<PAGE> 1
Rule 497(c)
File No. 811-5545
Registration No. 33-21489
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
1ST SOURCE MONOGRAM INTERMEDIATE TAX-FREE BOND FUND LOGO
- --------------------------------------------------------------------------------
3435 Stelzer Road
Columbus, Ohio 43219
For current yield, purchase, and redemption
information, call (800) 766-8938.
- --------------------------------------------------------------------------------
The Sessions Group (the "Group") is an open-end management investment company.
The Group includes the 1st Source Monogram U.S. Treasury Obligations Money
Market Fund (the "Money Market Fund"), the 1st Source Monogram Diversified
Equity Fund (the "Diversified Equity Fund"), the 1st Source Monogram Income
Equity Fund (the "Income Equity Fund"), the 1st Source Monogram Special Equity
Fund (the "Special Equity Fund"), the 1st Source Monogram Income Fund (the
"Income Fund") and the 1st Source Monogram Intermediate Tax-Free Bond Fund (the
"Intermediate Tax-Free Fund"), each of which is a diversified investment fund of
the Group (the Money Market, Diversified Equity, Income Equity, Special Equity,
Income and Intermediate Tax-Free 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").
1st Source Bank, South Bend, Indiana (the "Adviser"), which is a wholly owned
subsidiary of 1st Source Corporation ("FSC"), acts as the investment adviser to
each of the Funds. In addition, with respect to the Diversified Equity Fund, the
Adviser has retained Miller Anderson & Sherrerd LLP, Loomis Sayles & Company,
L.P. and Columbus Circle Investors to provide sub-investment advisory services.
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.
Each of the Diversified Equity Fund's, Income Equity Fund's, Special Equity
Fund's, Income Fund's and Intermediate Tax-Free 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, 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.
THE SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, THE ADVISER, FSC 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.
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 April 1, 1997.
<PAGE> 2
PROSPECTUS SUMMARY
SHARES OFFERED: Units of beneficial interest ("Shares") of the Money Market
Fund, the Diversified Equity Fund, the Income Equity Fund, the Special Equity
Fund, the Income Fund and the Intermediate Tax-Free 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 of 5.00% (with respect to the
Diversified Equity, Income Equity and Special Equity Funds) and 4.00% (with
respect to the Income and Intermediate Tax-Free Funds) of the public offering
price, reduced on investments of $50,000 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 $25 minimum
subsequent investments. Such minimum initial and subsequent investments are
reduced for investors using the Auto Invest Plan described herein and for
employees of the Adviser or one of its affiliates.
TYPE OF COMPANY: Each Fund is a diversified series of an open-end, management
investment company.
INVESTMENT OBJECTIVES: For the MONEY MARKET FUND, current income with
liquidity and stability of principal.
For the DIVERSIFIED EQUITY FUND and the SPECIAL EQUITY FUND, capital
appreciation.
For the INCOME EQUITY FUND, capital appreciation with current income as a
secondary objective.
For the INCOME FUND, current income consistent with preservation of capital.
For the INTERMEDIATE TAX-FREE FUND, current income which is exempt from
federal income tax consistent with preservation of capital.
INVESTMENT POLICIES: Under normal market conditions, the MONEY MARKET FUND
will invest as fully as possible, but in no event less than 80%, of its total
assets in the U.S. Treasury bills, notes and bonds, and repurchase agreements
secured by such obligations.
Under normal market conditions, the DIVERSIFIED EQUITY 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--of that amount 25% to 40%
will be committed to each of the following styles, representing the three
different styles of the SubAdvisers: (1) investing in companies believed to have
strong value measures whose stock is traded at a price below its perceived
value, (2) investing in companies believed to have growth potential, and (3)
investing in companies believed to be in a position to take advantage of
political, economic, industrial or secular trends or developments.
Under normal market conditions, the INCOME EQUITY 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.
Under normal market conditions, the SPECIAL EQUITY FUND will invest
substantially all, but in no event less than 65%, of its total assets in equity
securities issued by companies with market
2
<PAGE> 3
capitalizations ranging on average between $50 million and $1.5 billion and
which are considered to have growth potential.
Under normal market conditions, the INCOME FUND will invest substantially all,
but in no event less than 65%, of its total assets in debt securities of all
types, including high grade corporate bonds and U.S. Government bonds.
Under normal market conditions, the INTERMEDIATE TAX-FREE FUND will invest at
least 80% of its net assets in municipal securities issued by or on behalf of
the various States of the United States 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 income taxes
and is not treated as a preference item for certain Shareholders for purposes of
the federal alternative minimum tax. The Intermediate Tax-Free Fund, under
normal market conditions, expects to maintain an average weighted portfolio
maturity of four to eight years.
RISK FACTORS AND SPECIAL CONSIDERATIONS: An investment in any of the Funds is
subject to certain risks, including market risk and interest rate risk, 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 the
following practices: the use of repurchase agreements and reverse repurchase
agreements, purchasing futures contracts, foreign securities and restricted
securities, entering into option transactions on securities in which the Funds
may invest directly and the purchase of securities on a when-issued or
delayed-delivery basis.
INVESTMENT ADVISER: 1st Source Bank (the "Adviser").
SUB-ADVISERS: With respect to the Diversified Equity Fund only, Miller,
Anderson & Sherrerd LLP, Loomis, Sayles & Company, L.P. and Columbus Circle
Investors (collectively, the "Sub-Advisers").
DIVIDENDS: For the Money Market Fund, dividends from net income are declared
daily and generally paid monthly. For each of the other Funds, other than the
Special Equity Fund, dividends from net income are declared and generally paid
monthly. For the Special Equity Fund, dividends from net income are declared and
generally paid quarterly. Net realized capital gains, if any, for each of the
Funds are distributed at least annually.
DISTRIBUTOR: BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS").
3
<PAGE> 4
FEE TABLE
<TABLE>
<CAPTION>
MONEY DIVERSIFIED INCOME
MARKET EQUITY EQUITY
FUND FUND FUND
------- ----------- ------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)............................................. 0% 5.00% 5.00%
Exchange Fee.................................................. $ 0 $ 0 $ 0
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees............................................... .35% 1.10% .80%
12b-1 Fees After Fee Waivers(1)............................... .01 .01 .01
Other Expenses(2)............................................. .40 .42 .45
---------
----
--------- ---------
Estimated Total Fund Operating Expenses After Fee
Waivers(1).................................................. 0.76% 1.53% 1.26%
========= ============= =========
</TABLE>
<TABLE>
<CAPTION>
SPECIAL INTERMEDIATE
EQUITY INCOME TAX-FREE
FUND FUND FUND
------- ----------- ------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)............................................. 5.00% 4.00% 4.00%
Exchange Fee.................................................. $ 0 $ 0 $ 0
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees............................................... .80% .55% .55%
12b-1 Fees After Fee Waivers(1)............................... .01 .01 .01
Other Expenses(2)............................................. .51 .42 .57
---- ---- ----
Estimated Total Fund Operating Expenses After Fee
Waivers(1).................................................. 1.32% 0.98% 1.13%
==== ==== ====
</TABLE>
- ---------------
1. BISYS has agreed with the Group to waive a portion of its Rule 12b-1 Fees
until October 31, 1997, so that such fees will not exceed during that period,
on an annual basis, 0.01% of any Fund's average daily net assets. Absent such
Fee Waivers, 12b-1 Fees for each of the Funds would be 0.25% and Estimated
Total Fund Operating Expenses would be estimated to be 1.00%, 1.77%, 1.50%,
1.66%, 1.22% and 1.37% for the Money Market Fund, Diversified Equity Fund,
Income Equity Fund, Special Equity Fund, Income Fund and Intermediate
Tax-Free Fund, respectively.
2. "Other Expenses" are based upon estimated amounts for the current fiscal
year.
4
<PAGE> 5
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
------ -------
<S> <C> <C>
Money Market Fund......................................................... $ 8 $24
Diversified Equity Fund................................................... 65 96
Income Equity Fund........................................................ 62 88
Special Equity Fund....................................................... 63 90
Income Fund............................................................... 50 70
Intermediate Tax-Free Fund................................................ 51 74
</TABLE>
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.
Except with respect to the Money Market Fund, as a result of the payment of
sales loads 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 FOREGOING EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
Each Fund is one separate fund of the Group. The table below sets forth
certain information concerning the investment results of the Funds, other than
the Money Market Fund and the Intermediate Tax-Free Fund, since their inception.
Such financial information for the Money Market Fund and the Intermediate
Tax-Free Fund has not been provided since such Funds have not
5
<PAGE> 6
yet commenced operations. Further financial information is included in the
Statement of Additional Information. The Financial Highlights contained in the
table below have not been audited.
<TABLE>
<CAPTION>
DIVERSIFIED INCOME SPECIAL
EQUITY EQUITY EQUITY INCOME
------------ ------------ ------------ ------------
FOR PERIOD FOR PERIOD FOR PERIOD FOR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 (A) 1996 (A) 1996 (A) 1996 (A)
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................ $ 10.00 $ 10.00 $ 10.00 $ 10.00
-----------
--
--------- ---------
INVESTMENT ACTIVITIES
Net investment income............. -- 0.08 -- 0.16
Net realized gains (losses) on
investments.................... 0.42 0.30 0.16 (0.02)
Net unrealized gains (losses) on
investments.................... 0.26 0.48 (0.16) 0.19
-----------
--
--------- ---------
Total from Investment
Activities................... 0.68 0.86 0.00 0.33
-----------
--
--------- ---------
DISTRIBUTIONS
Net investment income............. -- (0.08) -- (0.16)
In excess of net investment
income......................... -- -- -- --
Net realized gains................ (0.22) (0.05) (0.16) --
In excess of realized gains....... -- -- (0.15) --
-----------
--
--------- ---------
Total Distributions............ (0.22) (0.13) (0.31) (0.16)
-----------
--
--------- ---------
NET ASSET VALUE, END OF PERIOD...... $ 10.46 $ 10.73 $ 9.69 $ 10.17
========= ============= =========
Total Return (excludes sales
charge)........................... 8.61%(b) 10.25%(b) -2.30%(b) 4.38%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period
(000).......................... $ 65,681 $ 32,580 $ 26,058 $ 48,959
Ratio of expenses to average net
assets......................... 1.57%(c) 1.32%(c) 1.33%(c) 1.01%(c)
Ratio of net investment income to
average net assets............. -0.08%(c) 2.39%(c) -0.11%(c) 1.31%(c)
Ratio of expenses to average net
assets*........................ 1.82%(c) 1.57%(c) 1.58%(c) 1.26%(c)
Ratio of net investment income to
average net assets*............ -0.33%(c) 2.14%(c) -0.36%(c) 1.06%(c)
Portfolio Turnover Rate........... 23% 14% 37% 71%
</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) Commencement of the Funds began September 20, September 19, September 23,
and September 24, respectively.
(b) Not annualized. The quoted returns of the Funds are for the period ended
December 31, 1996, and include, prior to commencement of operations for such
Funds, the performance of certain collective trust portfolio accounts for
the period beginning June 30, 1996.
(c) Annualized.
6
<PAGE> 7
PERFORMANCE INFORMATION
From time to time performance information for the Funds showing the Funds'
average annual total return, aggregate total return, yield, tax 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 PERFORMANCE 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 (or its respective
predecessor collective investment 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. Aggregate total return is
calculated similarly to average annual total return except that the return
figure is aggregated over the relevant period instead of 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. Tax 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 tax equivalent
yield, as the case may be, excluding the effect of a sales charge, if any.
Each of the Funds, other than the Money Market Fund and the Intermediate
Tax-Free Fund, were initially funded in part by the transfer of all of the
assets of a corresponding collective investment fund managed by the Adviser and,
in the case of the Diversified Equity Fund, the Sub-Advisers (the "CIFs").
Because the management of such Funds is substantially the same as the
corresponding CIF, the quoted performance of those Funds includes the
performance of the CIFs for periods prior to the effectiveness of the Group's
registration statement as it relates to those Funds. The CIFs were not
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), and therefore were not subject to certain investment restrictions that
are imposed by the 1940 Act. If the CIFs had been so registered, their
performance might have been adversely affected.
For the one year, five year and ten year periods ended December 31, 1996, and
the respective periods from commencement of operations to December 31, 1996, the
average annual total returns for the Diversified Equity Fund, the Income Equity
Fund, the Special Equity Fund and the Income Fund are set forth in the following
table. Such performance information includes the prior performance of the
respective CIFs for such Funds during those periods which has been restated to
reflect the estimated fees for those Funds.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
------------------------------------------------------------------------------------
WITH MAXIMUM SALES LOAD(1) WITHOUT SALES LOAD
---------------------------------------- ----------------------------------------
SINCE SINCE
FUND 1 YEAR 5 YEAR 10 YEAR INCEPTION 1 YEAR 5 YEAR 10 YEAR INCEPTION
- -------------------------------- ------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Equity(2)........... 13.19% 11.02.% 12.15% 11.15% 19.13% 12.17% 12.73% 11.65%
Income Equity(3)................ 11.67% 13.93% 11.56% 12.54% 17.59% 15.09% 12.12% 13.07%
Special Equity(3)............... 15.98% 12.17% 15.39% 13.60% 22.07% 13.32% 15.98% 14.12%
Income(2)....................... -1.55% 5.21% 6.45% 7.22% 2.55% 6.07% 6.88% 7.69%
</TABLE>
7
<PAGE> 8
- ---------------
1. The maximum sales load for the Diversified Equity, Income Equity and Special
Equity Funds is 5.00%. For the Income Fund, the maximum sales load is 4.00%.
2. Commenced operations June 30, 1985.
3. Commenced operations November 30, 1985.
For the period ended December 31, 1996, there is no total return information
for the Money Market Fund or the Intermediate Tax-Free Income Fund since such
Funds had not yet commenced operations. And, of course, past performance is no
guarantee as to future performance.
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 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. The Money
Market Fund may also present a 30-day yield which is calculated similarly to the
seven-day yield but instead refers to a 30-day period rather than a seven-day
period.
In addition, from time to time the Funds may also 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 FSC 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.
