trustees are generally elected by the Shareholders and, subject
to removal by the vote of two-thirds of the Board of Trustees, serve for a term
lasting until the next meeting of shareholders at which Trustees are elected.
Such meetings are not required to be held at any specific intervals. Generally,
shareholders owning not less than 20% of the outstanding shares of the Group
entitled to vote may cause the Trustees to call a special meeting. However, the
Group has represented to the Commission that the Trustees will call a special
meeting for the purpose of considering the removal of one or more Trustees upon
written request therefor from shareholders owning not less than 10% of the
outstanding votes of the Group entitled to vote. At such a meeting, a quorum of
shareholders (constituting a majority of votes attributable to all outstanding
shares of the Group), by majority vote, has the power to remove one or more
Trustees.
The Group is registered with the Commission as a management investment
company. Such registration does not involve supervision by the Commission of the
management or policies of the Group.
The Prospectus and this Statement of Additional Information omit certain
of the information contained in the Registration Statement filed with the
Commission. Copies of such information may be obtained from the Commission upon
payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and this Statement of Additional Information.
B-52
<PAGE> 99
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
The Sessions Group-
The Riverside Capital Funds:
We have audited the accompanying statements of assets and liabilities of The
Sessions Group- The Riverside Capital Funds (comprised of the Riverside Capital
Money Market Fund, Riverside Capital Value Equity Fund, Riverside Capital
Growth Fund, Riverside Capital Fixed Income Fund, Riverside Capital Low
Duration Government Securities Fund and Riverside Capital Tennessee Municipal
Obligations Fund), including the schedules of portfolio investments as of June
30, 1996, and the related statements of operations, statements of changes in
net assets and the financial highlights for each of the periods indicated
herein. These financial statements and the financial highlights are the
responsibility of The Sessions Group - The Riverside Capital Funds' management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of June
30, 1996 by confirmation with the custodian and other appropriate audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned funds comprising The Session Group - The Riverside Capital
Funds at June 30, 1996, the results of their operations, the changes in their
net assets and the financial highlights for each of the periods indicated
herein, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
August 26, 1996
B-53
<PAGE> 100
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1996
<TABLE>
<CAPTION>
MONEY VALUE
MARKET EQUITY GROWTH
FUND FUND FUND
------------ ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investments, at value (cost
$125,869,852; $66,911,792; and
$28,072,751, respectively).......... $125,869,852 $80,426,289 $33,878,339
Repurchase agreements (cost
$7,714,419)......................... 7,714,419 -- --
------------ ----------- -----------
Total investments.................... 133,584,271 80,426,289 33,878,339
Interest and dividends receivable.... 1,122,472 214,984 75,842
Receivable from brokers for
investments sold.................... -- 470,068 --
Prepaid expenses..................... 26,402 7,278 3,142
------------ ----------- -----------
Total Assets....................... 134,733,145 81,118,619 33,957,323
------------ ----------- -----------
LIABILITIES:
Dividends payable.................... 502,254 -- --
Payable to brokers for investments
purchased........................... -- -- 166,450
Accrued expenses and other payables:
Investment advisory fees........... 3,854 6,024 971
Administration fees................ 7,351 4,473 1,390
Administrative services fees....... 13,805 12,959 4,351
12b-1 fees......................... 25,042 2,720 1,121
Custodian and accounting fees...... 1,103 3,736 2,003
Legal and audit fees............... 29,881 24,544 11,142
Printing fees...................... 3,293 4,899 785
Transfer agent fees................ 939 3,951 735
Other.............................. -- 179 1,006
------------ ----------- -----------
Total Liabilities.................. 587,522 63,485 189,954
------------ ----------- -----------
NET ASSETS:
Capital.............................. 134,348,768 60,131,224 27,015,438
Undistributed net investment income.. -- 106,815 11,382
Net unrealized appreciation on
investments......................... -- 13,514,497 5,805,588
Accumulated undistributed net
realized gains (losses) on
investment transactions............. (203,145) 7,302,598 934,961
------------ ----------- -----------
Net Assets......................... $134,145,623 $81,055,134 $33,767,369
============ =========== ===========
Outstanding units of beneficial
interest (shares)................... 134,348,769 5,573,485 2,409,383
============ =========== ===========
Net asset value--redemption price
per share........................... $ 1.00 $ 14.54 $ 14.01
============ =========== ===========
Maximum Sales Charge................. 4.50% 4.50%
=========== ===========
Maximum Offering Price (100%/(100%--
Maximum Sales Charge) of net asset
value adjusted to nearest cent) per
share............................... $ 1.00(a) $ 15.23 $ 14.67
============ =========== ===========
<FN>
- ------
(a) Offering price and redemption price are the same for the Money Market Fund.
</TABLE>
See notes to financial statements.
B-54
<PAGE> 101
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1996
<TABLE>
<CAPTION>
LOW DURATION TENNESSEE
GOVERNMENT MUNICIPAL
FIXED INCOME SECURITIES OBLIGATIONS
FUND FUND FUND
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS:
Investments, at value (cost $29,370,100;
$7,363,027; and $18,441,220, respec-
tively)................................ $29,388,109 $7,354,770 $18,683,329
Interest and dividends receivable....... 654,353 134,738 396,380
Receivable from brokers for investments
sold................................... 3,140,789 -- --
Unamortized organization costs.......... -- -- 11,952
Prepaid expenses........................ 3,143 617 4,418
----------- ---------- -----------
Total Assets.......................... 33,186,394 7,490,125 19,096,079
----------- ---------- -----------
LIABILITIES:
Cash overdraft.......................... 399,580 1,185 35,935
Payable to brokers for investments pur-
chased................................. 3,779,764 -- --
Accrued expenses and other payables:
Investment advisory fees.............. 1,541 -- 78
Administration fees................... 1,577 303 1,034
Administrative services fees.......... 2,700 1,686 1,880
12b-1 fees............................ 945 1,475 1,548
Custodian and accounting fees......... 5,133 9,332 1,452
Trustees' fees........................ 479 42 205
Legal and audit fees.................. 13,735 10,880 13,186
Transfer agent fees................... 2,892 1,136 1,762
Printing fees......................... 2,713 2,460 1,911
Other................................. 128,126 635 --
----------- ---------- -----------
Total Liabilities..................... 4,339,185 29,134 58,991
----------- ---------- -----------
NET ASSETS:
Capital................................. 35,111,736 7,487,755 19,961,714
Undistributed net investment income..... 72,377 15,797 41,200
Net unrealized appreciation (deprecia-
tion) on investments................... 18,009 (8,257) 242,109
Accumulated undistributed net realized
losses on investment transactions...... (6,354,913) (34,304) (1,207,935)
----------- ---------- -----------
Net Assets............................ $28,847,209 $7,460,991 $19,037,088
=========== ========== ===========
Outstanding units of beneficial interest
(shares)............................... 3,289,966 750,109 1,949,549
=========== ========== ===========
Net asset value--redemption price per
share.................................. $ 8.77 $ 9.95 $ 9.76
=========== ========== ===========
Maximum Sales Charge.................... 3.00% 2.00% 3.00%
=========== ========== ===========
Maximum Offering Price (100%/(100%--Max-
imum Sales Charge) of net asset value
adjusted to nearest cent) per share.... $ 9.04 $ 10.15 $ 10.06
=========== ========== ===========
</TABLE>
See notes to financial statements.
B-55
<PAGE> 102
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
MONEY VALUE
MARKET EQUITY GROWTH
FUND FUND FUND
---------- ----------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income......................... $8,446,191 $ 47,939 $ 49,358
Dividend income......................... -- 2,101,037 637,528
---------- ----------- ----------
Total Income............................ 8,446,191 2,148,976 686,886
---------- ----------- ----------
EXPENSES:
Investment advisory fees................ 524,476 747,594 284,790
Administration fees..................... 299,701 166,025 56,958
Administrative services fees............ 374,626 207,537 71,198
12b-1 fees.............................. 374,626 207,537 71,198
Custodian and accounting fees........... 67,844 45,604 34,999
Legal and audit fees.................... 45,430 29,575 5,713
Organization costs...................... -- -- 5,124
Trustees' fees and expenses............. 13,828 7,445 2,428
Transfer agent fees..................... 31,646 41,742 21,594
Interest expense........................ 20,788 -- --
Registration and filing fees............ 7,214 10,730 3,049
Printing costs.......................... 24,317 14,247 1,895
Other................................... 14,944 8,132 1,579
---------- ----------- ----------
Expenses before fee waivers............. 1,799,440 1,486,168 560,525
Less: Fee waivers....................... (314,686) (174,337) (262,782)
---------- ----------- ----------
Net Expenses............................ 1,484,754 1,311,831 297,743
---------- ----------- ----------
Net Investment Income................... 6,961,437 837,145 389,143
---------- ----------- ----------
REALIZED/UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investment
transactions......................... 141,785 9,340,011 1,167,209
Change in unrealized appreciation on
investments.......................... -- 5,384,702 3,513,955
---------- ----------- ----------
Net realized/unrealized gains on
investments......................... 141,785 14,724,713 4,681,164
---------- ----------- ----------
Change in net assets resulting from
operations.............................. $7,103,222 $15,561,858 $5,070,307
========== =========== ==========
</TABLE>
See notes to financial statements.
B-56
<PAGE> 103
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
LOW DURATION TENNESSEE
FIXED GOVERNMENT MUNICIPAL
INCOME SECURITIES OBLIGATIONS
FUND FUND FUND
----------- ------------ -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income....................... $ 2,583,016 $ 511,233 $ 1,277,149
Dividend income....................... 105,493 22 --
----------- --------- -----------
Total Income.......................... 2,688,509 511,255 1,277,149
----------- --------- -----------
EXPENSES:
Investment advisory fees.............. 223,976 38,565 129,939
Administration fees................... 68,916 15,426 39,991
Administrative services fees.......... 86,072 19,283 49,977
12b-1 fees............................ 86,072 19,283 49,977
Custodian and accounting fees......... 59,324 41,676 50,864
Legal and audit fees.................. 15,283 7,329 8,927
Organization costs.................... -- 3,294 9,025
Trustees' fees and expenses........... 4,267 848 2,071
Transfer agent fees................... 24,049 18,791 20,871
Registration and filing fees.......... 5,125 3,787 366
Printing costs........................ 5,972 751 2,312
Other................................. 4,124 848 2,062
----------- --------- -----------
Expenses before fee waivers........... 583,180 169,881 366,382
Less: Fee waivers..................... (72,216) (58,617) (169,544)
----------- --------- -----------
Net Expenses.......................... 510,964 111,264 196,838
----------- --------- -----------
Net Investment Income................. 2,177,545 399,991 1,080,311
----------- --------- -----------
REALIZED/UNREALIZED LOSSES ON
INVESTMENTS:
Net realized losses on investment
transactions....................... (1,646,585) (1,813) (37,429)
Change in unrealized appreciation
(depreciation) on investments...... 29,430 (149,458) (106,825)
----------- --------- -----------
Net realized/unrealized losses on
investments........................ (1,617,155) (151,271) (144,254)
----------- --------- -----------
Change in net assets resulting from
operations......................... $ 560,390 $ 248,720 $ 936,057
=========== ========= ===========
</TABLE>
See notes to financial statements.