8
<PAGE> 9
INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
The investment objective of the Money Market Fund is current income with
liquidity and stability of principal. The investment objective for each of the
Diversified Equity Fund and the Special Equity Fund is capital appreciation. The
investment objectives of the Income Equity Fund are capital appreciation with
current income as a secondary objective. The investment objectives of the Income
Fund are current income consistent with preservation of capital. The investment
objectives of the Intermediate Tax-Free Fund are income which is exempt from
federal income tax consistent with preservation of capital.
The investment objectives with respect to a Fund are non-fundamental policies
and as such may be changed by the Group's Trustees 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
Under normal market conditions, the Money Market Fund invests as fully as
possible, but in no event less than 80% of its total assets, in U.S. Treasury
bills, notes and bonds and repurchase agreements relating to such obligations.
The Money Market Fund will purchase only obligations which have, or are deemed
to have, maturities, from the date of purchase, of thirteen months or less.
Current income earned on such securities may not be as great as current income
that could be earned on lower quality securities that have less liquidity and/or
a greater risk of non-payment or securities that have a longer term.
Notwithstanding any of the foregoing, the Money Market Fund, as a money market
fund subject to Rule 2a-7 of the 1940 Act, must invest 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 deemed to be of comparable
quality. In addition, the dollar-weighted average maturity of the obligations in
the Money Market Fund may not exceed 90 days.
Subject to the foregoing limitations and in order to achieve its investment
objectives, the Money Market Fund expects to invest in the following types of
securities: direct obligations issued by the U.S. Treasury including bills,
notes and bonds which differ from each other only in interest rates, maturities
and times of issuance; U.S. Treasury securities that have been stripped of their
unmatured interest coupons (which typically provide for interest payments
semi-annually); interest coupons that have been stripped from such U.S. Treasury
securities; receipts and certificates for such stripped debt obligations and
stripped coupons (collectively, "Stripped Treasury Securities"); and in
repurchase agreements collateralized by such securities. 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").
Treasury bills have maturities of one year or less; Treasury notes have
maturities of one to ten years; and Treasury bonds generally have maturities of
greater than ten years. Stripped Treasury Securities are sold at a deep discount
because the buyer of those securities receives
9
<PAGE> 10
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. The Money Market Fund may engage in other investment
techniques described below.
THE DIVERSIFIED EQUITY FUND
Under normal market conditions, the Diversified Equity 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 of companies with market
capitalizations of $100 million or greater--of that amount, 25% to 40% will be
committed to each of the following styles, representing the three different
styles of the Sub-Advisers: (1) investing in companies believed to have strong
value measures whose stock is traded at a price below its perceived value, (2)
investing in companies believed to have growth potential, and (3) investing in
companies believed to be in a position to take advantage of political, economic,
industrial or secular trends or developments. For purposes of the foregoing,
securities convertible into common stocks include convertible bonds, convertible
preferred stock, options and rights. To the extent the Diversified Equity Fund
invests in options or rights, such investments may contribute to its primary
investment objective of capital appreciation but will not contribute to its
secondary objective of current income.
Miller Anderson & Sherrerd LLP, one of the Sub-Advisers ("Miller Anderson"),
will manage its portion of the Diversified Equity Fund's portfolio with an
emphasis on equity securities of companies it believes have traditional value
characteristics, i.e., high yield, low price to earnings ratios and low price to
book value ratios, which Miller Anderson believes have unrecognized potential
for earnings improvement.
Loomis, Sayles & Company, L.P., another of the Sub-Advisers ("Loomis"), will
manage its portion of the Diversified Equity Fund's portfolio with an emphasis
on equity securities of companies Loomis believes are entering into a phase of
accelerating earnings growth. The criteria used by Loomis to select such
securities are historic and current relative price to earnings ratios, and the
extent to which Loomis believes that the market has recognized the accelerating
growth of such company.
Columbus Circle Investors, the third Sub-Adviser ("Columbus"), will manage its
portion of the Diversified Equity Fund's portfolio based upon Columbus'
identification of companies where political or economic developments, secular
trends, industry or group dynamics and company-specific events present greater
that market expected growth.
Under normal market conditions, the Diversified Equity Fund may also invest up
to 35% of its total assets in sponsored and unsponsored American Depositary
Receipts ("ADRs"), as described more fully below, securities of other investment
companies, units of real estate investment trusts ("REITs"), warrants, cash and
short-term obligations (with maturities of 12 months or less) (collectively,
"Short-Term Obligations") such as commercial paper, bankers' acceptances,
certificates of deposit, obligations of the U.S. Government or its agencies or
instrumentalities, demand and time deposits of domestic banks and savings and
loan associations and repurchase agreements secured by such Short-Term
Obligations. Commercial paper which is included within "Short-Term Obligations"
is that which is rated at the time of purchase within the two highest rating
groups assigned by one or more appropriate NRSROs, or, if unrated, which the
Adviser or the Sub-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 Diversified Equity Fund may also engage in other
investment techniques described below.
10
<PAGE> 11
THE INCOME EQUITY FUND
Under normal market conditions, the Income Equity 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 of companies with market
capitalization of at least $100 million which the Adviser believes pay above
average dividends or interest. For purposes of the foregoing, securities
convertible into common stocks include convertible bonds, convertible preferred
stock, options and rights. The securities purchased by the Income Equity Fund
are those considered by the Adviser to be generally undervalued by the market.
Under normal market conditions, the Income Equity Fund may also invest up to
35% of its total assets in warrants, ADRs, securities of other investment
companies and REITs, cash and Short-Term Obligations and may engage in other
investment techniques described below.
THE SPECIAL EQUITY FUND
Under normal market conditions, the Special Equity 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, options and rights), traded in U.S. markets, and
issued by companies believed by the Adviser to exhibit an attractive outlook for
growth in sales and earnings and with market capitalizations of between $50
million and $1.5 billion. Such companies may include "unseasoned" companies,
i.e., companies that, together with any predecessor, have less than three years
of continuous operation. The Special Equity Fund will not invest more than 25%
of its total assets in the securities of unseasoned companies.
The Special Equity Fund may also invest up to 35% of its total assets in
warrants, ADRs, securities of other investment companies and REITs, cash and
Short-Term Obligations and may engage in other investment techniques described
below.
THE INCOME FUND
Under normal market conditions, the Income Fund will invest substantially all,
but in no event less than 65%, of its total assets in debt securities of all
types, including variable and floating rate securities (as described more fully
below under "The Intermediate Tax-Free Fund"), although up to 35% of its total
assets may be invested in securities of other investment companies and in
preferred stock and dividend paying common stocks. Debt securities include
bonds, debentures, notes, mortgage-related securities, state, municipal or
industrial revenue bonds, obligations issued or guaranteed as to principal and
interest by the U.S. Government or its agencies or instrumentalities
("Government Obligations") and fixed-income securities convertible into, or
exchangeable for, common stocks. In addition, a portion of the Income Fund may
from time to time be invested in participation certificates in pools of
mortgages issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
Under normal market conditions, the Income Fund expects to invest primarily in
Government Obligations and in debt obligations of United States corporations.
The Income Fund also intends that, under normal market conditions, its portfolio
will maintain a dollar-weighted average maturity of no more than 18 years.
The 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. 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
11
<PAGE> 12
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 Income
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 Income Fund also expects to invest in bonds, notes and debentures of a
wide range of U.S. corporate issuers. Such obligations may be secured or
unsecured promises to pay and will in most cases differ in their interest rates,
maturities and times of issuance.
The 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. In the event that a security's rating falls below "A" by an
appropriate NRSRO, the Adviser will reevaluate the security in order to
determine whether to sell. In no event, however, will the Income Fund be
required to liquidate such security if it would suffer a loss on the sale of
such security or so long as one appropriate NRSRO has rated such security within
its three highest rating groups. For a description of the rating symbols of the
NRSROs, see the Appendix to the Statement of Additional Information.
The Income Fund may hold some Short-Term Obligations and securities of other
investment companies for cash management purposes.
The 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 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 Income Fund may invest up to 25% of its total assets 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 to be 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
12
<PAGE> 13
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 the Income 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 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.
The Income Fund may also acquire collateralized mortgage obligations or
"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.
Asset-backed securities are similar to mortgage-backed securities except that
instead of using mortgages to collateralize the obligations, a broad range of
other assets may be used as collateral, primarily automobile and credit card
receivables and home equity loans. Such receivables and loans are securitized in
pass-through structures similar to the mortgage pass-through or pay-through
structures described above.
Certain debt securities such as, but not limited to, mortgage-backed
securities, 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 Income Fund's dollar-weighted average
maturity, the effective maturity of such securities will be used.
An increase in interest rates will generally reduce the value of the
investments in the 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.
THE INTERMEDIATE TAX-FREE FUND
Under normal market conditions, at least 80% of the net assets of the
Intermediate Tax-Free Fund will be invested in a portfolio of obligations
consisting of bonds, notes, commercial paper, certificates of indebtedness and
other debt instruments, issued by or on behalf of the various States of the
United States, or any county, political subdivision or municipality thereof
(including any agency, board, author-
13
<PAGE> 14
ity 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 is
not treated as a preference item for individuals for purposes of the federal
alternative minimum tax. The Intermediate Tax-Free Fund may also invest 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 income taxes and is not treated as a
preference item for individuals for purposes of the federal alternative minimum
tax (collectively, "Exempt Securities"). The Intermediate Tax-Free Fund, under
normal market conditions, expects to maintain an average weighted portfolio
maturity of four to eight years.
The two principal classifications of Exempt Securities which may be held by
the Intermediate Tax-Free 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 Intermediate
Tax-Free 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 Intermediate Tax-Free 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 Intermediate Tax-Free 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 Intermediate Tax-Free
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. In the
event that a security's rating falls below "A" by an appropriate NRSRO, the
Adviser will reevaluate the security in order to determine whether to sell. In
no event, however, will the Intermediate Tax-Free Fund be required to liquidate
such security if it would suffer a loss on the sale of such security or so long
as one appropriate NRSRO has rated such security within its three highest rating
groups. The applicable Exempt Securities ratings are described in the Appendix
to the Statement of Additional Information.
The Intermediate Tax-Free 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. In addition, investments of the Intermediate
Tax-Free Fund may be made in taxable Short-Term Obligations if, for example,
suitable tax-exempt obligations are unavailable. Under such circumstances and
during the period of such investment, the Intermediate Tax-Free Fund may not
achieve its stated investment objectives.
The Intermediate Tax-Free Fund may also invest up to 20% of its net assets in
municipal securities, the interest income on which is exempt from federal income
tax but may be treated as a preference item for individuals for
14
<PAGE> 15
purposes of the federal alternative minimum tax. The Intermediate Tax-Free Fund
will not include such municipal securities in the calculation of compliance with
the 80% test described above. For further information relating to the types of
municipal securities 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 income taxes are normally rendered by bond counsel
to the respective issuers at the time of issuance. Neither the Intermediate
Tax-Free 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 Intermediate Tax-Free Fund may include
rated and unrated variable and floating rate obligations the interest on which
is tax-exempt. A variable rate obligation 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 par
value.
A floating rate obligation 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
par value.
Such obligations are frequently not rated by credit rating agencies; however,
unrated variable and floating rate obligations purchased by the Intermediate
Tax-Free Fund will be determined by the Adviser to be of comparable quality at
the time of purchase to rated instruments eligible for purchase under the
Intermediate Tax-Free 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 obligations and will continuously monitor their
financial condition. Although there may be no active secondary market with
respect to a particular variable or floating rate obligation purchased by the
Intermediate Tax-Free Fund, the Intermediate Tax-Free Fund may attempt to resell
the obligation at any time to a third party. The absence of an active secondary
market, however, could make it difficult for the Intermediate Tax-Free Fund to
dispose of a variable or floating rate obligation in the event the issuer of the
obligation defaulted on its payment obligations and the Intermediate Tax-Free
Fund could, as a result or for other reasons, suffer a loss to the extent of the
default. Variable or floating rate obligations may be secured by bank letters of
credit.
In the event the interest rate of a variable or floating rate obligation 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 obligation, on readjustment of its interest rate, will not
approximate its par value.
Variable and floating rate obligations for which no readily available market
exists will be purchased in an amount which, together with other illiquid
securities, exceeds 15% of the Intermediate Tax-Free Fund's net assets only if
such obligations are subject to a demand feature that will permit the
Intermediate Tax-Free Fund to receive payment of the principal within seven days
after demand by the Intermediate Tax-Free Fund.
An increase in interest rates will generally reduce the value of the
investments in the Intermediate Tax-Free 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
15
<PAGE> 16
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.
IN GENERAL
Each of the Funds, other than the Money Market Fund, may purchase securities
of other investment companies which in the opinion of the Adviser or
Sub-Adviser, as the case may be, will assist such Fund in achieving its
investment objective and/or for cash management purposes, and each of the Funds
may enter into repurchase and reverse repurchase agreements, and except for the
Money Market Fund, the Intermediate Tax-Free Fund and the Income Fund, enter
into options and futures transactions and write covered-call options on
securities that such Fund could otherwise purchase directly. In addition, the
Income Fund and the Intermediate Tax-Free Fund may purchase securities on a
when-issued basis. Use by the Intermediate Tax-Free Fund of one or more of these
investment techniques may cause such Fund to earn income which would be taxable
to its Shareholders.
The securities purchased by the Funds are generally traded on U.S. markets,
including the New York Stock Exchange, the American Stock Exchange and NASDAQ,
although each of the Diversified Equity Fund, Income Equity Fund, Special Equity
Fund and Income Fund may purchase 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").
During temporary defensive periods as determined by the Adviser or the
appropriate Sub-Adviser, as the case may be, based upon current or anticipated
market conditions, each Fund may hold up to 100% of its total assets in
Short-Term Obligations as described above or in cash. However, to the extent
that a Fund is so invested, it may not achieve its investment objective or
objectives.
Each of the Funds, other than the Money Market Fund, may invest in certain
types of securities which are considered to be "derivative" securities, such as
certain variable or floating rate securities, options and futures. 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. The Diversified Equity Fund, the Income Equity Fund,
the Special Equity Fund and the Intermediate Tax-Free Fund each will not invest
more than 25% of its total assets in such derivatives. With respect to the
Income Fund, such Fund may invest up to 35% of its total assets in CMOs and
asset-backed securities and up to 25% of its total assets in any other
derivatives. Notwithstanding the foregoing, with respect to the Income and
Intermediate Tax-Free Funds, there is no limitation on the amount of their total
assets which may be invested in variable or floating rate obligations regardless
of whether or not such obligations are deemed to be "derivatives."
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 Diversified Equity, Income
Equity and Special Equity Funds may invest are more volatile and carry more risk
than some other forms of investment, including investments in high grade fixed
income securities. Therefore, such Funds are 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 Income and Intermediate Tax-Free Funds invest in bonds, investors in
such a Fund, to the extent so invested, 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. While
16
<PAGE> 17
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 pre-payment features to be extended, thus
effectively converting short or intermediate term securities into longer term
securities which are generally more volatile in price.
The Special Equity Fund is intended for investors who can accept the higher
risks involved in seeking potentially higher capital appreciation through
investments in growth oriented companies. A growth oriented company typically
invests most of its net income in its enterprise and does not pay out much, if
any, in dividends. Accordingly, the Special Equity Fund does not anticipate any
significant distributions to shareholders from net investment income, and
potential investors should be in a financial position to forego current income
from their investment in the Special Equity Fund. The securities of less
seasoned companies may have limited marketability, and therefore may be less
liquid, and may be subject to more abrupt or erratic market movements over time
than securities of more seasoned companies or the market as a whole.
Depending upon the performance of each Funds' 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.
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 or Sub-Adviser, as the case may be, 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 "INVESTMENT OBJECTIVES AND
POLICIES--Additional Information on Portfolio Instruments--Repurchase
Agreements" in the Statement of Additional Information.
Reverse Repurchase Agreements. Each Fund may borrow funds 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 and
therefore a form of leverage. A Fund may experience a negative impact on its net
asset value if interest rates rise during the term of a reverse repurchase
agreement. A Fund generally will invest the proceeds of such borrowings only
when such borrowings will enhance the Fund's liquidity or when the Fund
reasonably expects that the interest income to be earned from the investment of
the proceeds is greater
17
<PAGE> 18
than the interest expense of the transaction. For further information about, and
limitations on the use of, reverse repurchase agreements, see investment
restriction no. 3 under "INVESTMENT RESTRICTIONS" below and "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, any Sub-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.
Options. The Diversified Equity Fund, the Income Equity Fund, the Special
Equity Fund and the Income Fund may also each purchase put and call options for
hedging purposes. Such Funds anticipate that options will be exchange traded
options, meaning that such options are generally standardized and are guaranteed
by a clearing agency, which is in contrast to over-the-counter or OTC 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
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 or the Sub-Adviser, as the case may be,
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.
Each of those Funds, as part of its options transactions, also may purchase
index put and call options and write index options. Through the writing or
purchase of index options a Fund can achieve many of the same objectives as
through the use of options on individual securities. Options on securities
indices are similar to options on a security except that, rather than the right
to take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option.
18
<PAGE> 19
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. Because index
options are settled in cash, a call writer cannot determine the amount of its
settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities. A Fund may be
required to segregate assets or provide an initial margin to cover index options
that would require it to pay cash upon exercise. 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 Intermediate Tax-Free Fund may acquire "puts" with respect to
Exempt Securities held in its portfolio. Under a put, the Intermediate Tax-Free
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 Intermediate Tax-Free 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 Intermediate Tax-Free 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 Intermediate Tax-Free 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).
Futures Contracts. Each Fund, other than the Money Market Fund, may also enter
into contracts for the future delivery of securities and futures contracts based
on a specific security, class of securities, interest rate or an index, purchase
or sell options on any such futures contracts and engage in related closing
transactions. A futures contract on a securities index or based on an interest
rate is an agreement obligating either party to pay, and entitling the other
party to receive, while the contract is outstanding, cash payments based on the
level of a specified securities index or interest rate, as the case may be. A
Fund may use this investment technique as a substitute for a comparable market
position in the underlying securities or to hedge against anticipated future
changes in market prices or interest rates, which otherwise might adversely
affect either the value of such Fund's securities or the prices of securities
which the Fund intends to purchase at a later date. Alternatively, a Fund may
purchase or sell futures contracts to hedge against changes in market interest
rates which may result in the premature call at par value of certain securities
which the Fund has purchased at a premium.
Each such Fund may engage in such futures contracts in an effort to hedge
against market risks. For example, when interest rates are expected to rise or
market values of portfolio securities are expected to fall, a Fund can seek
through the sale of futures contracts to offset a decline in the value of its
portfolio securities. When interest rates are expected to fall or market values
are expected to rise, a Fund, through the purchase of such contracts, can
attempt to secure better rates or prices for such Fund than might later be
available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a specified
price, to sell or to purchase the underlying futures contract, upon exercise of
the option, at any time during the option period. A Fund may also sell options
on futures contracts as
19
<PAGE> 20
part of closing purchase transactions to terminate its options positions. No
assurance can be given that such closing transactions can be effected, that
there will be a correlation between price movements in the Fund's portfolio
securities which are the subject of the hedge or of liquidity in the secondary
market for purposes of closing out future positions. In addition, a Fund's
purchase of such options will be based upon predictions as to anticipated
interest rate or other market trends, which could prove to be inaccurate.
In general, the value of futures contracts sold by a Fund to offset declines
in its portfolio securities will not exceed the total market value of the
portfolio securities to be hedged, and futures contracts purchased by a Fund
will be covered by a segregated account consisting of cash or liquid securities
in an amount equal to the total market value of such futures contracts, less the
initial margin deposited therefor.
When buying futures contracts and when writing put options, a Fund will be
required to segregate in a separate account cash and/or U.S. Government
securities in an amount sufficient to meet its obligations. When writing call
options, a Fund will be required to own the financial instrument or futures
contract underlying the option or segregate cash and/or U.S. Government
securities in an amount sufficient to meet its obligations under written calls.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed five percent of a Fund's total assets, and the
value of securities that are the subject of such futures and options (both for
receipt and delivery) may not exceed one-third of the market value of a Fund's
total assets. Futures transactions will be limited to the extent necessary to
maintain each Fund's qualifications as a regulated investment company.
A Fund may lose the expected benefit of futures transactions if interest rates
or securities prices move in an unanticipated manner. Such unanticipated changes
may also result in poorer overall performance than if the Fund had not entered
into any futures transactions. In addition, the value of a Fund's futures
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 interest rate and/or market risk and giving rise to additional risks.
For futures contracts based on indices, the risk of imperfect correlation
increases as the composition of the Fund's portfolio varies from the composition
of the index. In an effort to compensate for the imperfect correlation of
movements in the price of the securities being hedged and movements in the price
of futures contracts, a Fund may buy or sell futures contracts in a greater or
lesser dollar amount than the dollar amount of the securities being hedged if
the historical volatility of the futures contract has been less or greater than
that of the securities. Such "over hedging" or "under hedging" may adversely
affect the Fund's net investment results if the market does not move as
anticipated when the hedge is established.
Foreign Investments. As described above, each of the Diversified Equity,
Income Equity and Special Equity Funds may invest in sponsored and unsponsored
ADRs. ADRs are receipts typically issued by a United States bank or trust
company evidencing ownership of the underlying foreign securities and are
denominated in U.S. dollars. Unsponsored ADRs may be less liquid than sponsored
ADRs, and there may be less information available regarding the underlying
foreign issuer for unsponsored ADRs.
Investments in foreign securities, including ADRs, 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, fluctuations in exchange rates,
possible seizure, nationalization, or expropriation of foreign deposits or
investments, the possible establishment of exchange
20
<PAGE> 21
controls or taxation at the source, less stringent disclosure requirements, less
liquid or developed 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.
Securities Lending. In order to generate additional income, each Fund may,
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 or the Sub-Adviser, as the case may be. 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 on 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 or the Sub-Adviser, as the case may be, has determined are creditworthy
under guidelines established by the Group's Board of Trustees.
When-Issued and Delayed Delivery Transactions. The Income Fund and the
Intermediate Tax-Free Fund may 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. The
Income Fund and the Intermediate Tax-Free 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 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, the 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.
Restricted Securities. Securities in which the Diversified Equity Fund, the
Income Equity Fund, the Special Equity Fund and the Income Fund 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
21
<PAGE> 22
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, if at all, to other institutional
investors through or with the assistance of the issuer or investment dealers who
facilitate the resale of such Section 4(2) securities, thus providing some
liquidity.
Pursuant to procedures adopted by the Board of Trustees of the Group, the
Adviser, or the Sub-Adviser, as the case may be, may determine Section 4(2)
securities to be liquid if such securities are eligible for resale under Rule
144A under the 1933 Act and are readily saleable. Rule 144A permits a Fund to
purchase securities which have been privately placed and resell such securities
to certain qualified institutional buyers without restriction. For purposes of
determining whether a Rule 144A security is readily saleable, and therefore
liquid, the Adviser or the Sub-Adviser, as the case may be, must consider, among
other things, the frequency of trades and quotes for the security, the number of
dealers willing to purchase or sell the security and the number of potential
purchasers, dealer undertakings to make a market in the security, and the nature
of the security and marketplace trades of such security. However, investing in
Rule 144A securities, even if such securities are initially determined to be
liquid, could have the effect of increasing the level of the Fund's illiquidity
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities.
Investment Company Securities. Each Fund, other than the Money Market Fund,
may also invest in the securities of other investment companies in accordance
with the limitations of the 1940 Act and any exemptions therefrom. Each Fund
intends to invest in the securities of other investment companies which, in the
opinion of the Adviser or the Sub-Adviser, as the case may be, will assist such
Fund in achieving its investment objectives and 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. Additional restrictions on the Funds' investments in the securities of
other mutual funds are described 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 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.
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--Miscellan-
eous" herein).
Each of the 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 and
repurchase agreements secured by such obligations, if, immediately after such
purchase, more than 5% of such Fund's total assets would be invested in such
issuer, or
22
<PAGE> 23
such Fund would hold more than 10% of outstanding voting securities of such
issuer, except that up to 25% 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 or
repurchase agreements secured by such obligations.
2. Purchase any securities which would cause more than 25% 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 such obligations; (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.
3. Borrow money or issue senior securities except as and to the extent
permitted by the 1940 Act or any rule, order or interpretation thereunder. So
long as the Money Market Fund's borrowings, including reverse repurchase
agreements and dollar roll agreements, exceed 5% of such Fund's total assets,
the Money Market Fund will not acquire any portfolio securities.
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:
1. The Money Market Fund will not 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.
2. Each of the other Funds will not 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, 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
23
<PAGE> 24
Day of such Fund. 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.
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) 766-8938.
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
24
<PAGE> 25
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 1st Source Monogram Funds, P.O.
Box 182084, Columbus, Ohio 43218-2084. 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 Funds' 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) 766-8938 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 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 funds 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.
For orders for the purchase of Shares of any 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 Business Day.
25
<PAGE> 26
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 an 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.
1ST SOURCE MONOGRAM INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
A 1st Source Monogram IRA enables individuals, even if they participate in an
employer-sponsored retirement plan, to establish their own retirement program.
1st Source Monogram 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 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 1st Source Monogram IRA distribution requests must be made in writing to
the Distributor. Any deposits to a 1st Source Monogram IRA must distinguish the
type and year of the contributions.
For more information on the 1st Source Monogram IRAs call the Group at (800)
766-8938. Investment in Shares of the Intermediate Tax-Free Fund or any other
tax-exempt fund would not be appropriate for a 1st Source Monogram IRA.
Shareholders are advised to consult a tax adviser on 1st Source Monogram IRA
contribution and withdrawal requirements and restrictions.
AUTO INVEST PLAN
The 1st Source Monogram Funds Auto Invest Plan enables Shareholders to make
regular semi-monthly, 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 described below) from the
Shareholder's bank account which will automatically be invested in Shares of the
designated Fund at the public offering price next determined after receipt of
payment by the Transfer Agent. 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) 766-8938. 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.
26
<PAGE> 27
MINIMUM INVESTMENT
The following table sets forth the minimum requirements for initial purchases
of a Fund's Shares and any subsequent purchases made thereafter. As the table
shows, these requirements may vary depending upon the method or methods used by
the purchaser to invest in the Funds.
<TABLE>
<CAPTION>
MINIMUM MINIMUM
REQUIREMENTS REQUIREMENTS
FOR FOR
METHOD OF INITIAL SUBSEQUENT
PURCHASE PURCHASES PURCHASES
- ---------------- --------------- ------------
<S> <C> <C>
For purchases
other than
through the Auto
Invest Plan:
Non-IRA....... $1,000 per Fund $25 per Fund
IRAs.......... $1,000 per Fund $25 per Fund
For purchases
made through the
Auto Invest
Plan:
Non-IRA....... $ 25 per Fund $25 per Fund
IRAs.......... $ 250 per Fund $25 per Fund
</TABLE>
SPECIAL PURCHASE PROGRAMS FOR EMPLOYEES OF THE ADVISER OR ONE OF ITS AFFILIATES
The Adviser has arranged for lower minimum requirements for its employees and
the employees of its affiliates (collectively, "Employees") to invest in the
Funds. Regardless of the method chosen by an Employee to purchase Shares (e.g.,
whether or not for an IRA and whether or not through the Auto Invest Plan), all
initial purchases of Shares in a Fund must be for a dollar amount of not less
than $10 and all subsequent purchases of Shares in that Fund must be for a
dollar amount of not less than $10.
Employees should note that regardless of the amount that they use to open a
1st Source Monogram IRA, the annual fee of $10 will be deducted from their IRA
account each December. Therefore, if an Employee opens a 1st Source Monogram IRA
account with only the minimum investment and does not add to it during that
year, the annual fee may reduce the Employee's IRA account balance to $0.