B-57
<PAGE> 104
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY MARKET FUND VALUE EQUITY FUND GROWTH FUND
---------------------------- -------------------------- ------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995 1996 1995
------------- ------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income.. $ 6,961,437 $ 6,920,710 $ 837,145 $ 899,777 $ 389,143 $ 194,157
Net realized gains
(losses)
on investment
transactions......... 141,785 (948,499) 9,340,011 953,377 1,167,209 273,411
Net change in
unrealized
appreciation on
investments.......... -- -- 5,384,702 3,898,036 3,513,955 2,415,733
------------- ------------- ------------ ------------ ----------- -----------
Change in net assets
resulting from
operations........... 7,103,222 5,972,211 15,561,858 5,751,190 5,070,307 2,883,301
------------- ------------- ------------ ------------ ----------- -----------
DISTRIBUTIONS TO
SHAREHOLDERS:
From net investment
income............... (6,961,437) (6,920,710) (827,973) (841,639) (389,143) (165,741)
In excess of net
investment income.... -- -- -- -- (19,825) --
From net realized gains
on investments....... -- -- (2,982,043) (953,377) (505,659) --
In excess of net
realized
gains on investments. -- -- -- (4,237,871) -- --
------------- ------------- ------------ ------------ ----------- -----------
Change in net assets
from shareholder
distributions........ (6,961,437) (6,920,710) (3,810,016) (6,032,887) (914,627) (165,741)
------------- ------------- ------------ ------------ ----------- -----------
CAPITAL TRANSACTIONS:
Proceeds from shares
issued............... 426,124,612 481,425,381 5,108,660 9,107,308 10,696,082 13,601,991
Dividends reinvested... 512,232 559,926 1,808,516 2,629,804 383,839 85,237
Cost of shares
redeemed............. (450,674,926) (451,762,504) (17,877,680) (10,424,030) (2,953,582) (1,264,531)
------------- ------------- ------------ ------------ ----------- -----------
Change in net assets
from capital
transactions......... (24,038,082) 30,222,803 (10,960,504) 1,313,082 8,126,339 12,422,697
------------- ------------- ------------ ------------ ----------- -----------
Capital contribution... 138,311 628,737 -- -- -- --
------------- ------------- ------------ ------------ ----------- -----------
Change in net assets... (23,757,986) 29,903,041 791,338 1,031,385 12,282,019 15,140,257
NET ASSETS:
Beginning of period.... 157,903,609 128,000,568 80,263,796 79,232,411 21,485,350 6,345,093
------------- ------------- ------------ ------------ ----------- -----------
End of period.......... $ 134,145,623 $ 157,903,609 $ 81,055,134 $ 80,263,796 $33,767,369 $21,485,350
============= ============= ============ ============ =========== ===========
SHARE TRANSACTIONS:
Issued................. 426,124,613 481,425,381 373,123 734,724 832,694 1,231,162
Reinvested............. 512,232 559,926 133,595 232,650 29,644 7,846
Redeemed............... (450,674,926) (451,762,504) (1,290,025) (862,147) (222,427) (115,950)
------------- ------------- ------------ ------------ ----------- -----------
Change in shares....... (24,038,081) 30,222,803 (783,307) 105,227 639,911 1,123,058
============= ============= ============ ============ =========== ===========
</TABLE>
See notes to financial statements.
B-58
<PAGE> 105
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
LOW DURATION GOVERNMENT TENNESSEE MUNICIPAL
FIXED INCOME FUND SECURITIES FUND OBLIGATIONS FUND
-------------------------- ------------------------ ------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995 1996 1995
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT
ACTIVITIES:
OPERATIONS:
Net investment income.. $ 2,177,545 $ 2,614,835 $ 399,991 $ 464,598 $ 1,080,311 $ 1,030,817
Net realized losses on
investment
transactions......... (1,646,585) (3,007,163) (1,813) (21,516) (37,429) (980,042)
Net change in
unrealized
appreciation
(depreciation)
on investments....... 29,430 2,284,408 (149,458) 187,815 (106,825) 925,567
------------ ------------ ----------- ----------- ----------- -----------
Change in net assets
resulting from
operations........... 560,390 1,892,080 248,720 630,897 936,057 976,342
------------ ------------ ----------- ----------- ----------- -----------
DISTRIBUTIONS TO
SHAREHOLDERS:
From net investment
income............... (2,163,561) (2,614,835) (399,991) (454,961) (1,077,559) (1,021,053)
In excess of net
investment income.... -- (39,804) (3,182) -- -- --
In excess of net
realized gains on
investments.......... (104,990) -- (2,537) -- (906) --
------------ ------------ ----------- ----------- ----------- -----------
(2,268,551) (2,654,639) (405,710) (454,961) (1,078,465) (1,021,053)
------------ ------------ ----------- ----------- ----------- -----------
CAPITAL TRANSACTIONS:
Proceeds from shares
issued............... 2,751,575 9,410,452 688,187 2,084,648 3,937,416 8,742,390
Dividends reinvested... 971,603 957,588 339,394 404,688 294,830 262,359
Cost of shares
redeemed............. (12,664,268) (12,417,944) (1,062,808) (2,704,498) (5,879,537) (8,098,317)
------------ ------------ ----------- ----------- ----------- -----------
Change in net assets
from capital
transactions......... (8,941,090) (2,049,904) (35,227) (215,162) (1,647,291) 906,432
------------ ------------ ----------- ----------- ----------- -----------
Change in net assets... (10,649,251) (2,812,463) (192,217) (39,226) (1,789,699) 861,721
NET ASSETS:
Beginning of period.... 39,496,460 42,308,923 7,653,208 7,692,434 20,826,787 19,965,066
------------ ------------ ----------- ----------- ----------- -----------
End of period.......... $ 28,847,209 $ 39,496,460 $ 7,460,991 $ 7,653,208 $19,037,088 $20,826,787
============ ============ =========== =========== =========== ===========
SHARE TRANSACTIONS:
Issued................. 300,179 1,017,567 67,717 212,299 402,934 903,304
Reinvested............. 106,183 103,889 33,512 41,066 30,243 27,164
Redeemed............... (1,377,873) (1,347,411) (105,303) (273,850) (600,866) (848,954)
------------ ------------ ----------- ----------- ----------- -----------
Change in shares....... (971,511) (225,955) (4,074) (20,485) (167,689) 81,514
============ ============ =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
B-59
<PAGE> 106
THE SESSIONS GROUP
RIVERSIDE CAPITAL MONEY MARKET FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
----------- ------------------------------------------------------- ----------
<S> <C> <C>
U.S. GOVERNMENT AGENCIES (93.8%):
A.I.D. to Israel:
$ 1,510,000 5.45%, 11/15/99*....................................... $1,495,175
A.I.D. to Jamaica:
750,000 5.94%, 10/5/12*........................................ 755,694
Federal Farm Credit Bank:
5,000,000 5.26%, 7/1/96.......................................... 5,000,000
Federal Home Loan Bank:
5,000,000 5.31%, 12/27/96........................................ 5,000,000
1,000,000 5.31%, 2/14/97*........................................ 999,194
2,000,000 5.28%, 4/4/97*......................................... 1,999,037
Federal National Mortgage Assoc.:
10,000,000 5.30%, 12/26/96........................................ 9,996,307
10,000,000 5.24%, 3/25/97*........................................ 9,996,291
3,000,000 5.49%, 7/28/97*........................................ 2,990,232
5,000,000 5.43%, 9/2/97*......................................... 4,995,023
Student Loan Marketing Assoc.:
7,000,000 5.54%, 7/11/96*........................................ 7,000,000
2,000,000 5.39%, 9/12/96*........................................ 2,000,000
650,000 5.61%, 11/27/96*....................................... 650,226
3,750,000 5.56%, 3/3/97*......................................... 3,750,000
1,000,000 5.70%, 4/21/97*........................................ 1,002,820
10,000,000 5.41%, 10/14/97*....................................... 9,990,711
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
----------- ---------------------------------------------------- ------------
<S> <C> <C>
U.S. GOVERNMENT AGENCIES, CONTINUED:
Student Loan Marketing Assoc., continued:
$ 4,830,000 5.41%, 11/24/97*.................................... $ 4,820,654
8,000,000 5.43%, 8/20/98*..................................... 7,989,927
2,000,000 5.43%, 9/28/98*..................................... 1,997,352
9,000,000 5.43%, 11/10/98*.................................... 8,987,219
6,000,000 5.45%, 1/13/99*..................................... 5,982,614
6,850,000 5.45%, 2/8/99*...................................... 6,835,109
1,000,000 5.45%, 7/12/99*..................................... 994,323
14,000,000 5.46%, 8/2/99*...................................... 13,984,811
Overseas Private Investment Corp.:
6,641,000 5.75%, 6/1/00*...................................... 6,657,133
------------
Total U.S. Government Agencies 125,869,852
------------
Total Investments, at amortized cost 125,869,852
------------
REPURCHASE AGREEMENTS (5.8%):
7,714,419 Zions Securities, 5.30%, 7/1/96 (Collateralized by
$7,420,000 U.S. Treasury Notes, 7.25%, 8/15/04,
market value--$7,887,649)........................... 7,714,419
------------
Total Repurchase Agreements 7,714,419
------------
Total (Cost--$133,584,271)(a) $133,584,271
============
- ------
<FN>
Percentages indicated are based on net assets of $134,145,623.
(a) Cost and value for federal income tax and financial reporting purposes are
the same.
* Floating Variable Rate Certificates are securities with interest rates that
change periodically and are payable on different dates ranging from daily,
weekly, monthly, quarterly or semi-annually. The interest rate is based on
an index of market interest rates. The rate reflected on the Schedule of
Portfolio Investments is the rate in effect on June 30, 1996.
</TABLE>
See notes to financial statements.