IN-KIND PURCHASES
Payment for Shares of a Fund may, in the discretion of the Adviser, be made in
the form of securities that are permissible investments for that Fund as
described in this Prospectus. For further information about this form of
payment, contact the Adviser. In connection with an in-kind securities payment,
a Fund will require, among other things, that the securities be valued on the
date of purchase in accordance with the pricing methods used by the Fund and
that the Fund receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form of transfer to the Fund; and that adequate information be provided
concerning the basis and other tax matters relating to the securities.
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 calculated 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 1933 Act.
There is no sales charge imposed by the Money Market Fund in connection with
the purchase of its Shares.
27
<PAGE> 28
DIVERSIFIED EQUITY, INCOME EQUITY
AND SPECIAL EQUITY FUNDS
<TABLE>
<CAPTION>
DEALER
DISCOUNTS
SALES SALES CHARGE AND BROKERAGE
AMOUNT OF CHARGE AS % OF COMMISSIONS
TRANSACTION AS % OF PUBLIC AS % OF
AT PUBLIC NET AMOUNT OFFERING PUBLIC
OFFERING PRICE INVESTED PRICE OFFERING PRICE
- --------------- ----------- ------------- ---------------
<S> <C> <C> <C>
Less than
$50,000....... 5.26% 5.00% 4.50%
$50,000 but
less than
$100,000...... 4.17 4.00 3.60
$100,000 but
less than
$250,000...... 3.09 3.00 2.70
$250,000 but
less than
$500,000...... 2.04 2.00 1.80
$500,000 but
less than
$1,000,000.... 1.52 1.50 1.35
$1,000,000 or
more.......... 0 0 0
</TABLE>
INCOME AND INTERMEDIATE TAX-FREE FUNDS
<TABLE>
<CAPTION>
DEALER
DISCOUNTS
SALES SALES CHARGE AND BROKERAGE
AMOUNT OF CHARGE AS % OF COMMISSIONS
TRANSACTION AS % OF PUBLIC AS % OF
AT PUBLIC NET AMOUNT OFFERING PUBLIC
OFFERING PRICE INVESTED PRICE OFFERING PRICE
- --------------- ----------- ------------- ---------------
<S> <C> <C> <C>
Less than
$50,000....... 4.17% 4.00% 3.60%
$50,000 but
less than
$100,000...... 3.63 3.50 3.15
$100,000 but
less than
$250,000...... 3.09 3.00 2.70
$250,000 but
less than
$500,000...... 2.04 2.00 1.80
$500,000 but
less than
$1,000,000.... 1.52 1.50 1.35
$1,000,000 or
more.......... 0 0 0
</TABLE>
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 own expense, will also provide additional compensation to
dealers in connection with sales of Shares 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 luxury resorts at an exotic location, (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) Accounts for which FSC, the Adviser, banks and trust companies or one of
their affiliates acts in a fiduciary, advisory, agency, custodial (other than
for individual retirement accounts), or similar capacity;
(2) Officers, trustees, directors, employees and retired employees (including
spouses and children under the age of 21 of the foregoing) of FSC, the Adviser,
the Group, BISYS and any affiliates thereof;
28
<PAGE> 29
(3) Purchasers pursuant to the terms of a payroll deduction plan, a 401(k)
plan or a 403(b) plan which by its terms permits purchases of Shares of the
Funds;
(4) Purchasers using solely the proceeds from a distribution from an account
for which the Adviser or an affiliate serves in a trust, fiduciary or agency
capacity (this waiver only applies to the initial purchase of Shares with such
proceeds);
(5) Brokers, dealers and agents for their own account, who have a sales
agreement with the Distributor, and their employees (and their spouses and
children under the age of 21);
(6) Orders placed on behalf of other investment companies distributed by The
BISYS Group, Inc. or its affiliated companies, including the Distributor;
(7) Investment advisers or financial planners regulated by a federal or state
governmental authority who are purchasing Shares for their own account or for an
account for which they are authorized to make investment decisions (i.e., a
discretionary account) and who charge a management, consulting or other fee for
their services, and clients of such investment advisers or financial planners
who place trades for their own accounts if the accounts are linked to the master
account of such investment adviser or financial planner on the books and records
of a broker or agent; and
(8) Investors purchasing Shares with proceeds from a redemption of shares of
another open-end investment company (other than the Group) on which a sales
charge was paid if (i) such redemption occurred with sixty (60) days prior to
the date of the purchase order and (ii) satisfactory evidence of the purchaser's
eligibility is provided to the Distributor at the time of purchase (e.g., a
confirmation of the redemption).
The Distributor may change or eliminate the foregoing waivers at any time or
from time to time without notice thereof. 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 sold with a sales charge ("1st Source Monogram Load Funds"). For
example, if a Shareholder concurrently purchases Shares in the Diversified
Equity Fund at the total public offering price of $25,000 and Shares in the
Income Fund at the total public offering price of $30,000, the sales charge on
the Shares of the Funds so sold would be that applicable to a $55,000 purchase
as shown in the tables above, i.e., 4.00% for the Shares of the Diversified
Equity Fund and 3.50% for Shares of the Income Fund. 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
1st Source Monogram Load 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
29
<PAGE> 30
letters of intent, interested investors should contact the Group at (800)
766-8938.
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 1st Source Monogram Load Fund at the public offering price
applicable to the total of (a) the total public offering price of the Shares of
the 1st Source Monogram 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 1st Source Monogram Load Funds. For example, if a
Shareholder held Shares of the Special Equity Fund and the Income Fund with a
total net asset value of $200,000 and wanted to invest $60,000 in the Income
Equity Fund, the sales charge applicable to such $60,000 investment in the
Income Equity Fund would be 2.00%. 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 accumulation, however, may be modified or
eliminated at any time or from time to time by the Group without notice.
EXCHANGE PRIVILEGE
Shares of a 1st Source Monogram Load Fund may be exchanged for Shares of any
of the other 1st Source Monogram 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 1st Source Monogram Load Fund and
the sales charge previously paid on the Fund Shares to be exchanged. When Shares
of the Money Market Fund are exchanged for Shares of a 1st Source Monogram 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 or to pay a reduced sales charge. Provided further, that with respect to
every exchange, the amount to be exchanged must meet the appli-
30
<PAGE> 31
cable minimum investment requirements and the exchange is made in states where
it is legally authorized.
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 1st
Source Monogram Load 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.
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) 766-8938 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
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 or mailed di-
31
<PAGE> 32
rectly to the Shareholder at the Shareholder's address as recorded by the
Transfer Agent. Under most circumstances, such payments will be transmitted on
the next Business Day following receipt of a valid request for redemption. 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)
766-8938.
Neither the Group, 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 $25 monthly. To participate in the Auto
Withdrawal Plan, Shareholders should call (800) 766-8938 for more information.
Purchases of additional Shares 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 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.
32
<PAGE> 33
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 by
an employee of the Adviser or one of its affiliates or by using the Auto Invest
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 not less than 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 generally paid
monthly on the first Business Day of the following month. However, from time to
time such dividends may be paid on the last Business Day of the preceding month.
A dividend for each of the other Funds, other than the Special Equity Fund, is
declared monthly at the close of business on the day of declaration and is
generally paid monthly. A dividend for the Special Equity Fund is declared
quarterly at the close of business on the day of declaration and is generally
paid quarterly. Each such dividend consists of an amount of accumulated
undistributed net income of that Fund as determined necessary or appropriate by
the appropriate officers of the Group.
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.
33
<PAGE> 34
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 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 Internal Revenue Code of 1986 (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, except as discussed below with respect to the Intermediate
Tax-Free Fund, 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, the Income
Fund's and the Intermediate Tax-Free Fund's net investment income is expected to
be derived from earned interest and short-term 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
34
<PAGE> 35
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--Addi-
tional 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.
The Intermediate Tax-Free Fund. The Intermediate Tax-Free 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
Intermediate Tax-Free Fund and will be excludable from gross income for federal
income tax purposes and is not expected to be treated as a preference item for
computing the alternative minimum tax.
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 Intermediate Tax-Free 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 Intermediate Tax-Free Fund anticipates that substantially all of its
dividends will be excluded from gross income for federal income tax purposes.
The Intermediate Tax-Free 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 Intermediate Tax-Free Fund is not deductible for federal
income tax purposes assuming the Intermediate Tax-Free Fund distributes
exempt-interest dividends during the Shareholder's taxable year. It is
anticipated that distributions from the Intermediate Tax-Free Fund will not be
eligible for the dividends received deduction for corporations.
STATE TAXES
Even though a substantial portion of distributions of net income by the Money
Market Fund to its Shareholders will be attributable to interest on U.S.
Treasury obligations, which may be exempt from state or local tax if received
directly by a Shareholder, Shareholders of the Money Market Fund may be subject
to state and local taxes with respect to their ownership of Shares or their
receipt of distributions from
35
<PAGE> 36
the Money Market Fund. In addition, to the extent Shareholders receive
distributions of income attributable to investments in repurchase agreements by
the Money Market Fund, such distributions may also be subject to state or local
taxes.
MANAGEMENT OF THE GROUP
TRUSTEES OF THE GROUP
Overall responsibility for management of the Group rests with its Board of
Trustees. At any given time all Trustees of the Group may not have been elected
by 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 or BISYS Fund Services Inc., the sole general
partner of BISYS, 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, Inc. receives fees from each of the
Funds for acting as Transfer Agent and for providing certain fund accounting
services.
INVESTMENT ADVISER
1st Source Bank, 100 North Michigan Street, South Bend, Indiana 46601, is the
investment adviser of each Fund. The Adviser is a wholly owned subsidiary of 1st
Source Corporation, a publicly held bank holding company ("FSC"). The Adviser
was founded in 1936, and while it has not previously served as an investment
adviser to an open-end management investment company, the Adviser and its
affiliates administer and manage, on behalf of their clients, trust assets which
as of December 31, 1996, totalled approximately $1.25 billion. Of such amount,
approximately $512 million are managed on behalf of personal trust customers and
approximately $739 million are managed on behalf of employee benefit plans. The
Adviser has over 60 years of banking experience and as of December 31, 1996,
had, on a consolidated basis with FSC, over $2.07 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, makes decisions with respect to and places orders for all
purchases and sales of portfolio securities for the Money Market Fund, the
Income Equity Fund, the Special Equity Fund, the Income Fund and the
Intermediate Tax-Free Fund, and, through the Sub-Advisers, the Diversified
Equity Fund.
For the services provided and expenses assumed pursuant to its investment
advisory agreement 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 (0.35%) of such Fund's average daily net assets; with respect to the
Diversified Equity Fund, the annual rate of one hundred ten one-hundredths of
one percent (1.10%) of such Fund's average daily net assets; with respect to the
Income Equity Fund, the annual rate of eighty one-hundredths of one percent
(0.80%) of such Fund's average daily net assets; with respect to the Special
Equity Fund, the annual rate of eighty one-hundredths of one percent (0.80%) of
such Fund's average daily net assets; with respect to the Income Fund, the
annual rate of fifty-five one--
36
<PAGE> 37
hundredths of one percent (0.55%) of such Fund's average daily net assets; and
with respect to the Intermediate Tax-Free Fund, the annual rate of fifty-five
one-hundredths of one percent (0.55%) of such Fund's average daily net assets.
While the fees of the Adviser with respect to the Diversified Equity, Special
Equity and Income Equity Funds are higher than similar fees paid by most mutual
funds, the Board of Trustees believes such fees to be fair and reasonable.
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 after the end of the fiscal year in which the
fees were reduced. 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.
Ralph Shive is the portfolio manager of the Income Equity Fund. Mr. Shive has
served as Vice President and an investment officer of the Adviser since
September, 1989. Generally, Mr. Shive has worked as an analyst and portfolio
manager for 20 years after receiving his BBA from Southern Methodist University.
Prior to joining the Adviser, he was employed by a brokerage firm and a private
investment partnership in Dallas, Texas. He is a Chartered Financial Analyst and
manages the Income Equity Fund as well as individual portfolios with a focus on
"value" investing.
J. Gregory Turner is the portfolio manager of the Special Equity Fund. Mr.
Turner has served as an investment officer of the Adviser since 1994. Prior
thereto and since October, 1986 he worked for IAA Trust Company, Bloomington,
Illinois, as a portfolio manager. Generally, Mr. Turner has worked as an analyst
and portfolio manager for 10 years after receiving his BS from Illinois State
University and a masters degree in management from Purdue University. As a
Chartered Financial Analyst, Mr. Turner manages individual portfolios, the
Special Equity Fund, and other growth equity accounts.
John S. Seidl is the portfolio manager of the Money Market Fund and since
March 17, 1997, has served as the portfolio manager of the Income Fund and the
Intermediate Tax-Free Fund. Mr. Seidl has served as Vice President and a Senior
Investment Officer of the Adviser since 1985, and Mr. Seidl heads the Investment
Division at the Adviser. He has worked more than 21 years as an Analyst and
Senior Portfolio Manager after receiving his BBA from the University of Notre
Dame. Mr. Seidl is a Chartered Financial Analyst who focuses his efforts on the
fixed income market, along with being responsible for the overall investment
strategy of the department.
THE SUB-ADVISERS
Pursuant to the terms of its Investment Advisory Agreement with the Group, the
Adviser has entered into Sub-Investment Advisory Agreements with each of:
Miller, Anderson, One Tower Bridge, Suite 1100, West Conshohocken, Pennsylvania
19428; Loomis, 3 First National Plaza, Suite 5450, Chicago, Illinois 60600; and
Columbus, One Station Place, Stamford, Connecticut 06902. Pursuant to the terms
of such Sub-Investment Advisory Agreements, each of the Sub-Advisers has been
retained by the Adviser to manage the day-to-day investment and reinvestment of
a designated portion of the assets of the Diversified Equity Fund, subject to
the direction and control of the Group's Board of Trustees, and the Adviser is
responsible for selecting and monitoring each Sub-Adviser and reporting the
activities of each Sub-Adviser to the Company's Board of Trustees.
Miller, Anderson is wholly owned by Morgan Stanley Group, Inc., 1585 Broadway,
New York, New York 10036. Miller, Anderson was founded in 1969 and was acquired
by Morgan Stanley Group, Inc. ("Morgan Stanley") in
37
<PAGE> 38
1995. On February 5, 1997, Morgan Stanley announced its intention to merge with
and into Dean Witter, Discover & Co. Upon consummation of that merger, Miller,
Anderson will be wholly owned by Morgan Stanley, Dean Witter, Discover & Co.