B-60
<PAGE> 107
THE SESSIONS GROUP
RIVERSIDE CAPITAL VALUE EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<S> <C> <C>
COMMON STOCKS (98.7%):
Automobiles (3.5%):
74,900 Echlin, Inc............................................ $ 2,836,838
-----------
Banking (1.3%):
36,965 First Hawaiian, Inc. .................................. 1,053,503
-----------
Computers & Peripherals (5.8%):
203,650 Amdahl Corp. (b)....................................... 2,189,238
25,200 I.B.M. Corp............................................ 2,494,800
-----------
4,684,038
-----------
Department Stores (3.1%):
155,000 Global Industries
Technology, Inc. (b).................................. 2,480,000
-----------
Electrical Equipment (2.6%):
109,700 Augat, Inc. ........................................... 2,098,013
-----------
Entertainment (3.6%):
81,300 Hasbro, Inc. .......................................... 2,906,475
-----------
Financial Services (3.4%):
61,046 Travelers, Inc......................................... 2,785,201
-----------
Food Processing & Packaging (5.5%):
164,100 J & J Snack Foods, Inc. (b)............................ 1,887,150
117,050 McCormick & Company, Inc............................... 2,589,731
-----------
4,476,881
-----------
Hotels & Motels (3.2%):
227,500 Equity Inns, Inc....................................... 2,616,250
-----------
Insurance (8.5%):
23,000 Phoenix Re Corp........................................ 557,750
53,800 SunAmerica, Inc........................................ 3,039,700
52,600 UNUM Corp.............................................. 3,274,350
-----------
6,871,800
-----------
Medical Services (3.0%):
102,700 Value Health, Inc. (b)................................. 2,426,288
-----------
Metal & Mineral Production (2.7%):
55,650 Cleveland Cliffs....................................... 2,177,306
-----------
Mobile Homes & Manufactured Housing (3.2%):
104,300 Skyline Corp........................................... 2,607,500
-----------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Oil & Gas (3.3%):
108,380 Valero Energy Corp..................................... $ 2,709,500
-----------
Oilfield Equipment & Services (3.3%):
75,195 B. J. Services (b)..................................... 2,641,224
-----------
Pollution Control Services & Equipment (3.9%):
178,700 Safety Kleen........................................... 3,127,250
-----------
Real Estate Investment Trusts (9.7%):
88,938 Mid-America Apartment Community........................ 2,256,802
75,260 Storage USA............................................ 2,427,135
127,625 Transnational Re Corp.................................. 3,142,765
-----------
7,826,702
-----------
Restaurants (3.0%):
226,600 Darden Restaurants, Inc................................ 2,435,950
-----------
Retail (7.8%):
262,650 Burlington Coat Factory (b)............................ 2,757,825
327,100 Hancock Fabrics........................................ 3,598,100
-----------
6,355,925
-----------
Savings & Loan Companies (3.8%):
113,100 Ahmanson (HF) & Co..................................... 3,053,700
-----------
Steel (2.7%):
132,400 Birmingham Steel Corp.................................. 2,168,050
-----------
Tobacco (7.7%):
35,050 Philip Morris Cos., Inc................................ 3,645,200
77,000 UST, Inc............................................... 2,637,250
-----------
6,282,450
-----------
Trucking (4.1%):
129,100 Werner Enterprises, Inc................................ 3,356,599
-----------
Total Common Stocks 79,977,443
-----------
INVESTMENT COMPANIES (0.6%):
443,929 Dreyfus Treasury Prime Fund............................ 443,929
4,917 Riverside Capital Money Market Fund.................... 4,917
-----------
Total Investment Companies 448,846
-----------
Total (Cost--$66,911,792)(a) $80,426,289
===========
- ------
<FN>
Percentages indicated are based on net assets of $81,055,134.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<S> <C>
Unrealized appreciation...................................... $15,988,069
Unrealized depreciation...................................... (2,473,572)
-----------
Net unrealized appreciation.................................. $13,514,497
===========
(b) Represents non-income producing securities.
</TABLE>
See notes to financial statements.
B-61
<PAGE> 108
THE SESSIONS GROUP
RIVERSIDE CAPITAL GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
------- --------------------------------------------------------- -----------
<S> <C> <C>
COMMON STOCKS (92.4%):
Automotive Parts (3.8%):
38,950 Titan Wheel International, Inc........................... $ 623,200
33,200 Walbro Corp. ............................................ 672,300
-----------
1,295,500
-----------
Banking (6.5%):
9,500 NationsBank Corp......................................... 784,938
14,200 Southern National Corp................................... 450,850
34,200 SouthTrust Corp.......................................... 961,875
-----------
2,197,663
-----------
Beverages (3.0%):
20,800 Coca-Cola Co............................................. 1,016,600
-----------
Computers (1.3%):
30,000 Checkmate Electronics, Inc. (b).......................... 435,000
-----------
Computers & Peripherals (2.0%):
35,000 EMC Corp.(b)............................................. 651,875
-----------
Construction (2.5%):
42,756 Clayton Homes, Inc....................................... 855,120
-----------
Electrical Equipment (4.7%):
18,500 General Electric Co. .................................... 1,600,250
-----------
Electronic & Electrical (5.4%):
21,000 AMP, Inc. ............................................... 842,625
15,500 Motorola, Inc. .......................................... 974,563
-----------
1,817,188
-----------
Food Processing & Packaging (4.7%):
25,000 Nabisco Holdings Corp. .................................. 884,375
22,000 Sara Lee Corp............................................ 712,250
-----------
1,596,625
-----------
Insurance (8.4%):
9,500 American International
Group, Inc.............................................. 936,937
49,400 First Colony Corp........................................ 1,531,400
9,000 Providian Corp........................................... 385,875
-----------
2,854,212
-----------
Manufacturing-Capital Goods (3.3%):
40,000 Metrotrans Corp. (b)..................................... 560,000
32,000 Wabash National Corp. ................................... 568,000
-----------
1,128,000
-----------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
------- --------------------------------------------------------- -----------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Medical Services (1.6%):
30,000 Healthsource, Inc. (b)................................... $ 525,000
-----------
Oil--Integrated Companies (4.7%):
7,400 Atlantic Richfield Co.................................... 876,900
8,500 Texaco, Inc.............................................. 712,938
-----------
1,589,838
-----------
Pharmaceuticals (6.5%):
22,500 Abbott Laboratories...................................... 978,750
19,100 Schering-Plough.......................................... 1,198,525
-----------
2,177,275
-----------
Pollution Control Services & Equipment (2.0%):
23,500 Browning-Ferris Industries, Inc.......................... 681,500
-----------
Real Estate Investment Trusts (5.3%):
44,000 Merry Land & Investment Co............................... 924,000
27,300 Storage USA.............................................. 880,425
-----------
1,804,425
-----------
Restaurants (2.7%):
37,000 Cracker Barrel Old Country Store, Inc.................... 897,250
-----------
Retail (6.8%):
45,000 Books-A-Million (b)...................................... 376,875
21,700 Home Depot, Inc.......................................... 1,171,800
29,000 Wal-Mart Stores, Inc. ................................... 735,875
-----------
2,284,550
-----------
Semiconductors (3.0%):
13,800 Intel Corp............................................... 1,013,437
-----------
Services (Non-Financial) (2.5%):
35,000 Rollins, Inc............................................. 822,500
-----------
Soaps & Cleaning Agents (2.1%):
8,000 Procter & Gamble Co. .................................... 725,000
-----------
Tobacco (4.1%):
13,200 Philip Morris Cos., Inc.................................. 1,372,800
-----------
Toys & Bicycles--Manufacturing (3.0%):
35,675 Mattel, Inc.............................................. 1,021,196
-----------
Utilities--Telecommunications (2.5%):
33,000 MCI Telecommunications
Corp.................................................... 845,625
-----------
Total Common Stocks 31,208,429
-----------
</TABLE>
Continued
B-62
<PAGE> 109
THE SESSIONS GROUP
RIVERSIDE CAPITAL GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1996
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
------ -------------------------------------------------------- ----------
<S> <C> <C>
INVESTMENT COMPANIES (7.9%):
1,334,955 Dreyfus Treasury Prime Fund............................. $1,334,955
1,334,955 Riverside Capital Money Market Fund..................... 1,334,955
----------
</TABLE>
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
------ -------------------------------------------------------- ----------
<S> <C> <C>
INVESTMENT COMPANIES, CONTINUED:
Total Investment Companies $ 2,669,910
-----------
Total (Cost--$28,072,751)(a) $33,878,339
===========
- ------
<FN>
Percentages indicated are based on net assets of $33,767,369.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<S> <C>
Unrealized appreciation....................................... $6,581,859
Unrealized depreciation....................................... (776,271)
----------
Net unrealized appreciation................................... $5,805,588
==========
(b) Represents non-income producing securities.
</TABLE>
See notes to financial statements.