Miller, Anderson provides advice primarily to institutions, including other
investment companies, and currently has approximately $35 billion in assets
under management, of which approximately $2.4 billion is managed using Miller
Anderson's value style as described above. Robert J. Marcin, CFA, is primarily
responsible for the day-to-day management of that portion of the Diversified
Equity Fund's portfolio managed by Miller Anderson. Mr. Marcin has been a
Partner with Miller Anderson since 1994, and has had more than 14 years of
investment experience.
Loomis is a limited partnership, the sole general partner of which is Loomis,
Sayles & Company, Incorporated, One Financial Center, Boston, Massachusetts
02111. All of the outstanding shares of Loomis, Sayles & Company, Incorporated
are owned by New England Investment Companies, L.P., a publicly-traded limited
partnership ("NEIC"). As a result of the merger of New England Mutual Life
Insurance Company with and into Metropolitan Life Insurance Company ("MET") on
August 30, 1996, MET holds approximately 55% of the outstanding limited
partnership units of NEIC. Loomis was founded in 1926 and has approximately $51
billion in assets under management. The Chicago office of Loomis was founded in
1952, and has currently approximately 62 clients and $4 billion in assets under
management. Jerry Castellini is primarily responsible for the day-to-day
management of that portion of the Diversified Equity Fund's portfolio managed by
Loomis. Mr. Castellini has been Managing Partner of Loomis since January, 1994,
a Director since February, 1995 and has had more than 16 years of investment
experience.
Columbus, a general partnership formed on September 9, 1994, is registered as
an investment adviser under the Investment Advisers Act of 1940 and acquired the
business operated by Columbus' predecessor since 1975. PIMCO Advisors L.P.
("PIMCO") and Columbus Circle Investors Management Inc. ("CCI"), a wholly owned
subsidiary of PIMCO, are the general partners of Columbus. Columbus serves as
sub-adviser to other mutual funds and also advises and manages individual
accounts, profit sharing and pension funds and institutional accounts. PIMCO's
general partner is a general partnership with two partners: (i) an indirect
wholly owned subsidiary of Pacific Mutual Life Insurance Company; and (ii) PIMCO
Partners, L.L.C., a limited liability company, all of the interests of which are
held directly by the 11 managing directors of Pacific Investment Management
Company, a subsidiary of PIMCO.
Columbus currently has approximately $13 billion in assets under management,
of which approximately $8 billion is managed using the sector rotation style of
management (known as Positive Momentum & Positive Surprise) described above.
Although Columbus operates on a team style management basis, Daniel S. Pickett,
CFA, is primarily responsible for the day-to-day management of that portion of
the Diversified Equity Fund's portfolio managed by Columbus. Mr. Pickett has
been with Columbus since June, 1988, and a Managing Director of Columbus since
1994, and has had more than 11 years of investment experience.
For its services provided and expenses assumed pursuant to its Sub-Investment
Advisory Agreement with the Adviser, each of Miller, Anderson, Loomis and
Columbus receives from the Adviser a fee (computed daily and paid monthly as a
percentage of that portion of the Diversified Equity Fund's average daily net
assets managed by that Sub-Adviser) at the following annual rates: for Miller
Anderson, 0.625% up to $25,000,000 and 0.375% of the excess over $25,000,000;
for Loomis, 0.65% up to $5,000,000 and 0.50% of the excess over $5,000,000; and
for Columbus, 1.00% up to
38
<PAGE> 39
$10,000,000 and 0.50% of the excess over $10,000,000.
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, 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 (0.20%) 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 fee reduction.
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. Each Fund will bear the following
expenses relating to its operations: organizational expenses, taxes, interest,
any brokerage fees and commissions, fees and expenses of the Trustees of the
Group, Commission fees, state securities notification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to the
Fund's current shareholders, outside auditing and legal expenses, advisory fees,
fund accounting fees, fees and out-of-pocket expenses of the custodian and
Transfer Agent, costs for independent pricing services, certain insurance
premiums, costs of maintenance of the Group's existence, costs of shareholders'
reports and meetings, distribution expenses incurred pursuant to the
Distribution and Shareholder Service Plan described below, administrative
services expenses incurred pursuant to the Administrative Services Plan
described below and any extraordinary expenses incurred in the Fund's operation.
DISTRIBUTION AND SHAREHOLDER SERVICE 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 BISYS, as Distributor, a fee in an amount not to exceed on an
annual basis 0.25% of the average daily
39
<PAGE> 40
net asset value of that Fund (the "12b-1 Fee"). Payments of the 12b-1 Fee to
BISYS pursuant to the Plan will be used (i) to compensate Participating
Organizations (as defined below) for providing distribution assistance relating
to Shares of a Fund, (ii) for promotional activities intended to result in the
sale of Shares of the Funds such as to pay for the preparation, printing and
distribution of prospectuses to other than current shareholders, and (iii) to
compensate Participating Organizations for providing shareholder services with
respect to their customers who are, from time to time, beneficial and record
holders of Shares of the Fund.
Participating Organizations include banks, broker-dealers and other financial
institutions (including BISYS, FSC, the Adviser and their affiliates). Such fee
paid to BISYS may exceed the actual costs incurred by BISYS in providing such
services and/or compensating such Participating Organizations. In addition, from
time to time, BISYS may periodically voluntarily reduce all or a portion of its
fee under the Plan with respect to a Fund to increase the net income of that
Fund available for distribution as dividends. BISYS may not seek reimbursement
of such reduced fees after the end of the fiscal year in which the fees were
reduced. 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.
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 of the date hereof, no such servicing
agreements have been entered into by the Group with respect to the Funds.
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, as described in this Prospectus, without
violation of applicable banking laws and regulations, and has so represented in
its investment advisory agreement with the Group. Future changes in Federal or
state statutes and regulations relating to permissible activities of banks
40
<PAGE> 41
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
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 seventeen funds, each having its own class of shares. In addition to
the Funds, the Group consists of the following funds: Riverside Capital Money
Market Fund, Riverside Capital Value Equity Fund, Riverside Capital Fixed Income
Fund, Riverside Capital Low Duration Government Securities Fund, Riverside
Capital Growth Fund, Riverside Capital Tennessee Municipal Obligations Fund, The
KeyPremier Prime Money Market Fund, The KeyPremier Pennsylvania Municipal Bond
Fund, The KeyPremier Established Growth Fund, The KeyPremier Intermediate Term
Income Fund and The KeyPremier Aggressive Growth Fund. 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 the fund as are declared at the discretion of the Trustees
(see "Miscellaneous" below).
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 the Group's
investment advisory agreement with respect to that Fund 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, although
Trustees may, under certain circumstances, fill vacancies, including vacancies
created by expanding the size of the Board. Trustees 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.
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 March 3, 1997, the Adviser possessed, on behalf of its underlying
accounts, voting or investment power with respect to more than 25% of the
outstanding Shares of the Diversi-
41
<PAGE> 42
fied Equity, Income Equity, Special Equity and Income Funds. As of such date,
neither the Money Market Fund nor the Intermediate Tax-Free Fund had commenced
operations.
CUSTODIAN
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263, serves
as the custodian for each of the Funds.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035,
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, 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 the Fund's average daily net assets or
(b) $50,000 minus the fee paid by such Fund under its Management and
Administration Agreement with BISYS. See "Management of the Group--Transfer
Agency and Fund Accounting Services" in the Statement of Additional Information
for further information.
While BISYS Fund Services, Inc. is a distinct legal entity from BISYS (the
Group's administrator and distributor), BISYS Fund Services, 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, Inc. is the general partner of BISYS.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual reports
audited by independent accountants.
As used in this Prospectus and in the Statement of Additional Information,
"assets belonging to the 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)
766-8938.
42
<PAGE> 43
INVESTMENT ADVISER
1st Source Bank
100 North Michigan Street
South Bend, Indiana 46634
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services Limited Partnership
3435 Stelzer Road
Columbus, Ohio 43219
LEGAL COUNSEL
Baker & Hostetler LLP
65 East State Street
Columbus, Ohio 43215
AUDITORS
Coopers & Lybrand L.L.P.
100 East Broad Street
Columbus, Ohio 43215
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY................... 2
FEE TABLE............................ 4
FINANCIAL HIGHLIGHTS................. 5
PERFORMANCE INFORMATION.............. 7
INVESTMENT OBJECTIVES AND POLICIES... 9
INVESTMENT RESTRICTIONS.............. 22
VALUATION OF SHARES.................. 23
HOW TO PURCHASE AND REDEEM SHARES.... 24
DIVIDENDS AND TAXES.................. 33
MANAGEMENT OF THE GROUP.............. 36
GENERAL INFORMATION.................. 41
</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.
LOGO
U.S. TREASURY OBLIGATIONS
MONEY MARKET FUND
DIVERSIFIED EQUITY FUND
INCOME EQUITY FUND
SPECIAL EQUITY FUND
INCOME FUND
INTERMEDIATE TAX-FREE BOND FUND
1ST SOURCE BANK
Investment Adviser
Prospectus dated
April 1, 1997
<PAGE> 44
Rule 497(c)
File No. 811-5545
Registration No. 33-21489
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
1st Source Monogram Intermediate Tax-Free Bond Fund
Each an Investment Portfolio of
THE SESSIONS GROUP
Statement of Additional Information
April 1, 1997
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the prospectus (the "Prospectus") of 1st
Source Monogram U.S. Treasury Obligations Money Market Fund (the "Money Market
Fund"), 1st Source Monogram Diversified Equity Fund (the "Diversified Equity
Fund"), 1st Source Monogram Income Equity Fund (the "Income Equity Fund"), 1st
Source Monogram Special Equity Fund (the "Special Equity Fund"), 1st Source
Monogram Income Fund (the "Income Fund"), and 1st Source Monogram Intermediate
Tax-Free Bond Fund (the "Intermediate Tax-Free Fund") (the Money Market Fund,
the Diversified Equity Fund, the Income Equity Fund, the Special Equity Fund,
the Income Fund and the Intermediate Tax-Free 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)
766-8938.
<PAGE> 45
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
THE SESSIONS GROUP............................................................................................ B-1
INVESTMENT OBJECTIVES AND POLICIES............................................................................ B-1
Additional Information on Portfolio Instruments...................................................... B-1
Investment Restrictions.............................................................................. B-12
Portfolio Turnover................................................................................... B-13
NET ASSET VALUE............................................................................................... B-14
Valuation of the Money Market Fund................................................................... B-14
Valuation of the Other Funds......................................................................... B-15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................................................ B-15
MANAGEMENT OF THE GROUP....................................................................................... B-16
Trustees and Officers................................................................................ B-16
Investment Adviser................................................................................... B-19
Portfolio Transactions............................................................................... B-22
Glass-Steagall Act................................................................................... B-24
Administrator........................................................................................ B-25
Distributor.......................................................................................... B-27
Administrative Services Plan......................................................................... B-28
Custodian............................................................................................ B-29
Transfer Agency and Fund Accounting Services......................................................... B-29
Auditors ............................................................................................ B-30
Legal Counsel........................................................................................ B-30
ADDITIONAL INFORMATION........................................................................................ B-31
Description of Shares................................................................................ B-31
Additional Tax Information........................................................................... B-32
Seven-Day Yield and 30-Day Yield of the Money Market
Fund........................................................................................ B-38
Yields of the Other Funds............................................................................ B-38
Calculation of Total Return.......................................................................... B-39
Distribution Rates................................................................................... B-40
Performance Comparisons.............................................................................. B-40
Miscellaneous........................................................................................ B-41
FINANCIAL STATEMENTS.......................................................................................... B-43
APPENDIX ...................................................................................................... A-1
</TABLE>
- i -
<PAGE> 46
STATEMENT OF ADDITIONAL INFORMATION
THE SESSIONS GROUP
The Sessions Group (the "Group") is an open-end management investment
company which currently offers 17 separate investment portfolios. This
Statement of Additional Information deals with six of such portfolios, 1st
Source Monogram U.S. Treasury Obligations Money Market Fund (the "Money Market
Fund"), 1st Source Monogram Diversified Equity Fund (the "Diversified Equity
Fund"), 1st Source Monogram Income Equity Fund (the "Income Equity Fund"), 1st
Source Monogram Special Equity Fund (the "Special Equity Fund"), 1st Source
Monogram Income Fund (the "Income Fund") and 1st Source Monogram Intermediate
Tax-Free Bond Fund (the "Intermediate Tax-Free Fund"), each a diversified
portfolio of the Group (the Money Market Fund, the Diversified Equity Fund, the
Income Equity Fund, the Special Equity Fund, the Income Fund and the
Intermediate Tax-Free 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. Capitalized
terms not defined herein are defined in the 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 objectives and
policies of each Fund as set forth in the Prospectus.
Bank Obligations. Each of the Funds, other than the Money Market Fund,
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 return. Certificates of deposit
and demand and time deposits will be those of domestic banks and savings and
loan associations, if (a) at the time of investment the depository institution
has
<PAGE> 47
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.
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.
The Funds, other than 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
Funds may also invest in commercial paper that is not rated but that is
determined by the Adviser or the applicable Sub-Adviser, as the case may be, to
be of comparable quality to instruments that are so rated 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.
Variable Amount Master Demand Notes. Variable amount master demand
notes, in which the Income 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, issuers of variable amount master demand notes (which are normally
manufacturing, retail, financial and other business concerns), must satisfy,
for purchase by the Income Fund, the same criteria as set forth above for
commercial paper for such Fund. 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 longer 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
issuers, including ADRs, 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.
B-2
<PAGE> 48
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 or the applicable Sub-Adviser, as the case may be, believes
the risks associated with such investments are minimal.
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
Intermediate Tax-Free Fund will be primarily invested in Exempt Securities.
Under normal market conditions, at least 80% of the net assets of the
Intermediate Tax-Free Fund will be invested in Exempt Securities.
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.
Among other types of Exempt Securities, the Intermediate Tax-Free 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 Intermediate Tax-Free Fund may invest in other
types of tax-exempt instruments, such as municipal 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
B-3
<PAGE> 49
credit of the United States through agreements with the issuing authority which
provide that, if required, the federal government 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
Intermediate Tax-Free 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 Intermediate Tax-Free 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 Income and the Intermediate
Tax-Free Funds may each 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 par value. 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 par value. Such notes are frequently
not rated by credit
B-4
<PAGE> 50
rating agencies; however, unrated variable and floating rate notes purchased by
such Funds will be determined by the Adviser 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
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.
Restricted Securities. Securities in which the Diversified Equity,
Income Equity, Special Equity and Income 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 make a market in 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. Each such Funds will each limit its investment in Section
4(2) securities to not more than 10% of its net assets.
Options Trading. Each of the Diversified Equity Fund, the Income
Equity Fund, the Special Equity Fund and the Income Fund may
B-5
<PAGE> 51
purchase and write (sell) 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 such 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 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 a call
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.
Each such Fund may also purchase or sell (write) index options. Index
options (or options on securities indices) are similar in many respects to
options on securities except that an index option gives the holder the right to
receive, upon exercise, cash instead of securities, if the closing level of the
securities index upon which the option is based is greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the option.
Puts. The Intermediate Tax-Free 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 Intermediate Tax-Free Fund may sell, transfer, or
assign a put only in conjunction with the sale, transfer, or assignment of the
underlying security or securities.
The amount payable to the Intermediate Tax-Free Fund upon its exercise
of a "put" is normally (i) the Intermediate Tax-Free
B-6
<PAGE> 52
Fund's acquisition cost of the Exempt Securities (excluding any accrued
interest which the Intermediate Tax-Free Fund paid on the acquisition), less
any amortized market premium or plus any amortized market or original issue
discount during the period the Intermediate Tax-Free 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 Intermediate Tax-Free Fund to facilitate
the liquidity of its portfolio assets. Puts may also be used to facilitate the
reinvestment of the Intermediate Tax-Free 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 Intermediate Tax-Free 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 Intermediate
Tax-Free 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 Intermediate Tax-Free Fund intends to enter into puts only with
dealers, banks, and broker-dealers which, in the Adviser's opinion, present
minimal credit risks.
Future Contracts. As discussed in the Prospectus, each of the Funds,
other than the Money Market Fund, may enter into futures contracts. This
investment technique is designed primarily to hedge against anticipated future
changes in market conditions which otherwise might adversely affect the value
of securities which a Fund holds or intends to purchase. For example, when
interest rates are expected to rise or market values of portfolio securities
are expected to fall, a Fund can seek through the sale of futures contracts to
offset a decline in the value of its portfolio securities. When interest rates
are expected to fall or market values are expected to rise, a Fund, through the
purchase of such contracts, can attempt to secure better rates or prices for
the Fund than might later be available in the market when it effects
anticipated purchases.
The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a specified
price, to sell or to purchase the underlying futures contract, upon exercise of
the option, at any time during the option period.
B-7
<PAGE> 53
Futures transactions involve brokerage costs and require a Fund to
segregate liquid assets, such as cash, U.S. Government securities or other
liquid high grade debt obligations, to cover its performance under such
contracts. A Fund may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund had not entered into any futures
transactions. In addition, the value of a Fund's futures positions may not
prove to be perfectly or even highly correlated with the value of its portfolio
securities, limiting the Fund's ability to hedge effectively against interest
rate and/or market risk and giving rise to additional risks. There is no
assurance of liquidity in the secondary market for purposes of closing out
futures positions.
Regulatory Restrictions. To the extent required to comply with
Securities and Exchange Commission Release No. IC-10666, when purchasing a
futures contract or writing a put option, a Fund will maintain in a segregated
account cash or liquid high-grade securities equal to the value of such
contracts.
To the extent required to comply with Commodity Futures Trading
Commission Regulation 4.5 and thereby avoid being classified as a "commodity
pool operator," a Fund will not enter into a futures contract or purchase an
option thereon if immediately thereafter the initial margin deposits for
futures contracts held by such Fund plus premiums paid by it for open options
on futures would exceed 5% of such Fund's total assets. A Fund will not engage
in transactions in financial futures contracts or options thereon for
speculation, but only to attempt to hedge against changes in market conditions
affecting the values of securities which such Fund holds or intends to
purchase.
When-Issued Securities. As discussed in the Prospectus, the Income
Fund and the Intermediate Tax-Free Fund may each purchase securities on a
"when-issued" basis (i.e., for delivery beyond the normal settlement date at a
stated price and yield). When such 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, such 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 a Fund's net assets will fluctuate to a
greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. In addition, because a Fund will set
aside cash or liquid portfolio securities to satisfy its purchase commitments
in the manner described above,
B-8
<PAGE> 54
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, neither the Income Fund's nor the Intermediate Tax-Free Fund's
commitment to purchase "when-issued" or "delayed-delivery" securities will
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. The Income Fund and the Intermediate Tax-Free
Fund will each engage in "when-issued" delivery transactions only for the
purpose of acquiring portfolio securities consistent with that Fund's
investment objectives and policies and not for investment leverage.
Mortgage-Related Securities. The Income 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 or
issued by nongovernmental entities.
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 the Income 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
B-9
<PAGE> 55
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 the Income Fund. In addition, regular payments received in
respect of mortgage-related securities include both interest and principal. No
assurance can be given as to the return the Income Fund will receive when these
amounts are reinvested.
The Income Fund may also invest 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. 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"). 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 FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
B-10
<PAGE> 56
Repurchase Agreements. Securities held by each of the Funds may be
subject to repurchase agreements. Under the terms of a repurchase agreement, a
Fund would acquire securities from banks and registered broker-dealers which
the Adviser or the applicable Sub-Adviser, as the case may be, 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 Board of Trustees of 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 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
B-11
<PAGE> 57
value of the securities sold by a Fund may decline below the price at which a
Fund is obligated to repurchase the securities. Reverse repurchase agreements
are considered to be borrowings by a Fund under the 1940 Act.
Securities of Other Investment Companies. Each Fund may invest in
securities issued by other investment companies. Each Fund currently intends to
limit its investments so that, as determined immediately after a securities
purchase is made: (a) not more than 5% of the value of its total assets will be
invested in the securities of any one investment company; (b) not more than 10%
of the value of its total assets will be invested in the aggregate in
securities of investment companies as a group; and (c) not more than 3% of the
outstanding voting stock of any one investment company will be owned by such
Fund. As a shareholder of another investment company, a Fund would bear, along
with other shareholders, its pro rata portion of that company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that such Fund bears directly in connection with its own
operations. Investment companies in which the Funds may investment may also
impose a sales or distribution charge in connection with the purchase or
redemption of their shares and other types of commissions or charges. Such
charges will be payable by such Fund and, therefore, will be borne directly by
shareholders.
Investment Restrictions
Each Fund's investment objective is a non-fundamental policy and may
be changed without a vote of the holders of a majority of such Fund's
outstanding Shares. In addition to the fundamental investment policies listed
in the Prospectus, 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 Funds 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 the Fund may be deemed to be an underwriter under certain
securities laws in the disposition of "restricted securities;"
B-12
<PAGE> 58
3. 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); and
4. Purchase or sell commodities or commodities contracts, except
to the extent disclosed in the current Prospectus of the Fund.
The following additional investment restrictions may be changed
without the vote of a majority of the outstanding Shares of a Fund. Each Fund
may not:
1. 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;
2. Engage in any short sales;
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; and
4. Mortgage or hypothecate the Fund's assets in excess of
one-third of the Fund's total assets.
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 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
B-13
<PAGE> 59
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
Diversified Equity Fund, the Income Equity Fund, the Special Equity Fund, the
Income Fund and the Intermediate Tax-Free Fund for the current fiscal year
ending June 30, 1997, are estimated to be less than 100%, 70%, 150%, 80% and
30%, respectively. 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.
NET ASSET VALUE
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.
B-14
<PAGE> 60
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 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
B-15
<PAGE> 61
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.
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:
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name and Address With the Group During Past 5 Years
- ---------------- ---------------- --------------------
<S> <C> <C>
Walter B. Grimm* Chairman, From June, 1992 to present,
3435 Stelzer Road President and employee of BISYS Fund Services
Columbus, Ohio 43219 Trustee Limited Partnership (formerly
Age: 51 The Winsbury Company); from July,
1981 to June, 1992, President of
Leigh Investments Consulting
(investment firm).
Nancy E. Converse* Trustee and Since June, 1990, employee of
3435 Stelzer Road Assistant BISYS Fund Services Limited
Columbus, Ohio 43219 Secretary Partnership (formerly, The
Age: 47 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 President-
Columbus, Ohio 43235 Finance and Chief Financial
Age: 61 Officer, Battelle
</TABLE>
B-16
<PAGE> 62
<TABLE>
<S> <C> <C>
Memorial Institute (scientific
research and development service
corporation).
James H. Woodward, Ph.D. Trustee Since July 1991, Chancellor
The University of North of The University of North
Carolina at Charlotte Carolina at Charlotte.
Charlotte, NC 28223
Age: 56
Chalmers P. Wylie Trustee From April, 1993 to present, of
754 Stonewood Court Counsel with Emens, Kegler, Brown,
Columbus, Ohio 43235 Hill & Ritter (law firm); from
Age: 75 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, President of
3435 Stelzer Road BISYS Fund Services Division of
Columbus, Ohio 43219 BISYS Fund Services Limited Partnership;
Age: 50 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 present, employee
3435 Stelzer Road of BISYS Fund Services Limited Partnership
Columbus, Ohio 43219 (formerly The Winsbury Company).
Age: 37
Stephen G. Mintos Treasurer From January, 1987 to present, employee
3435 Stelzer Road of BISYS Fund Services Limited
Columbus, Ohio 43219 Partnership (formerly The Winsbury
Age: 42 Company).
George L. Stevens Secretary From September, 1996 to present,
3435 Stelzer Road employee of BISYS Fund Services Limited
Columbus, Ohio 43219 Partnership; from September, 1995
Age: 45 to August, 1996, consultant on bank
investment products and activities;
from June 1980, to September, 1995,
employee of AmSouth Bank.
</TABLE>
B-17
<PAGE> 63
<TABLE>
<S> <C> <C>
Alaina V. Metz Assistant From June, 1995 to present,
3435 Stelzer Road Secretary employee of BISYS Fund Services
Columbus, Ohio 43219 Limited Partnership; prior to
Age: 28 June 1995, Supervisor at Alliance
Capital Management, L.P. (investment
management firm).
</TABLE>
- -------------------
*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, 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, and may receive fees pursuant to the
Administrative Services Plan described below. BISYS Fund Services, Inc.
receives fees from the Funds for acting as transfer agent and for providing
certain fund accounting services. Ms. Converse and Ms. Metz and Messrs. Grimm,
Huber, Mintos, Tomko and Stevens 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
</TABLE>
B-18
<PAGE> 64
<TABLE>
<S> <C> <C>
James H. Woodward, Ph.D. $0 $0
Trustee
Chalmers P. Wylie $7,772.17 $7,772.17
Trustee
</TABLE>
- ----------------------
*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 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 1st Source Bank (the "Adviser"), pursuant to an Investment
Advisory Agreement dated as of August 20, 1996. Under the terms of the
Investment Advisory Agreement, the Adviser has agreed to provide, either
directly or through one or more subadvisers, investment advisory services as
described in the Prospectus of the Funds. For the services provided and
expenses assumed pursuant to the Investment Advisory Agreement, each Fund pays
the Adviser a fee, computed daily and paid monthly, at the following annual
rates: (1) for the Money Market Fund, thirty-five one-hundredths of one percent
(0.35%) of such Fund's average daily net assets; (2) for the Diversified Equity
Fund, one hundred ten one-hundredths of one percent (1.10%) of such Fund's
average daily net assets; (3) for both the Income Equity Fund and the Special
Equity Fund, eighty one-hundredths of one percent (0.80%) of such Fund's
average daily net assets; and (4) for both the Income Fund and the Intermediate
Tax-Free Fund, fifty-five one-hundredths of one percent (0.55%) of such Fund's
average daily net assets. The Adviser may from time to time 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.
Unless sooner terminated, the Investment Advisory Agreement will
continue in effect until August 20, 1998, and year to year thereafter for
successive annual periods ending on August 20, 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
B-19
<PAGE> 65
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 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.
The Adviser has licensed the name "1st Source Monogram" to the Funds
on a royalty-free basis, and the Adviser has reserved to itself the right to
grant the non-exclusive right to use the name "1st Source Monogram" to any
other person. At such time as the Investment Advisory Agreement is no longer in
effect, the Adviser may require the Funds to cease using the name "1st Source
Monogram."
Subadvisers
Pursuant to the terms of the Investment Advisory Agreement, the
Adviser has entered into three separate Sub-Investment Advisory Agreements each
dated as of August 20, 1996 (collectively, the "Sub-Advisory Agreements"). The
first Sub-Advisory Agreement is with Miller Anderson & Sherrerd LLP, One Tower
Bridge, Suite 1100, West Conshohocken, Pennsylvania 19428 ("Miller Anderson").
The second Sub-Advisory Agreement is with Loomis, Sayles & Company, L.P., 3
First National Plaza, Suite 5450, Chicago, Illinois 60600 ("Loomis"). The third
Sub-Advisory Agreement is with Columbus Circle Investors, One Station Place,
Stamford, Connecticut 06902 ("Columbus"). Pursuant to the terms of such
Sub-Investment Advisory Agreements, Miller Anderson, Loomis and Columbus have
each been retained by the Adviser to manage the investment and reinvestment of
a portion the assets of the Diversified Equity Fund, subject to the direction
and control of the Adviser and the Group's Board of Trustees.
Under this arrangement, the Sub-Advisers are responsible for the
day-to-day management of the Diversified Equity Fund's assets, investment
performance, policies and guidelines, and maintaining certain books and
records, and the Adviser is responsible for
B-20
<PAGE> 66
selecting and monitoring the performance of each of the Sub-Advisers, and for
reporting the activities of the Sub-Advisers in managing the Diversified Equity
Fund to the Group's Board of Trustees.