B-63
<PAGE> 110
THE SESSION GROUP
RIVERSIDE CAPITAL FIXED INCOME FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------------------------------- -----------
<C> <S> <C>
CORPORATE BONDS (24.8%):
Banking (5.5%):
$1,500,000 Commerce Bancorp, Inc., 8.38%, 7/15/03............... $ 1,587,914
-----------
Industrial Goods & Services (13.9%):
1,500,000 Montalbano Builders, 10.00%, 5/1/99, Callable 5/1/98
@100................................................ 1,500,000
889,787 Rosewood Care Center Funding, 7.25%, 11/1/13......... 902,022
1,600,000 Voyager Lines Private Placement, 9.50%, 11/1/99,
Callable 11/1/96 @100 (b)........................... 1,600,000
-----------
4,002,022
-----------
Manufacturing (1.5%):
450,000 Timken, 7.25%, 8/20/02............................... 449,438
-----------
Transportation & Shipping (3.9%):
1,125,000 Ray and Ross Transport, Inc., 10.00%, 2/1/06,
Callable 1/1/97 @100................................ 1,125,000
-----------
Total Corporate Bonds 7,164,374
-----------
PREFERRED STOCKS (2.2%):
Financial Services (2.2%):
25,000 Lincoln National PLC, 8.75%, Callable 7/2/01 @25..... 625,000
-----------
Total Preferred Stocks 625,000
-----------
TAXABLE MUNICIPAL BONDS (12.3%):
Illinois (0.5%):
132,036 Belleville, St. Clair County, CMO, 7.35%, 11/15/09... 131,141
-----------
Indiana (1.5%):
420,000 Jeffersonville, Public Warehouse Income Project,
10.45%, 4/1/05, LOC: State Bank of Austria.......... 436,275
-----------
Tennessee (4.8%):
130,000 Decatur County, Tennessee Health, Educational &
Housing Facilities Board Revenue, First Mortgage,
8.00%, 9/1/97....................................... 127,752
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ----------------------------------------------------- -----------
<C> <S> <C>
TAXABLE MUNICIPAL BONDS, CONTINUED:
Tennessee, continued:
$ 745,000 Hamilton County, Tennessee Industrial Development
Board, Multifamily Housing Revenue, Waterford
Apartments, Project A, 8.50%, 8/1/10................ $ 729,385
120,000 Jackson County, Tennessee Health & Educational
Facilities, First Mortgage, Forest Cove B, 8.00%,
9/1/97.............................................. 117,925
410,000 Memphis-Shelby County, Tennessee Industrial
Development Board, Economic Development Revenue,
Cleo Project B, 9.10%, 2/1/04....................... 419,840
-----------
1,394,902
-----------
West Virginia (5.5%):
110,000 Harrison County, West Virginia Revenue Refunding,
First Mortgage, Meadow B, 9.25%, 11/1/08............ 109,968
285,000 Summers County, West Virginia First Mortgage Gross
Revenue Refunding, Limited Partnership, 8.00%,
10/1/03............................................. 277,185
1,230,000 West Virginia State Hospital Financial Authority,
Hospital Revenue, Nellas Income Project, 9.50%,
8/1/15.............................................. 1,205,941
-----------
1,593,094
-----------
Total Taxable Municipal Bonds 3,555,412
-----------
</TABLE>
Continued
B-64
<PAGE> 111
THE SESSION GROUP
RIVERSIDE CAPITAL FIXED INCOME FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------ -----------
<S> <C> <C>
U.S. GOVERNMENT AGENCIES (60.0%):
Federal Home Loan Bank:
$ 620,000 6.75%, 4/10/06, Callable 7/10/96 @100................. $ 602,671
Federal Home Loan Mortgage Corp.:
5,000,000 7.52%, 4/21/06, Callable 4/21/99 @100................. 4,961,356
3,000,000 7.55%, 4/26/06, Callable 4/26/99 @100................. 2,987,190
2,500,000 7.40%, 3/28/11, Callable 3/28/01 @100................. 2,433,025
Federal National Mortgage Assoc.:
3,000,000 6.93%, 10/26/05, Callable 10/26/98 @100............... 2,901,900
3,330,000 6.69%, 2/2/11, Callable 2/2/01 @100................... 3,090,140
Government Trust Certificates, State of Israel:
8,314 9.13%, 11/15/96....................................... 8,376
Puerto Rico, HUD 94A Caguas:
340,000 6.85%, 8/1/07......................................... 332,248
-----------
Total U.S. Government Agencies 17,316,906
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------ -----------
<S> <C> <C>
U.S. TREASURY BONDS (0.2%):
$ 49,000 9.13%, 5/15/09........................................ $ 55,849
-----------
Total U.S. Treasury Bonds 55,849
-----------
INVESTMENT COMPANIES (2.3%):
670,568 Riverside Capital Money Market Fund................... 670,568
-----------
Total Investment Companies 670,568
-----------
Total (Cost--$29,370,100)(a) $29,388,109
===========
- ------
<FN>
Percentages indicated are based on net assets of $28,847,209.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<S> <C>
Unrealized appreciation........................................ $ 224,796
Unrealized depreciation........................................ (206,787)
---------
Net unrealized appreciation.................................... $ 18,009
=========
(b) Represents a restricted security, purchased under Rule 144A, which is
exempt from registration under the Securities Act of 1933, as amended.
CMO-- Collateralized Mortgage Obligation
LOC-- Letter of Credit
PLC-- Public Liability Company
</TABLE>
See notes to financial statements.
B-65
<PAGE> 112
THE SESSIONS GROUP
RIVERSIDE CAPITAL LOW DURATION GOVERNMENT SECURITIES FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- --------------------------------------------------------- ----------
<S> <C> <C>
U.S. GOVERNMENT AGENCIES (96.8%):
Federal Farm Credit Bank:
$ 700,000 8.80%, 1/31/02........................................... $ 766,451
250,000 7.10%, 11/12/02.......................................... 253,792
Federal Home Loan Bank:
700,000 4.54%, 7/15/98*.......................................... 661,252
250,000 5.50%, 1/23/01........................................... 238,830
Federal Home Loan Mortgage Corp.:
250,000 7.75%, 11/07/01.......................................... 261,950
750,000 7.54%, 5/3/04............................................ 750,255
500,000 7.89%, 5/12/04........................................... 500,410
Federal National Mortgage Assoc.:
250,000 5.55%, 1/17/01........................................... 239,352
545,000 7.20%, 1/10/02........................................... 545,033
Guaranteed Export Certificates--Series 1994-A:
2,215,555 7.12%, 4/15/06........................................... 2,243,271
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- ------------------------------------------------------- ----------
<S> <C> <C>
U.S. GOVERNMENT AGENCIES, CONTINUED:
Private Export Funding:
$ 466,900 5.65%, 3/15/03......................................... $ 448,808
Shipco 668 Series A-Title XI:
316,000 8.50%, 5/11/02......................................... 316,365
----------
Total U.S. Government Agencies 7,225,769
----------
INVESTMENT COMPANIES (1.7%):
1 Dreyfus Treasury Prime Fund............................ 1
129,000 Riverside Capital Money Market Fund.................... 129,000
----------
Total Investment Companies 129,001
----------
Total (Cost--$7,363,027)(a) $7,354,770
==========
- ------
<FN>
Percentages indicated are based on net assets of $7,460,991.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized depreciation of securities as follows:
<S> <C>
Unrealized appreciation........................................ $ 77,980
Unrealized depreciation........................................ (86,237)
--------
Net unrealized depreciation.................................... $ (8,257)
========
* Floating Variable Rate Certificates are securities with interest rates that
change periodically and are payable on different dates ranging from daily,
weekly, monthly, quarterly or semi-annually. The interest rate is based on an
index of market interest rates or other index. The rate reflected on the
Schedule of Portfolio Investments is the rate in effect on June 30, 1996.
</TABLE>
See notes to financial statements.
B-66
<PAGE> 113
THE SESSIONS GROUP
RIVERSIDE CAPITAL TENNESSEE MUNICIPAL OBLIGATIONS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- ----------------------------------------------------- -----------
<S> <C> <C>
MUNICIPAL BONDS (85.8%):
Alabama (1.3%):
$ 250,000 Troy, Affordable Housing Revenue, 6.30%, 7/1/01...... $ 246,322
-----------
Georgia (2.2%):
400,000 Atlanta, Georgia Housing Development Corp., Mortgage
Revenue, 7.00%, 12/1/20, Callable 12/1/05 @102...... 418,552
-----------
Kansas (3.9%):
750,000 Manhattan, Kansas Industrial Revenue, 7.00%, 12/1/14,
Callable 12/1/05 @100............................... 734,467
-----------
Louisiana (4.3%):
750,000 New Orleans, Louisiana Audubon Park Revenue, 8.00%,
4/1/12.............................................. 812,273
-----------
Pennsylvania (2.6%):
250,000 Schuylkill County, Pennsylvania Industrial
Development Authority Revenue, Beverly Enterprises
Project, 6.63%, 5/1/03.............................. 252,238
250,000 Wyoming County, Pennsylvania Industrial Development
Authority Revenue, Beverly Enterprises Project,
6.25%, 7/1/06....................................... 250,260
-----------
502,498
-----------
Puerto Rico (3.3%):
195,000 Puerto Rico Commonwealth Highway & Transportation,
5.50%, 7/1/19, Callable 7/1/03 @101.5............... 183,265
450,000 Puerto Rico Electric Power Authority, 6.00%, 7/1/15,
Callable 7/1/05 @102................................ 454,144
-----------
637,409
-----------
South Carolina (1.1%):
200,000 Charleston County, South Carolina Health Facilities
Revenue, Franke Home Project, 8.00%, 11/1/24........ 207,694
-----------
Tennessee (65.2%):
105,000 Blount County, Tennessee Health & Educational
Facilities Board Revenue, Multifamily Mortgage,
Maryville Towers Project, 6.20%, 7/20/28, GNMA...... 105,066
100,000 Bruceton, Tennessee Water & Sewer Development, GO,
6.70%, 3/1/13....................................... 104,650
105,000 Bruceton, Tennessee Water & Sewer Development, GO,
6.70%, 3/1/14....................................... 109,882
115,000 Bruceton, Tennessee Water & Sewer Development, GO,
6.75%, 3/1/15....................................... 120,698
125,000 Bruceton, Tennessee Water & Sewer Development, GO,
6.75%, 3/1/16....................................... 131,194
100,000 Chattanooga, Tennessee Industrial Development Board
Revenue, 7.05%, 8/15/05............................. 108,019
395,000 Clarkesville, Tennessee Water, Sewer & Gas Refunding
& Improvement, 6.25%, 2/1/18, MBIA.................. 406,131
100,000 Dayton, Tennessee Housing Assistance, Pikeville
Townhomes, 5.75%, 11/1/13........................... 97,951
470,000 Dyer County, Tennessee Health, Educational & Housing
Facilities Board Revenue, 1st Mortgage Parkview
Convalescent, 7.25%, 10/1/04........................ 490,356
500,000 Hamilton County, Tennessee Industrial Development
Board Revenue, Multifamily Housing, Park at 58
Project, 6.70%, 3/1/21, Callable 3/1/06 @101........ 506,015
250,000 Hamilton County, Tennessee Industrial Development
Board Revenue, Multifamily Housing, Pattern Towers,
6.38%, 8/1/26, Callable 8/1/05 @102................. 247,177
</TABLE>
Continued
B-67
<PAGE> 114
THE SESSIONS GROUP
RIVERSIDE CAPITAL TENNESSEE MUNICIPAL OBLIGATIONS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- ----------------------------------------------------- -----------
<C> <S> <C>
MUNICIPAL BONDS, CONTINUED:
Tennessee, continued:
$ 890,000 Hamilton County, Tennessee Industrial Development
Board Revenue, Multifamily Housing, Waterford Place
Apartments, Series B, 6.60%, 2/1/24, FGIC........... $ 864,653
300,000 Jackson, Tennessee Health, Educational & Housing,
Posthouse Apartments, 7.00%, 5/1/17................. 313,545
100,000 Johnson City, Tennessee Health & Education Refunding
Bonds, Health Hospital, Nursing Home, 6.75%, 7/1/06,
Prerefunded 7/1/01 @102............................. 110,379
100,000 Knox County, Tennessee Industrial Development Board,
Multifamily Revenue, 5.85%, 3/1/15, Callable 9/1/05
@102................................................ 99,094
350,000 Knox County, Tennessee Public Improvement, GO, 6.38%,