For their services provided and expenses assumed pursuant to their
respective Sub-Investment Advisory Agreement with the Adviser, the Sub-Advisers
receive from the Adviser a fee (computed daily and paid monthly as a percentage
of the Diversified Equity Fund's average daily net assets managed by that
Sub-Adviser) at the following annual rates: for Miller Anderson, 0.625% up to
$25,000,000 and 0.375% of the excess over $25,000,000; for Loomis, 0.65% up to
$5,000,000 and 0.50% of the excess over $5,000,000; and for Columbus, 1.00% up
to $10,000,000 and 0.50% of the excess over $10,000,000.
Miller Anderson was founded in 1969 and became wholly owned by The
Morgan Stanley Group, Inc. ("Morgan Stanley") in December, 1995. On February 5,
1997, Morgan Stanley announced its intention to merge with and into Dean
Witter, Discover & Co. Upon consummation of that merger, Miller Anderson will
be wholly owned by Morgan Stanley, Dean Witter, Discover & Co.
Loomis was founded in 1926 and established its Chicago office in 1952.
Loomis' sole general partner is Loomis, Sayles & Company, Incorporated.
Columbus was founded in 1975 and is a sub-partnership of PIMCO
Advisors L.P., a publicly held limited partnership whose general partner is
owned by Pacific Mutual Life Insurance Company and the managing directors of
one of the subpartnerships of PIMCO Advisors L.P.
Unless sooner terminated, each of the Sub-Investment Advisory
Agreements continue in effect as to the Diversified Equity Fund until August
20, 1998, and thereafter for successive one-year periods ending August 20 of
each year if 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 such
Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the Funds'
Prospectus), and a majority of the Trustees who are not parties to the
Sub-Investment Advisory Agreements or interested persons (as defined in the
1940 Act) of any party to the Sub-Investment Advisory Agreements by votes cast
in person at a meeting called for such purpose. Each of the Sub-Investment
Advisory Agreements are terminable as to the Diversified Equity Fund at any
time on 60 days' written notice without penalty by the Fund, by vote of a
majority of the outstanding shares of that Fund, or on 60 days' prior written
notice from the Subadviser. Such Agreements also terminate automatically in
the event of any assignment, as defined in the 1940 Act.
B-21
<PAGE> 67
Each of the Sub-Investment Advisory Agreements provide that the
respective Sub-Advisers shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Group in connection with the
performance of their duties, 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 respective Sub-Advisers in the performance of their duties, or from
reckless disregard of their duties and obligations thereunder.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement with respect to each
Fund, other than the Diversified Equity Fund, the Adviser determines, subject
to the general supervision of the Board of Trustees of the Group and in
accordance with each such 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. Pursuant to the
Sub-Investment Advisory Agreements, the Sub-Advisers determine, subject to the
supervision of the Adviser and the overall general supervision of the Group's
Board of Trustees and in accordance with the Diversified Equity Fund's
investment objectives and policies, which securities are to be purchases and
sold by such 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 Income
Fund, the Intermediate Tax-Free Fund and the Money Market 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 or the applicable Sub-Adviser,
as the case may be, in its best judgment and in a manner deemed fair and
reasonable to Shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration,
B-22
<PAGE> 68
brokers and dealers who provide supplemental investment research to the Adviser
or the applicable Sub-Adviser, as the case may be, may receive orders for
transactions on behalf of the Funds. The Adviser and each Sub-Adviser are
authorized to pay a broker-dealer who provides such brokerage and research
services a commission for executing each such Fund's brokerage transactions
which is in excess of the amount of commission another broker would have
charged for effecting that transaction if, but only if, the Adviser or
Sub-Adviser, as the case may be, determines in good faith that such commission
was reasonable in relation to the value of the brokerage and research services
provided by such broker viewed in terms of that particular transaction or in
terms of all of the accounts over which it exercises investment discretion. Any
such research and other statistical and factual information provided by brokers
to a Fund or to the Adviser or Sub-Adviser, as the case may be, is considered
to be in addition to and not in lieu of services required to be performed by
such Adviser or Sub-Adviser under its respective agreement regarding management
of the Fund. The cost, value and specific application of such information are
indeterminable and hence are not practicably allocable among the Funds and
other clients of the Adviser or Sub-Adviser, as the case may be, who may
indirectly benefit from the availability of such information. Similarly, the
Funds may indirectly benefit from information made available as a result of
transactions effected for such other clients. Under the Investment Advisory
Agreement and Sub-Advisory Agreements, the Adviser and Sub-Advisers are
permitted to pay higher brokerage commissions for brokerage and research
services in accordance with Section 28(e) of the Securities Exchange Act of
1934. In the event the Adviser and/or the Sub-Advisers do follow such a
practice, they will do so on a basis which is fair and equitable to the Group
and the Funds.
While the Adviser and the Sub-Advisers generally seek competitive
commissions, the Group may not necessarily pay the lowest commission available
on each brokerage transaction, for reasons discussed 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, the Sub-Advisers, 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, other funds of the Group or any other investment company
or account managed by the Adviser or any of the
B-23
<PAGE> 69
Sub-Advisers. 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 or the Sub-Adviser, as the
case may be, believes to be equitable to the Fund and such other fund,
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 permitted by law, the Adviser and
the Sub-Advisers 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 and the Sub-Advisory Agreements, in making
investment recommendations for the Funds, neither the Adviser nor any
Sub-Adviser will inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by the Group is a customer of the
Adviser, any Sub-Adviser, any of their parents or subsidiaries or affiliates
and, in dealing with its customers, the Adviser, the Sub-Advisers, their
respective parents, 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.
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
B-24
<PAGE> 70
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.
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 and the Investment Advisory Agreement 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 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, the Board of Trustees of the
Group would review the Group's relationship with the Adviser 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 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 as of August 20,
1996 (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 the Sub-Advisers under the Sub-Advisory
Agreements, by The Fifth Third Bank under the Custody Agreement and by BISYS
Fund Services, Inc. under the Transfer Agency Agreement and Fund Accounting
Agreement). The Administrator is a broker-dealer registered with the
Commission, and is a member of the National Association of Securities Dealers,
Inc. The Administrator provides financial services to institutional clients.
B-25
<PAGE> 71
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, assist the Group or its designee in the preparation
of, 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; periodic review of the amount of the deviation, if any, of
the Money Market Fund's current net asset value per share (calculated using
available market quotations or an appropriate substitute that reflects current
market conditions) from such Fund's amortized cost price 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 the
Sub-Advisers under the Sub-Investment Advisory Agreements, by The Fifth Third
Bank under the Custody Agreement and by BISYS Fund Services, Inc. under the
Transfer Agency 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 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.
Unless sooner terminated as provided therein, the Administration
Agreement has an initial term expiring on August 20, 1999. The Administration
Agreement thereafter shall be renewed automatically for successive one-year
terms, unless written notice not to renew is given by the non-renewing 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
B-26
<PAGE> 72
any loss suffered by any Fund in connection with the matters to which the
Administration Agreement relates, except a loss resulting from willful
misfeasance, bad faith, or negligence in the performance of its duties, or from
the reckless disregard by the Administrator of its obligations and duties
thereunder.
Distributor
BISYS serves as agent for each of the Funds in the distribution of its
Shares pursuant to a Distribution Agreement dated as of August 20, 1996 (the
"Distribution Agreement"). Unless otherwise terminated, the Distribution
Agreement will continue in effect until August 20, 1998, and year to year
thereafter for successive annual periods ending on August 20, if, as to each
Fund, such continuance is approved at least annually by (i) by the Group's
Board of Trustees or by the vote of a majority of the outstanding shares of
that Fund, 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.
As described in the Prospectus, the Group has adopted a Distribution
and Shareholder Service Plan (the "Plan") with respect to the Funds pursuant to
Rule 12b-1 under the 1940 Act under which each Fund is authorized to pay BISYS
in an amount not in excess, on an annual basis, of 0.25% of the average daily
net asset value of the Shares of that Fund (the "12b-1 Fee"). Payments of the
12b-1 Fee to BISYS will be used (i) to compensate Participating Organizations
(as defined below) for providing distribution assistance relating to a Fund's
Shares, (ii) for promotional activities intended to result in the sale of
Shares and distribution of prospectuses to other than current shareholders, and
(iii) to compensate Participating Organizations for providing shareholder
services with respect to their customers who are, from time to time, beneficial
and record holders of Shares. Participating Organizations include banks
(including affiliates of the Adviser), broker-dealers, the Adviser, BISYS and
other institutions. Payments to such Participating Organizations may be made
pursuant to agreements entered into with BISYS.
B-27
<PAGE> 73
As required by Rule 12b-1, the Plan was approved by the initial
Shareholder 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 expenses, and therefore total
expenses per Share, may be reduced and overall performance per Share may be
improved.
BISYS may enter into, from time to time, 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.
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
B-28
<PAGE> 74
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 of the date
hereof, the Group has not entered into any such servicing agreements.
Custodian
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263
(the "Custodian"), has been selected to serve as the Funds' custodian pursuant
to the Custody Agreement dated as of August 20, 1996. 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, Inc. serves as transfer agent and dividend
disbursing agent (the "Transfer Agent") for all of the Funds pursuant to the
Transfer Agency Agreement dated as of August 20, 1996. 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 Fund's shareholders of record; processing
shareholder purchase and redemption orders; processing transfers and exchanges
of shares of the Funds on the shareholder
B-29
<PAGE> 75
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.
In addition, BISYS Fund Services, Inc. provides certain fund
accounting services to the Funds pursuant to a Fund Accounting Agreement dated
as of August 20, 1996. BISYS Fund Services, 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) $50,000 minus the fee paid by such Fund under its Management and
Administration Agreement with BISYS of the same date. Under such Agreement,
BISYS Fund Services, 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 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.
Auditors
Coopers & Lybrand L.L.P., 100 East Broad Street, Columbus, Ohio 43215,
has been selected as the independent accountants for the Funds and as such will
audit the financial statements of the Funds.
Legal Counsel
Baker & Hostetler LLP, 65 East State Street, Columbus, Ohio 43215 is
counsel to the Group and will pass upon the legality of the Shares offered
hereby.
B-30
<PAGE> 76
ADDITIONAL INFORMATION
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 17 series of
shares, one of which represents interests in the Money Market Fund, one of
which represents interests in the Diversified Equity Fund, one of which
represents interests in the Income Equity Fund, one of which represents
interests in the Special Equity Fund, one of which represents interests in the
Income Fund and one of which represents interests in the Intermediate Tax-Free
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 powers, 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 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 approval of principal
B-31
<PAGE> 77
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Group voting without regard to series.
As of March 3, 1997, the following is the only entity known to the
Group who owns of record or beneficially 5% or more of the outstanding Shares
of any Fund: 1st Source Bank, P. O. Box 1602, South Bend, Indiana 46634 owned
of record and beneficially 99.6% of the issued and outstanding Shares of the
Income Fund, 99.01% of the issued and outstanding Shares of the Income Equity
Fund, 99.74% of the issued and outstanding Shares of the Diversified Equity
Fund and 98.97% of the issued and outstanding Shares of the Special Equity
Fund.
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.
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.
B-32
<PAGE> 78
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.
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
B-33
<PAGE> 79
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. Because all of the Money Market Fund's, the Income Fund's and the
Intermediate Tax-Free Fund's net investment income is expected to be derived
from earned interest, it is anticipated that no distributions from those Funds
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, if any. 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.
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
Group with a correct taxpayer identification number, (2) under-reports dividend
or interest income, or (3) fails to certify to the Group that he or she is not
subject to such withholding. An individual's taxpayer identification number is
his or her Social Security number.
B-34
<PAGE> 80
The Intermediate Tax-Free Fund. The Intermediate Tax-Free 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 Intermediate Tax-Free
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 Intermediate Tax-Free Fund's dividends being tax-exempt and such
dividends would be ultimately taxable to the beneficiaries when distributed to
them. In addition, the Intermediate Tax-Free 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
Intermediate Tax-Free 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 Intermediate Tax-Free Fund that is
derived from interest received by the Intermediate Tax-Free 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 Intermediate Tax-Free Fund's taxable year. The percentage of the
total dividends paid by the Intermediate Tax-Free Fund during any taxable year
that qualifies as exempt-interest dividends will be the same for all
Shareholders of the Intermediate Tax-Free Fund receiving dividends during such
year. Exempt-interest dividends shall be treated by the Intermediate Tax-Free
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 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 Intermediate Tax-Free 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.
B-35
<PAGE> 81
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 Intermediate Tax-Free Fund distributes exempt-interest
dividends during the Shareholder's taxable year. A Shareholder of the
Intermediate Tax-Free Fund that is a financial institution may not deduct
interest expense attributable to indebtedness incurred or continued to purchase
or carry Shares of the Intermediate Tax-Free Fund if the Intermediate Tax-Free
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 Intermediate Tax-Free 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 Intermediate Tax-Free Fund.
In the event the Intermediate Tax-Free Fund realizes long-term capital
gains, such Fund intends to distribute any realized net long-term capital gains
annually. If the Intermediate Tax-Free 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
Intermediate Tax-Free Fund to the Shareholders not later than sixty days after
the close of the Intermediate Tax-Free 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.
For taxable years of corporations beginning before 1996 (and pursuant
to legislation proposed, but not yet enacted, thereafter), 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 Intermediate Tax-Free 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.
B-36
<PAGE> 82
Distributions of exempt-interest dividends by the Intermediate
Tax-Free 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 Intermediate
Tax-Free 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 Intermediate Tax-Free 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 Intermediate Tax-Free 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 Intermediate Tax-Free 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 currently no guidance
available from the Internal Revenue Service that definitively establishes the
tax consequences of many of the types of puts that the Intermediate Tax-Free
Fund could acquire under the 1940 Act. Therefore, although the Intermediate
Tax-Free 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.