4/1/07.............................................. 378,885
350,000 Knoxville, Tennessee Community Development Corp.,
Clinton Towers Housing Revenue, Multifamily, 6.60%,
10/15/07............................................ 362,834
250,000 Knoxville, Tennessee Community Development Corp.,
Clinton Towers Housing Revenue, Multifamily, 6.65%,
10/15/10............................................ 256,855
250,000 Lawrance County, GO, 6.63%, 3/1/14................... 266,025
115,000 Manchester, Tennessee Water & Sewer Revenue, Series
1992, GO, 6.00%, 7/1/06, AMBAC...................... 118,352
450,000 Maury County Industrial Development Board, PCR,
6.50%, 9/1/24, Callable 9/1/04 @102................. 463,140
250,000 Memphis, Tennessee Health, Educational, & Housing
Facilities Board, Mortgage Revenue, Edgewater
Terrace Project, 7.38%, 1/20/27, FHA, LOC: First
Alabama Birmingham.................................. 264,007
250,000 Memphis, Tennessee Health, Educational, & Housing
Facilities Board, Multifamily Refunding, River Trace
II, 6.45%, 4/1/26................................... 253,902
250,000 Metropolitan Government, Nashville & Davidson County,
Tennessee Health & Educational Facilities Board
Revenue, 1st Mortgage, Blakeford Project, 7.50%,
7/1/99.............................................. 259,903
100,000 Metropolitan Government, Nashville & Davidson County,
Tennessee Housing & Educational Facilities Board
Revenue, Vanderbilt University, Series A, 6.00%,
10/1/16............................................. 100,798
170,000 Metropolitan Government, Nashville & Davidson County,
Tennessee Water & Sewer Revenue, 7.00%, 1/1/14...... 173,798
150,000 Morristown, Tennessee Housing Development Corp.,
Multifamily Revenue, 6.25%, 5/1/18.................. 151,988
150,000 Poplar Grove, Tennessee Utility District, Tipton
County Gas System Revenue, Series 1993, 6.90%,
1/15/07............................................. 154,623
130,000 Poplar Grove, Tennessee Utility District, Waterworks
Revenue Refunding & Improvement, 6.05%, 4/1/05...... 136,715
160,000 Rutherford County, 0.00%, 5/1/13..................... 58,315
370,000 Shelby County, Tennessee Compound Interest School
Bonds, Series A, GO, 0.00%, 5/1/12.................. 140,940
1,150,000 Shelby County, Tennessee Health, Educational &
Housing Facilities Board Revenue, Multifamily
Housing, Windsor Apartments, 6.75%, 10/1/17......... 1,186,513
250,000 Shelby County, Tennessee Health, Educational &
Housing Facilities Board Revenue Refunding, Beverly
Enterprises Project, 6.50%, 3/1/09.................. 251,428
</TABLE>
Continued
B-68
<PAGE> 115
THE SESSIONS GROUP
RIVERSIDE CAPITAL TENNESSEE MUNICIPAL OBLIGATIONS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- ----------------------------------------------------- -----------
<C> <S> <C>
MUNICIPAL BONDS, CONTINUED:
Tennessee, continued:
$ 125,000 Shelby County, Tennessee Health, Educational &
Housing Facilities Board Revenue Refunding,
Industrial Development, 1st Healthcare Project,
6.50%, 4/1/02....................................... $ 122,930
725,000 Shelby County, Tennessee Health, Educational &
Housing Facilities Board Revenue Refunding, Heritage
Place Project, 7.12%, 7/1/25, MBIA, FHA............. 768,892
500,000 Shelby County, 6.00%, 4/15/24........................ 481,015
500,000 Shelby County, Tennessee Health, Educational &
Housing Facilities Board Revenue, Trezevant Manor
Project, 6.00%, 8/1/16.............................. 472,300
500,000 South Fulton, Tennessee Industrial Development
Revenue, 6.35%, 10/1/15, Callable 10/1/05 @102...... 501,135
310,000 South Fulton, Tennessee Industrial Revenue Authority,
6.00%, 10/1/10, Callable 10/1/05 @102............... 307,914
200,000 Spring City, Tennessee Health, Educational & Housing
Facility, Spring City Care Center, 8.75%, 9/1/24.... 208,002
100,000 Tennessee State School Board Authority, Higher
Education Facilities, Series A, 6.25%, 5/1/17....... 103,523
100,000 Weakley County, GO, 6.00%, 8/1/12.................... 103,085
550,000 Winchester, Tennessee Health & Educational Facilities
Board, Revenue Refunding, Beverly Enterprises Income
Project, 7.00%, 6/1/09.............................. 557,838
-----------
12,420,465
-----------
West Virginia (0.7%):
125,000 Summers County, West Virginia, First Mortgage Gross
Revenue Refunding, 7.25%, 10/1/09................... 128,095
-----------
Wyoming (1.2%):
65,000 Sweetwater County, PCR, Idaho Power Company, Series
C, 7.63%, 12/1/13, Callable 11/3/96 @103............ 67,428
150,000 Sweetwater County, PCR, Idaho Power Company, Series
D, 7.63%, 12/1/13, Callable 11/3/96 @103............ 155,602
-----------
223,030
-----------
Total Municipal Bonds........................................... 16,330,805
-----------
ALTERNATIVE MINIMUM TAX PAPER (12.4%):
Oklahoma (1.6%):
300,000 Oklahoma Development Finance Authority Revenue, First
Mortgage, Bake Rite Income Project, 8.38%, 8/1/11... 303,015
-----------
Tennessee (10.8%):
530,000 Loudon County, Tennessee Industrial Development
Board, Solid Waste Disposal Revenue, Kimberly-Clark
Corp. Project, 6.20%, 2/1/23........................ 533,609
100,000 Memphis Shelby County, Tennessee Airport Revenue,
8.13%, 2/15/12, MBIA................................ 106,957
740,000 Tennessee Housing Development Agency, 7.05%, 7/1/20.. 758,360
145,000 Tennessee Housing Development Agency Mortgage, Series
A, 6.90%, 7/1/25.................................... 150,188
</TABLE>
Continued
B-69
<PAGE> 116
THE SESSIONS GROUP
RIVERSIDE CAPITAL TENNESSEE MUNICIPAL OBLIGATIONS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
---------- ----------------------------------------------------- -----------
<S> <C> <C>
ALTERNATIVE MINIMUM TAX PAPER, CONTINUED:
Tennessee, continued:
$ 500,000 Tennessee Housing Development Agency Mortgage,
Series C, 6.10%, 7/1/15............................... $ 500,395
-----------
2,049,509
-----------
Total Alternative Minimum Tax Paper............................. 2,352,524
-----------
Total (Cost--$18,441,220)(a).................................... $18,683,329
===========
- --------
<FN>
Percentages indicated are based on net assets of $19,037,088.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<S> <C>
Unrealized appreciation........................................ $ 359,432
Unrealized depreciation........................................ (117,323)
---------
Net unrealized appreciation.................................... $ 242,109
=========
AMBAC Insured by American Municipal Bond Assurance Corp.
FGIC Insured by Financial Guaranty Insurance Corp.
FHA Insured by Federal Housing Administration
GNMA Insured by Government National Mortgage Assoc.
GO General Obligation
LOC Letter of Credit
MBIA Insured by Municipal Bond Insurance Assoc.
PCR Pollution Control Revenue
</TABLE>
See notes to financial statements.
B-70
<PAGE> 117
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
1. ORGANIZATION:
The Sessions Group (the "Group") was organized on April 25, 1988 as an Ohio
business trust, and is registered under the Investment Company Act of 1940
as amended, (the "1940 Act"), as an open-end management investment company.
Between the date of organization and the dates of commencement of operations
of the Riverside Capital Money Market Fund, the Riverside Capital Value
Equity Fund, the Riverside Capital Growth Fund, the Riverside Capital Fixed
Income Fund, the Riverside Capital Low Duration Government Securities Fund
and the Riverside Capital Tennessee Municipal Obligation Fund (individually,
a "Fund" and collectively, the "Funds"), each a series of the Group, the
Funds earned no investment income and had no operations other than incurring
organizational expenses and the sale of initial units of beneficial interest
("shares") of the Funds. On August 29, 1995, the Riverside Capital Equity
and Municipal Income Fund liquidated and ceased operations.
The investment objective of the Money Market Fund is to seek current income
with liquidity and stability of principal. The investment objective of the
Value Equity Fund is to seek growth of capital by investing primarily in a
diversified portfolio of common stocks and securities convertible into
common stocks. The investment objective of the Growth Fund is to seek growth
of capital by investing primarily in a diversified portfolio of common
stocks and securities convertible into common stocks. The investment
objective of the Fixed Income Fund is to seek current income as well as
preservation of capital by investing in a portfolio of high grade fixed
income securities. The investment objective of the Low Duration Government
Securities Fund is to seek current income consistent with preservation of
capital. The investment objectives of the Tennessee Municipal Obligations
Fund are to seek (1) income which is exempt from federal income tax and
Tennessee state income tax, and (2) preservation of capital.
The Group is authorized to issue an unlimited number of shares without par
value. Sales of shares of the Funds may be made to customers of National
Bank of Commerce ("NBC") and its affiliates, to all accounts of
correspondent banks of NBC and to the general public. NBC serves as
investment adviser to the Funds.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Group in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles. The preparation
of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses for the period. Actual results could differ from those estimates.
SECURITIES VALUATION:
Investments of the Money Market Fund are valued at either amortized cost,
which approximates market value, or at original cost, which combined with
accrued interest, approximates market value. Under the amortized cost
method, discount or premium is amortized on a constant basis to the maturity
of the security. In addition, the Fund may not a) purchase any instrument
with a remaining maturity greater than thirteen months unless such
investment is subject to a demand feature, or b) maintain a dollar-weighted
average portfolio maturity which exceeds 90 days.
Continued
B-71
<PAGE> 118
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1996
Investments in common and preferred stocks and commercial paper of the Value
Equity Fund, the Growth Fund, the Fixed Income Fund, the Low Duration
Government Securities Fund and the Tennessee Municipal Obligations Fund
(collectively, "the variable net asset value funds"), are valued at their
market values determined on the basis of the latest available bid quotations
in the principal market (closing sales prices if the principal market is an
exchange) in which such securities are normally traded. Investments in
corporate bonds, municipal securities and U.S. Government securities of the
variable net asset value funds are valued at their market values determined
on the basis of the mean of the latest bid and asked quotations in the
principal market (closing sales prices if the principal market is an
exchange) in which such securities are normally traded. Investments in
investment companies are valued at their net asset values as reported by
such companies. Other securities for which quotations are not readily
available are valued at their fair value under procedures established by the
Group's Board of Trustees. The differences between the cost and market
values of investments held by the variable net asset value funds are
reflected as either unrealized appreciation or depreciation.
SECURITY TRANSACTIONS AND RELATED INCOME:
Security transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the accrual
basis and includes, where applicable, the amortization of premium or
discount. Dividend income is recorded on the ex-dividend date. Gains or
losses realized on sales of securities are determined by comparing the
identified cost of the security lot sold with the net sales proceeds.
REPURCHASE AGREEMENTS:
The Funds may acquire repurchase agreements from financial institutions such
as banks and broker dealers which NBC deems creditworthy under guidelines
approved by the Board of Trustees, subject to the seller's agreement to
repurchase such securities at a mutually agreed-upon date and price. The
repurchase price generally equals the price paid by each Fund plus interest
negotiated on the basis of current short-term rates, which may be more or
less than the rate on the underlying portfolio securities. The seller, under
a repurchase agreement, is required to maintain the value of collateral held
pursuant to the agreement at not less than the repurchase price (including
accrued interest). Securities subject to repurchase agreements are held by
the Funds' custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to
be loans by the Funds under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS:
The Funds may borrow for temporary purposes by entering into reverse
repurchase agreements. Pursuant to such agreements, a Fund would sell
portfolio securities to financial institutions such as banks and broker-
dealers, and agree to repurchase them at a mutually agreed-upon date and
price. At the time a Fund enters into a reverse repurchase agreement, it
places in a segregated custodial account assets having a value equal to the
repurchase price (including accrued interest), and will continually monitor
the account to ensure such equivalent value is maintained at all times.
Reverse repurchase agreements are considered to be borrowings by the Funds
under the 1940 Act.
DERIVATIVES:
A derivative is defined as a financial instrument whose value is derived
from the performance of underlying assets, interest rate and currency
exchange rates, or indices, and include (but are not limited to) structured
Continued
B-72
<PAGE> 119
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1996
debt obligations, interest rate and currency swaps, futures contracts,
options, and forward currency contracts. The variable net asset value funds
may invest in structured debt obligations for the purpose of mitigating
interest rate risk in the portfolio. Such structured debt obligations have
floating interest rates that reset to various indices, which may include
swap rates or floors, and which reset at periodic intervals, as disclosed in
the accompanying Schedules of Portfolio Investments. Risks of entering into
such transactions include the potential inability of the dealer to meet
their obligations and unanticipated movements in the value of the security
or the underlying assets or indices. It is possible that the Funds will
incur a loss as a result of their investments in derivative instruments. It
is the Fund's policy to the extent that there exists no readily available
market for such securities, that the investment will be treated as an
illiquid security for purposes of calculating the Funds' limitations in
illiquid securities as set forth in the Funds' investment restrictions.
DIVIDENDS TO SHAREHOLDERS:
Dividends from net investment income are declared daily and paid monthly and
distributable net realized capital gains, if any, are declared and
distributed at least annually for the Money Market Fund. Dividends from net
investment income are declared and paid monthly and distributable net
realized capital gains, if any, are declared and distributed annually for
the variable net asset value funds.
Dividends from net investment income and net realized capital gains are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily
due to differing treatments for net operating losses, expiring capital loss
carry forwards, and deferral of certain losses. The following
reclassification has been made to the components of net assets of the Money
Market Fund as of June 30, 1996 to more clearly reflect the differences
between financial statement amounts available for distribution and the
amounts available for distribution to comply with income tax regulations: an
decrease in capital and corresponding decrease in accumulated undistributed
net realized losses on investment transactions in the amount of
approximately $138,000.
FEDERAL INCOME TAXES:
It is the policy of each of the Funds to qualify or continue to qualify as a
regulation investment company by complying with the provisions available to
certain investment companies, as defined in applicable sections of the
Internal Revenue Code, and to make distributions of net investment income
and net realized capital gains sufficient to relieve it from all, or
substantially all, federal income taxes.
ORGANIZATION COSTS:
All expenses in connection with each Fund's organization and registration
under the 1940 Act and the Securities Act of 1933 were paid by the Funds.
Such expenses are amortized over a period of two years commencing with the
date of the initial public offering (five years for the Tennessee Municipal
Obligations Fund). In the event that any of the initial shares of a Fund are
redeemed during such period by any holder thereof, the redemption proceeds
will be reduced by a pro rata portion of any remaining organization costs in
the same proportion as the number of initial shares being redeemed bears to
the number of initial shares outstanding at the time of redemption.
Continued
B-73
<PAGE> 120
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1996
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding short-term securities) for the
year ended June 30, 1996 are as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Value Equity Fund.................................. $ 22,246,521 $ 34,354,010
Growth Fund........................................ $ 15,450,988 $ 8,085,554
Fixed Income Fund.................................. $117,254,138 $120,909,929
Low Duration Government Securities Fund............ $ 1,547,136 $ 1,472,589
Tennessee Municipal Obligations Fund............... $ 11,843,364 $ 13,329,531
</TABLE>
4. RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to the Funds by NBC. Under the
terms of the investment advisory agreement, NBC is entitled to receive fees
based on a percentage of the average net assets of each Fund. NBC has agreed
that if the aggregate expenses of the Funds, as defined, for any fiscal year
exceed limitations of any state having jurisdiction over the Funds, NBC will
refund to the Funds, or otherwise bear, such excess. Such limitation did not
affect the calculation of the investment advisory fees during the year ended
June 30, 1996.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS"),
an Ohio limited partnership, and BISYS Fund Services Ohio, Inc. ("BISYS
Ohio") are subsidiaries of The BISYS Group, Inc.
BISYS, with whom certain officers and trustees of the Group are affiliated,
serves the Funds as administrator. Such officers and trustees are paid no
fees directly by the Funds for serving as officers and trustees of the
Group. Under the terms of the administration agreement, BISYS fees are
computed daily as a percentage of the average net assets of each Fund. BISYS
Ohio serves the Funds as transfer agent and fund accountant.
During the year ended, June 30, 1996, NBC voluntarily contributed $124,984
of its investment advisory fees and BISYS voluntarily contributed $13,327 of
its administrative fees to the Money Market Fund. During the year ended,
June 30, 1995, NBC voluntarily contributed $97,370 of its investment
advisory fees to the Money Market Fund. In addition, during the year ended
June 30, 1995, NBC purchased securities from the Fund for their carrying
value of $14,199,150 plus accrued interest. The market value of these
securities at the date of the sale to NBC was $13,667,783. The voluntary
contribution of investment advisory fees and administrative fees, and the
difference between the market value and carrying value of the securities on
the transaction date are reflected in the accompanying financial statements
as a capital contribution to the Fund.
The Group has adopted a Distribution and Shareholder Service Plan in
accordance with Rule 12b-1 under the 1940 Act, pursuant to which each Fund
is authorized to pay or reimburse BISYS, as distributor, a periodic amount,
calculated at an annual rate not to exceed 0.25% of the average daily net
asset value of each Fund. These fees are used by BISYS to pay banks,
including NBC, broker dealers and other institutions, or to reimburse BISYS
or its affiliates, for administration, distribution and shareholder services
in connection with the distribution of Fund shares.
Continued
B-74
<PAGE> 121
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1996
The Group has adopted an Administrative Services Plan, pursuant to which
each Fund is authorized to pay compensation to banks and other financial
institutions, which may include NBC, its correspondent and affiliated banks
and BISYS, for providing ministerial, recordkeeping and/or administrative
support services to their customers who are the beneficial or record owners
of a Fund. The compensation which may be paid under the Administrative
Services Plan is a fee computed daily at an annual rate of up to 0.25% of
the average daily net asset value of a Fund.
BISYS is also entitled to receive commissions on sales of shares of the
variable net asset value funds. For the year ended June 30, 1996, BISYS
received $9,120 from commissions earned on sales of shares of the variable
net asset value funds, of which $4,090 was reallowed to affiliated
broker/dealers.
Fees may be voluntarily reduced to assist the Funds in maintaining
competitive expense ratios.
Information regarding these transactions is as follows for the year ended
June 30, 1996:
<TABLE>
<CAPTION>
MONEY VALUE
MARKET EQUITY GROWTH
FUND FUND FUND
-------- ----------------- -----------------
<S> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee .35% 1.00% of 1.00% of
reductions (percentage of average first $50 million first $50 million
net assets)....................... .75% of remaining .75% of remaining
Voluntary fee reductions........... -- -- $188,588
ADMINISTRATION FEES:
Annual fee before voluntary fee
reductions (percentage of average
net assets)....................... .20% .20% .20%
Voluntary fee reductions........... -- -- $14,290
12b-1 FEES:
Annual fee before voluntary fee
reductions (percentage of average
net assets)....................... .25% .25% .25%
Voluntary fee reductions........... $171,557 $151,866 $55,404
ADMINISTRATIVE SERVICES FEES:
Annual fee before voluntary fee
reductions (percentage of average
net assets)....................... .25% .25% .25%
Voluntary fee reductions........... $143,129 $22,471 $4,500
FUND ACCOUNTANT AND TRANSFER
AGENT FEES......................... $76,601 $72,840 $52,692
</TABLE>
Continued
B-75
<PAGE> 122
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1996
<TABLE>
<CAPTION>
LOW DURATION TENNESSEE
FIXED GOVERNMENT MUNICIPAL
INCOME SECURITIES OBLIGATIONS
FUND FUND FUND
------- ------------ -----------
<S> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before
voluntary fee reductions
(percentage of average
net assets)............... .65% .50% .65%
Voluntary fee reductions... -- $38,565 $127,577
ADMINISTRATION FEES:
Annual fee before
voluntary fee reductions
(percentage of average
net assets)............... .20% .20% .20%
Voluntary fee reductions:.. -- $ 3,856 --
12b-1 FEES:
Annual fee before
voluntary fee reductions
(percentage of average
net assets)............... .25% .25% .25%
Voluntary fee reductions:.. $63,798 $12,381 $20,359
ADMINISTRATIVE SERVICES
FEES:
Annual fee before
voluntary fee reductions
(percentage of average
net assets)............... .25% .25% .25%
Voluntary fee reductions... $8,418 $3,815 $21,608
FUND ACCOUNTANT AND
TRANSFER AGENT FEES........ $58,691 $49,282 $70,155
</TABLE>
5. FEDERAL INCOME TAXES:
For federal income tax purposes, the following Funds have capital loss
carryforwards as of June 30, 1996, which are available to offset future
capital gains, if any:
<TABLE>
<CAPTION>
AMOUNT EXPIRES
--------- -------
<S> <C> <C>
Money Market Fund........................................... $145,161 2003
69,007 2004
Fixed Income Fund........................................... 2,812,097 2003
2,114,706 2004
Low Duration Government Securities Fund..................... 8,905 2003
23,561 2004
Tennessee Municipal Obligations Fund........................ 235,900 2003
968,507 2004
</TABLE>
Continued
B-76
<PAGE> 123
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1996
6. ELIGIBLE DISTRIBUTIONS (UNAUDITED):
The Group designates the following eligible distributions for the dividends
received deduction for corporations:
<TABLE>
<CAPTION>
VALUE
EQUITY GROWTH
FUND FUND
---------- --------
<S> <C> <C>
Dividend Income.......................................... $2,101,037 $637,528
Dividend Income Per Share................................ $ 0.137 $ 0.167
</TABLE>
7. EXEMPT-INTEREST INCOME DESIGNATIONS (UNAUDITED):
The Group designates the following exempt-interest income for the Tennessee
Municipal Obligations Fund's taxable year ended June 30, 1996:
<TABLE>
<S> <C>
Exempt-Interest Distributions...................................... $1,077,559
Exempt-Interest Distributions Per Share............................ $ 0.53
</TABLE>
The percentage break-down of the exempt-interest income by state for the
Tennessee Municipal Obligations Fund's taxable year ended June 30, 1996 was
as follows:
<TABLE>
<S> <C>
Alabama............................................................... 1.69%
Arkansas.............................................................. 0.33%
Georgia............................................................... 0.11%
Kansas................................................................ 2.63%
Kentucky.............................................................. 0.17%
Louisiana............................................................. 2.18%
Minnesota............................................................. 0.38%
Oklahoma.............................................................. 1.98%
Pennsylvania.......................................................... 2.54%
Puerto Rico........................................................... 1.66%
South Carolina........................................................ 1.26%
Tennessee............................................................. 79.24%
Texas................................................................. 0.59%
West Virginia......................................................... 5.11%
Wyoming............................................................... 0.13%
------
100.00%
======
</TABLE>
For the year ended June 30, 1996, 9.5% of the income earned by the Tennessee
Municipal Obligations Fund may be subject to the alternative minimum tax.
B-77
<PAGE> 124
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MONEY MARKET FUND
------------------------------------------------------
YEAR ENDED JUNE 30,
------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment Activities
Net investment income. 0.046 0.044 0.026 0.032 0.051
Net realized and
unrealized gains
(losses) on invest-
ments................ -- (0.004) -- -- 0.003
-------- -------- -------- -------- --------
Total from Invest-
ment Activities.... 0.046 0.040 0.026 0.032 0.054
-------- -------- -------- -------- --------
Distributions
Net investment income. (0.046) (0.044) (0.026) (0.032) (0.051)
Net realized gains.... -- -- -- -- (0.003)
-------- -------- -------- -------- --------
Total distributions. (0.046) (0.044) (0.026) (0.032) (0.054)
-------- -------- -------- -------- --------
Capital Transactions.... -- 0.004 -- -- --
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return............ 4.75%(a) 4.44%(a) 2.65% 3.20% 5.61%
RATIOS/SUPPLEMENTAL
DATA:
Net Assets, at end of
period (000)........... $134,146 $157,904 $128,001 $141,840 $162,361
Ratio of expenses to
average net assets..... 0.99% 0.97% 0.95% 0.85% 0.66%
Ratio of net investment
income to average
net assets............. 4.65% 4.41% 2.62% 3.17% 5.12%
Ratio of expenses to
average net assets*.... 1.20% 1.18% 1.09% 0.94% 0.91%
Ratio of net investment
income to average
net assets*............ 4.44% 4.20% 2.48% 3.08% 4.87%
- ------
<FN>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) The capital contribution had no impact on the total return for the years
ended June 30, 1995 and June 30, 1996.
</TABLE>
See notes to financial statements.
B-78
<PAGE> 125
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
VALUE EQUITY FUND
----------------------------------------------------
YEAR ENDED JUNE 30, OCTOBER 31, 1991
---------------------------------- TO JUNE 30,
1996 1995 1994 1993 1992 (a)
------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................ $ 12.63 $ 12.67 $ 11.57 $ 11.04 $ 10.00
------- ------- ------- ------- -------
Investment Activities
Net investment income... 0.14 0.14 0.07 0.21 0.17
Net realized and
unrealized gains on
investments............ 2.40 0.76 1.28 0.96 1.03
------- ------- ------- ------- -------
Total from Investment
Activities........... 2.54 0.90 1.35 1.17 1.20
------- ------- ------- ------- -------
Distributions
Net investment income... (0.14) (0.13) (0.06) (0.22) (0.16)
Net realized gains...... (0.49) (0.15) (0.19) (0.42) --
In excess of net
realized gains......... -- (0.66) -- -- --
------- ------- ------- ------- -------
Total Distributions... (0.63) (0.94) (0.25) (0.64) (0.16)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................... $ 14.54 $ 12.63 $ 12.67 $ 11.57 $ 11.04
======= ======= ======= ======= =======
Total Return (excludes
sales charges)........... 20.50% 8.03% 11.76% 10.94% 12.04%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of
period (000)............. $81,055 $80,264 $79,232 $52,629 $25,461
Ratio of expenses to
average net assets....... 1.58% 1.58% 1.36% 0.73% 0.67%(c)
Ratio of net investment
income to average
net assets............... 1.01% 1.13% 0.52% 1.84% 2.43%(c)
Ratio of expenses to
average net assets*...... 1.79% 1.79% 1.74% 1.69% 1.95%(c)
Ratio of net investment
income to average
net assets*.............. 0.80% 0.92% 0.14% 0.88% 1.15%(c)
Portfolio turnover........ 27.89% 35.64% 62.17% 16.13% 23.07%
Average commission rate
paid (d)................. $0.0605 -- -- -- --
- ------
<FN>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
</TABLE>
See notes to financial statements.
B-79
<PAGE> 126
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GROWTH FUND
------------------------------------
YEAR ENDED JUNE 30, APRIL 15, 1994
-------------------- TO JUNE 30,
1996 1995 1994(a)
--------- --------- --------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..... $ 12.14 $ 9.82 $10.00
--------- --------- ------
Investment Activities
Net investment income.................. 0.18 0.16 --
Net realized and unrealized gains
(losses) on investments............... 2.13 2.30 (0.18)
--------- --------- ------
Total from Investment Activities..... 2.31 2.46 (0.18)
--------- --------- ------
Distributions
Net investment income.................. (0.18) (0.14) --
In excess of net investment income..... (0.01) -- --
Net realized gains..................... (0.25) -- --
--------- --------- ------
Total Distributions.................. (0.44) (0.14) --
--------- --------- ------
NET ASSET VALUE, END OF PERIOD........... $ 14.01 $ 12.14 $ 9.82
========= ========= ======
Total Return (excludes sales charges).... 19.35% 25.27% (1.80)%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (000)....... $33,767 $21,485 $6,345
Ratio of expenses to average net assets.. 1.05% 1.24% 2.59%(c)
Ratio of net investment income to average
net assets.............................. 1.37% 1.64% 0.25%(c)
Ratio of expenses to average net assets*. 1.97% 2.51% 3.90%(c)
Ratio of net investment income (loss) to
average net assets*..................... 0.45% 0.37% (1.07)%(c)
Portfolio turnover....................... 31.22% 29.36% 0.00%
Average commissions rate paid (d)........ $ 0.0686 -- --
- ------
<FN>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
</TABLE>
See notes to financial statements.
B-80
<PAGE> 127
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FIXED INCOME FUND
-----------------------------------------------------
YEAR ENDED JUNE 30, OCTOBER 31, 1991
----------------------------------- TO JUNE 30,
1996 1995 1994 1993 1992 (a)
------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 9.27 $ 9.43 $ 10.44 $ 10.26 $ 10.00
------- ------- ------- ------- -------
Investment Activities
Net investment income.. 0.59 0.58 0.57 0.68 0.42
Net realized and
unrealized gains
(losses) on
investments........... (0.48) (0.15) (0.76) 0.27 0.22
------- ------- ------- ------- -------
Total from Investment
Activities.......... 0.11 0.43 (0.19) 0.95 0.64
------- ------- ------- ------- -------
Distributions
Net investment income.. (0.58) (0.58) (0.57) (0.69) (0.38)
In excess of net
investment income..... -- (0.01) -- -- --
Net realized gains..... -- -- -- (0.08) --
In excess of net
realized gains........ (0.03) -- (0.25) -- --
------- ------- ------- ------- -------
Total Distributions.. (0.61) (0.59) (0.82) (0.77) (0.38)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD.................. $ 8.77 $ 9.27 $ 9.43 $ 10.44 $ 10.26
======= ======= ======= ======= =======
Total Return (excludes
sales charges).......... 1.05% 4.82% (2.20)% 9.64% 6.56%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of
period (000)............ $28,847 $39,496 $42,309 $35,951 $27,256
Ratio of expenses to
average net assets...... 1.48% 1.43% 1.37% 0.74% 0.69%(c)
Ratio of net investment
income to average
net assets.............. 6.32% 6.33% 5.61% 6.65% 6.51%(c)
Ratio of expenses to
average net assets*..... 1.69% 1.64% 1.70% 1.42% 1.63%(c)
Ratio of net investment
income to average
net assets*............. 6.11% 6.12% 5.28% 5.97% 5.58%(c)
Portfolio turnover....... 363.84% 223.29% 328.44% 234.71% 40.85%
- ------
<FN>
* During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
</TABLE>
See notes to financial statements.
B-81
<PAGE> 128
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
LOW DURATION GOVERNMENT
SECURITIES FUND
------------------------------
YEAR ENDED
JUNE 30, APRIL 15, 1994
-------------- TO JUNE 30,
1996 1995 1994 (a)
------ ------ --------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........... $10.15 $ 9.93 $10.00
------ ------ ------
Investment Activities
Net investment income........................ 0.53 0.56 0.07
Net realized and unrealized gains (losses) on
investments................................. (0.20) 0.21 (0.08)
------ ------ ------
Total from Investment Activities........... 0.33 0.77 (0.01)
------ ------ ------
Distributions
Net investment income........................ (0.53) (0.55) (0.06)
------ ------ ------
NET ASSET VALUE, END OF PERIOD................. $ 9.95 $10.15 $ 9.93
====== ====== ======
Total Return (excludes sales charges).......... 3.31% 8.03% (0.13)%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (000)............. $7,461 $7,653 $7,692
Ratio of expenses to average net assets........ 1.44% 1.33% 2.85%(c)
Ratio of net investment income to average net
assets........................................ 5.19% 5.67% 3.63%(c)
Ratio of expenses to average net assets*....... 2.20% 2.10% 3.67%(c)
Ratio of net investment income to average net
assets*....................................... 4.43% 4.89% 2.81%(c)
Portfolio turnover............................. 20.87% 34.47% 21.20%
- ------
<FN>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
</TABLE>
See notes to financial statements.
B-80
<PAGE> 129
THE SESSIONS GROUP
RIVERSIDE CAPITAL FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TENNESSEE MUNICIPAL OBLIGATIONS FUND
--------------------------------------------
YEAR ENDED JUNE 30, NOVEMBER 4, 1992
------------------------- TO JUNE 30,
1996 1995 1994 1993 (a)
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................... $ 9.84 $ 9.81 $ 10.44 $ 10.00
------- ------- ------- -------
Investment Activities
Net investment income........... 0.53 0.50 0.48 0.30
Net realized and unrealized
gains (losses) on investments.. (0.08) 0.03 (0.57) 0.43
------- ------- ------- -------
Total from Investment
Activities................... 0.45 0.53 (0.09) 0.73
------- ------- ------- -------
Distributions
Net investment income........... (0.53) (0.50) (0.48) (0.29)
In excess of net realized gains. -- -- (0.06) --
------- ------- ------- -------
Total Distributions........... (0.53) (0.50) (0.54) (0.29)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD.... $ 9.76 $ 9.84 $ 9.81 $ 10.44
======= ======= ======= =======
Total Return (excludes sales
charges)......................... 4.67% 5.61% (1.00)% 7.39%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period
(000)............................ $19,037 $20,827 $19,965 $17,425
Ratio of expenses to average net
assets........................... 0.98% 1.12% 1.19% 0.82%(c)
Ratio of net investment income to
average net assets............... 5.40% 5.24% 4.67% 4.76%(c)
Ratio of expenses to average net
assets*.......................... 1.83% 1.98% 1.99% 1.62%(c)
Ratio of net investment income to
average net assets*.............. 4.55% 4.38% 3.87% 3.96%(c)
Portfolio turnover................ 60.76% 62.59% 86.57% 52.52%
- ------
<FN>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
</TABLE>
See notes to financial statements.
B-83
<PAGE> 130
APPENDIX
Commercial Paper Ratings. Commercial paper ratings of Standard & Poor's
Corporation ("S&P") are current assessments of the likelihood of timely payment
of debt considered short term in the relevant market. Commercial paper rated A-1
by S&P indicates that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted A-1+. Commercial paper rated A-2 by S&P indicates that capacity for
timely payment on issues is satisfactory. However, the relative degree of safety
is not as high as for issues designated A-1. Commercial paper rated A-3 by S&P
indicates adequate capacity for timely payment. Such paper is, however, more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations. Commercial paper rated B by S&P is regarded as
having only speculative capacity for timely payment. Commercial paper rated C by
S&P is regarded as short-term obligations with a doubtful capacity for payment.
Commercial paper rated D by S&P is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
Moody's Investors Service, Inc.'s ("Moody's") commercial paper rating are
opinions of the ability of issuers to repay punctually senior debt obligations
which have an original maturity not exceeding one year. The rating Prime-1 is
the highest commercial paper rating assigned by Moody's. Issuers rated Prime-1
(or supporting institutions) are considered to have a superior capacity 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.
Issuers rated Prime-2 (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 of Prime-1 rated issuers, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variations. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. The effects of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate
A-1
<PAGE> 131
alternate liquidity is maintained. Issuers rated Not Prime do not fall within
any of the Prime rating categories.
Commercial paper rated F-1+ by Fitch Investors Service ("Fitch") is
regarded as having the strongest degree of assurance for timely payments.
Commercial paper rated F-1 by Fitch is regarded as having an assurance of timely
payment only slightly less than the strongest rating, i.e., F-1+. Commercial
paper rated F-2 by Fitch is regarded as having a satisfactory degree of
assurance of timely payment, but the margin of safety is not as great as for
issues assigned F-1+ or F-1 ratings. Commercial paper rated F-3 by Fitch is
regarded as having characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes could cause these
securities to be rated below investment grade. Commercial paper rated F-S by
Fitch is regarded as having characteristics suggesting a minimal degree of
assurance for timely payment and is vulnerable to near term adverse changes in
financial and economic conditions. Commercial paper rated D by Fitch is in
actual or imminent payment default.
The description of the three highest short-term debt ratings by Duff &
Phelps, Inc. ("Duff") (Duff incorporates gradations of "1+" (one plus) and "1-"
(one minus) to assist investors in recognizing quality differences within the
highest rating category) are as follows. Duff 1+ is regarded as having the
highest certainty of timely payment. Short-term liquidity, including internal
operating factors and/or access to alternative sources of funds, is outstanding,
and safety is just below risk-free U.S. Treasury short-term obligations. Duff 1
is regarded as having a very high certainty of timely payment. Liquidity factors
are excellent and supported by good fundamental protection factors. Risk factors
are minor. Duff 1- is regarded as having a high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are minor. Duff 2 is regarded as having a good certainty
of timely payment. Liquidity factors and company fundamentals are sound.
Although ongoing funding needs may enlarge total financing requirements, access
to capital markets is good. Risk factors are small. Duff 3 is regarded as having
a satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected. Duff 4 is considered as having
speculative investment characteristics. Liquidity is not sufficient to insure
against disruption in debt service. Operating factors and market access may be
subject to a high degree of variation. Duff 5 indicates that the issuer has
failed to meet scheduled principal and/or interest payments.
Commercial paper rated A1 by IBCA Limited and its affiliate, IBCA Inc.
(collectively "IBCA") is regarded by IBCA as obligations supported by the
highest capacity for timely repayment. Where
A-2
<PAGE> 132
issues possess a particularly strong credit feature, a rating of A1+ is
assigned. Obligations rated A2 are supported by a good capacity for timely
repayment. Obligations rated A3 are supported by a satisfactory capacity for
timely repayment. Obligations rated B are those for which there is an
uncertainty as to the capacity to ensure timely repayment. Obligations rated C
are those for which there is a high risk of default or which are currently in
default.
The following summarizes the description of the three highest short-term
ratings of Thomson BankWatch, Inc. ("Thomson"). TBW-1 is the highest category
and indicates a very high likelihood that principal and interest will be paid on
a timely basis. TBW-2 is the second highest category indicating that while the
degree of safety regarding timely repayment of principal and interest is strong,
the relative degree of safety is not as high as for issues rated "TBW-1." TBW-3
is the lowest investment grade category and indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate. TBW-4 is the lowest rating category and
is regarded as non-investment grade and therefore speculative.
The plus (+) sign is used after a rating symbol to designate the relative
position of an issuer within the rating category.
Corporate Debt Ratings. A S&P corporate debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated A has a strong capacity to
pay interest and repay principal although it is somewhat more susceptible to
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
The following summarizes the four highest ratings used by Moody's for
corporate debt. Bonds that are rated Aaa by Moody's 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. Bonds
that are rated Aa are judged to be of high quality by all standards. Together
with the Aaa
A-3
<PAGE> 133
group, they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities. Bonds that are
rated A by Moody's 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 some time in the future. Bonds that
are rated Baa by Moody's 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.
Moody's applies numerical modifiers (1, 2, and 3) with respect to bonds
rated Aa through Baa. The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category.
The following summarizes the four highest long-term debt ratings by Duff.
Debt rated AAA has the highest credit quality. The risk factors are negligible
being only slightly more than for risk-free U.S. Treasury debt. Debt rated AA
has a high credit quality and protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions. Debt rated A
has protection factors that are average but adequate. However, risk factors are
more variable and greater in periods of economic stress. Debt rated BBB has
below average protection factors but is still considered sufficient for prudent
investment. However, there is considerable variability in risk during economic
cycles.
To provide more detailed indications of credit quality, the ratings from
AA to BBB may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
The following summarizes the four highest long-term debt ratings by Fitch
(except for AAA ratings, plus or minus signs are used with a rating symbol to
indicate the relative position of the credit within the rating category). Bonds
rated AAA are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment
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grade and of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated
"AAA." Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-term debt of
these issues is generally rated "F-1+." Bonds rated as A are considered to be
investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings. Bonds rated BBB are considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse impact on
these bonds, and therefore, impair timely payment. The likelihood that the
ratings for these bonds will fall below investment grade is higher than for
bonds with higher ratings.
The following summarizes IBCA's four highest long-term debt ratings.
Obligations rated AAA are those for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly. Obligations
rated AA are those for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic, or financial conditions may increase investment
risk albeit not very significantly. Obligations rated A are those for which
there is a low expectation of investment risk. Capacity for timely repayment of
principal and interest is strong, although adverse changes in business, economic
or financial conditions may lead to increased investment risk. Obligations rated
BBB are those for which there is currently a low expectation of investment risk.
Capacity for timely repayment of principal and interest is adequate, although
adverse changes in business, economic, or financial conditions are more likely
to lead to increased investment risk than for obligations in other categories.
The following summarizes Thomson's description of its four highest
long-term debt ratings (Thomson may include a plus (+) or minus (-) designation
to indicate where within the respective category the issue is placed). AAA is
the highest category and indicates that the ability to repay principal and
interest on a timely basis is very high. AA is the second highest category and
indicates a superior ability to repay principal and interest on a timely basis
with limited incremental risk versus issues rated in the highest category. A is
the third highest category and indicates the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
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BBB is the lowest investment grade category and indicates an acceptable capacity
to repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than obligations
with higher ratings.
Municipal Obligations Ratings
The following summarizes the three highest ratings used by Moody's for
state and municipal short-term obligations. Obligations bearing MIG-1 or VMIG-1
designations are of the best quality, enjoying strong protection by established
cash flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing. Obligations rated MIG-2 or VMIG-2 denote high quality
with ample margins of protection although not so large as in the preceding
rating group. Obligations bearing MIG-3 or VMIG-3 denote favorable quality. All
security elements are accounted for but there is lacking the undeniable strength
of the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
S&P SP-1, SP-2, and SP-3 municipal note ratings (the three highest ratings
assigned) are described as follows:
"SP-1": Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
"SP-2": Satisfactory capacity to pay principal and interest.
"SP-3": Speculative capacity to pay principal and interest.
The following summarizes the four highest ratings used by Moody's for
state and municipal bonds:
"Aaa": Bonds judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt edge." 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 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
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fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
"A": Bonds which 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 which 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.
The following summarizes the four highest ratings used by S&P for state
and municipal bonds:
"AAA": Debt which has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
"AA": Debt which has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in
small degree.
"A": Debt which has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
"BBB": Debt which has adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category then in higher rated
categories.
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Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange, normally
drawn by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed
as to payment of principal and interest by the full faith and
credit of the U.S. Government. These obligations may include
Treasury bills, notes and bonds, and issues of agencies and
instrumentalities of the U.S. Government, provided such obligations
are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations of the U.S. Government include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of agencies and instrumentalities of
the U.S. Government, such as the Government National Mortgage Association, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as those
of the Government National Mortgage Association, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Student Loan Marketing Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Federal
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Farm Credit Banks, 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.
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