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. 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
B-37
<PAGE> 83
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 and 30-Day Yield of the Money Market Fund
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, other than the Money Market Fund, 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 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 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
B-38
<PAGE> 84
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 Intermediate Tax-Free 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 December 31, 1996, the yields for the
Income Equity Fund and the Income Fund were 2.19% and 5.16%, respectively,
assuming the imposition of the maximum sales charge, and 2.30% and 5.38%,
respectively, excluding the effect of any sales charge. For such period, there
are no yields for the Money Market Fund or the Intermediate Tax-Free Income
Fund since such Funds had not yet commenced operations.
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 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 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, five year and ten year periods ended December 31,
1996, and the respective periods from commencement of operations to December
31, 1996, the average annual total returns for the Diversified Equity Fund, the
Income Equity Fund, the Special Equity Fund and the Income Fund are set forth
in the following table. Such performance information includes the prior
B-39
<PAGE> 85
performance of the respective CIFs for such Funds during those periods which
had been restated to reflect the estimated fees for those Funds.
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
With Maximum Sales Load(1) Without Sales Load
-------------------------- ------------------
Since 10 Since
Fund 1 Year 5 Year 10 Year Inception 1 Year 5 Year Year Inception
---- ------ ------ ------- --------- ------ ------ ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified 13.19% 11.02% 12.15% 11.15% 19.13% 12.17% 12.73% 11.65%
Equity(2)
Income 11.67% 13.93% 11.56% 12.54% 17.59% 15.09% 12.12% 13.07%
Equity(3)
Special 15.98% 12.17% 15.39% 13.60% 22.07% 13.32% 15.98% 14.12%
Equity(3)
Income(2) -1.55% 5.21% 6.45% 7.22% 2.55% 6.07% 6.88% 7.69%
</TABLE>
(1) The maximum sales load for the Diversified Equity, Income Equity and
Special Equity Funds is 5.00%. For the Income Fund, the maximum sales
load is 4.00%.
(2) Commenced operations June 30, 1985.
(3) Commenced operations November 30, 1985.
For the period ended December 31, 1996, there is no total return
information for the Money Market Fund or the Intermediate Tax-Free Income Fund
since such Funds had not yet commenced operations. And of course, past
performance is no guarantee as to future performance.
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.
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 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
B-40
<PAGE> 86
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 Intermediate Tax-Free 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,
B-41
<PAGE> 87
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-42
<PAGE> 88
------------------------------------------------------------------------------
FINANCIAL STATEMENTS
------------------------------------------------------------------------------
B-43
<PAGE> 89
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
DIVERSIFIED SPECIAL INCOME
EQUITY EQUITY INCOME EQUITY
FUND FUND FUND FUND
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (cost $55,146,136; $24,173,510;
$48,295,225; and $28,424,948, respectively)................. $65,683,448 $26,071,582 $48,303,209 $33,576,629
----------- ----------- ----------- -----------
Cash.......................................................... -- -- 2,840 --
Interest and dividends receivable............................. 68,252 16,060 682,897 148,886
Income and other receivables.................................. -- -- 5,833 5,119
Receivable from brokers for investments sold.................. 111,049 -- -- --
Unamortized organization costs................................ 13,389 4,741 10,499 6,706
Prepaid expenses and other assets............................. 2,184 702 1,317 3,141
----------- ----------- ----------- -----------
Total Assets............................................ 65,878,322 26,093,085 49,006,595 33,740,481
----------- ----------- ----------- -----------
LIABILITIES:
Payable to brokers for investments purchased.................. 105,156 -- -- 1,118,915
Accrued expenses and other payables:
Investment advisory fees.................................. 61,600 17,556 22,914 22,072
Administration fees....................................... 4,319 1,673 3,215 2,140
Custodian and accounting fees............................. 1,835 1,559 1,398 960
Legal and audit fees...................................... 16,200 5,970 12,417 7,570
Transfer agent fees....................................... 6,826 6,077 5,738 5,981
Registration and filing fees.............................. 1,089 1,513 1,161 2,155
Other..................................................... 650 270 483 319
----------- ----------- ----------- -----------
Total Liabilities....................................... 197,675 34,618 47,326 1,160,112
----------- ----------- ----------- -----------
NET ASSETS:
Capital....................................................... 53,849,964 24,563,728 49,032,402 26,610,288
Undistributed (distributed in excess of) net investment
income...................................................... (15,302) (4,870) 969 4,988
Net unrealized appreciation on investments.................... 10,537,312 1,898,072 7,984 5,151,681
Accumulated undistributed net realized gains (losses) on
investment transactions..................................... 1,308,673 (398,463) (82,086) 813,412
----------- ----------- ----------- -----------
Net Assets................................................ $65,680,647 $26,058,467 $48,959,269 $32,580,369
=========== =========== =========== ===========
Outstanding units of beneficial interest (shares)............. 6,280,137 2,688,604 4,812,756 3,035,244
=========== =========== =========== ===========
Net asset value--redemption price per share $ 10.46 $ 9.69 $ 10.17 $ 10.73
=========== =========== =========== ===========
Maximum Sales Charge.......................................... 5.00% 5.00% 4.00% 5.00%
=========== =========== =========== ===========
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of
net asset value adjusted to nearest cent) per share......... $ 11.01 $ 10.20 $ 10.59 $ 11.29
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
B-44
<PAGE> 90
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
STATEMENTS OF OPERATIONS
FOR PERIOD ENDED DECEMBER 31, 1996 (A)
(UNAUDITED)
<TABLE>
<CAPTION>
DIVERSIFIED SPECIAL INCOME
EQUITY EQUITY INCOME EQUITY
FUND FUND FUND FUND
----------- ---------- -------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income.............................. $ 1,222 $ 41,056 $871,853 $ 101,517
Dividend income.............................. 273,706 50,160 17,869 258,821
----------- ---------- -------- ----------
Total Income............................ 274,928 91,216 889,722 360,338
----------- ---------- -------- ----------
EXPENSES:
Investment advisory fees..................... 203,061 57,893 73,128 67,739
Administration fees.......................... 36,921 14,473 26,592 16,935
12b-1 fees................................... 46,151 18,094 33,240 21,178
Custodian and accounting fees................ 14,158 5,304 6,362 4,712
Legal and audit fees......................... 16,200 5,970 12,417 7,570
Organization costs........................... 2,130 747 1,629 1,004
Trustees' fees and expenses.................. 900 309 663 422
Transfer agent fees.......................... 7,760 6,489 6,465 6,626
Registration and filing fees................. 1,700 1,957 1,713 2,646
Printing costs............................... 6,090 2,459 4,554 3,294
Other........................................ 1,310 485 802 821
----------- ---------- -------- ----------
Total Expenses............................... 336,381 114,180 167,565 132,947
Less: Expenses voluntarily reduced...... (46,151) (18,094) (33,240) (21,178)
Net Expenses............................ 290,230 96,086 134,325 111,769
----------- ---------- -------- ----------
Net Investment Income........................ (15,302) (4,870) 755,397 248,569
----------- ---------- -------- ----------
REALIZED/UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investment
transactions............................... 2,641,501 402,552 (82,086) 972,001
Change in unrealized appreciation
(depreciation) on investments.............. 10,537,312 1,898,072 7,984 5,151,681
----------- ---------- -------- ----------
Net realized (unrealized) gains on
investments................................ 13,178,813 2,300,624 (74,102) 6,123,682
----------- ---------- -------- ----------
Change in net assets resulting from
operations................................. $13,163,511 $2,295,754 $681,295 $6,372,251
=========== ========== ======== ==========
</TABLE>
- ---------
(a) Commencement of the Funds began September 20, September 19, September 23,
September 24, respectively.
See notes to financial statements.
B-45
<PAGE> 91
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
DIVERSIFIED SPECIAL INCOME
EQUITY FUND EQUITY FUND INCOME FUND EQUITY FUND
------------ ------------ ------------ ------------
FOR PERIOD FOR PERIOD FOR PERIOD FOR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 (A) 1996 (A) 1996 (A) 1996 (A)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income.............................. $ (15,302) $ (4,870) $ 755,397 $ 248,569
Net realized gains (losses) on investments
transactions..................................... 2,641,501 402,552 (82,086) 972,001
Net change in unrealized appreciation
(depreciation) on investments.................... 10,537,312 1,898,072 7,984 5,151,681
----------- ----------- ----------- -----------
Change in net assets resulting from operations....... 13,163,511 2,295,754 681,295 6,372,251
----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income......................... -- -- (754,428) (243,581)
In excess of net investment income................. -- -- -- --
From net realized gains on investments............. (1,332,828) (402,552) -- (158,589)
In excess of net realized gains on investments..... -- (398,463) -- --
----------- ----------- ----------- -----------
Change in net assets from shareholder
distributions...................................... (1,332,828) (801,015) (754,428) (402,170)
----------- ----------- ----------- -----------
CAPITAL TRANSACTIONS:
Proceeds from shares issued........................ 66,356,782 28,579,625 57,187,896 31,920,854
Dividends reinvested 1,332,616 800,775 754,124 402,085
Cost of shares redeemed............................ (13,839,434) (4,816,672) (8,909,618) (5,712,651)
----------- ----------- ----------- -----------
Change in net assets from capital transactions..... 53,849,964 24,563,728 49,032,402 26,610,288
----------- ----------- ----------- -----------
Change in net assets............................... 65,680,647 26,058,467 48,959,269 32,580,369
NET ASSETS:
Beginning of period................................ 0 0 0 0
----------- ----------- ----------- -----------
End of period...................................... $65,680,647 $26,058,467 $48,959,269 $32,580,369
=========== =========== =========== ===========
SHARE TRANSACTIONS:
Issued............................................. 7,508,928 3,076,523 5,619,664 3,556,123
Reinvested......................................... 125,956 82,639 73,986 37,959
Redeemed........................................... (1,354,747) (470,559) (880,894) (558,838)
----------- ----------- ----------- -----------
Change in shares..................................... 6,280,137 2,688,603 4,812,756 3,035,244
=========== =========== =========== ===========
</TABLE>
- ---------
(a) Commencement of the Funds began September, 20, September 19, September 23,
September 24, respectively.
See notes to financial statements.
B-46
<PAGE> 92
THE SESSIONS GROUP
1ST SOURCE MONOGRAM DIVERSIFIED EQUITY
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY
SHARES DESCRIPTION VALUE
- ---------- ------------------------------- ------------
<C> <S> <C>
COMMON STOCKS (95.2%):
Aerospace/Defense (3.4%):
11,900 Boeing Co...................... $ 1,265,863
4,700 Lockheed Martin Corp........... 430,050
3,900 Raytheon Co.................... 187,688
3,400 Textron, Inc................... 320,450
------------
2,204,051
------------
Apparel (0.6%):
2,800 Talbots, Inc................... 80,150
4,400 VF Corp........................ 297,000
------------
377,150
------------
Automotive Parts (0.8%):
4,100 Eaton Corp..................... 285,975
5,000 TRW, Inc....................... 247,500
------------
533,475
------------
Banks (4.3%):
5,700 Bank of New York, Inc.......... 192,374
9,500 Chase Manhattan Corp........... 847,874
1,500 Crestar Financial Corp......... 111,562
5,478 First Chicago NBD Corp......... 294,442
2,500 First Union Corp............... 184,999
2,400 Mellon Bank Corp............... 170,399
5,300 NationsBank Corp............... 518,074
2,300 Republic New York Corp......... 187,737
5,800 Signet Banking Corp............ 178,349
3,000 Standard Federal Bancorp....... 170,624
------------
2,856,434
------------
Business Equip & Services (1.2%):
32,850 CUC International, Inc. (b).... 780,188
------------
Chemicals (4.5%):
3,200 Cabot Corp..................... 80,400
1,900 Dow Chemical Co................ 148,913
3,500 E. I. du Pont de Nemours &
Co........................... 330,313
3,500 FMC Corp. (b).................. 245,438
7,500 Great Lakes Chemical Corp...... 350,625
18,900 Monsanto Corp.................. 734,738
14,000 Morton International, Inc...... 570,500
5,700 Rhone Poulene S.A.............. 193,088
3,900 Rohm & Haas Co................. 318,338
------------
2,972,353
------------
Coal (0.4%):
7,600 MAPCO, Inc..................... 258,400
------------
Computers (6.9%):
8,100 Apple Computer, Inc. (b)....... 169,088
4,500 Cabletron Systems, Inc. (b).... 149,625
3,400 Compaq Computer Corp. (b)...... 252,450
<CAPTION>
SECURITY
SHARES DESCRIPTION VALUE
- ---------- ------------------------------- ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Computers, continued:
8,500 Dell Computer Corp. (b)........ $ 451,563
13,600 HBO & Co....................... 807,500
5,600 Honeywell, Inc................. 368,200
6,200 Intel Corp..................... 811,813
5,400 International Business Machines
Corp......................... 815,400
11,400 Seagate Technology, Inc. (b)... 450,300
10,000 Stratus Computer, Inc. (b)..... 272,500
------------
4,548,439
------------
Computer Software (6.0%):
17,500 Cisco Systems, Inc. (b)........ 1,113,438
6,225 Computer Associates
International, Inc........... 309,694
5,600 First Data Corp................ 204,400
5,600 Fiserv, Inc. (b)............... 205,800
11,800 Microsoft Corp. (b)............ 974,975
5,600 Netscape Communications Corp.
(b).......................... 318,500
12,475 Oracle Corp. (b)............... 520,831
5,800 Parametric Technology Corp.
(b).......................... 297,975
------------
3,945,613
-----------
Cosmetics & Toiletries (0.9%):
3,600 Avon Products, Inc............. 205,650
4,600 Gillette Co.................... 357,650
------------
563,300
------------
Electrical Equipment (0.3%):
4,738 Molex Inc...................... 168,791
------------
Electronic Components (1.2%):
8,200 Adaptec, Inc. (b).............. 328,000
7,200 LSI Logic Corp. (b)............ 192,600
5,100 Tektronix, Inc................. 261,375
------------
781,975
------------
Engines--Internal Combustion (0.6%):
9,300 Cummins Engine Co., Inc........ 427,800
------------
Financial Services (5.0%):
7,300 Associates First Capital
Corp......................... 322,112
5,100 Capital One Financial Corp..... 183,599
2,400 Citicorp....................... 247,199
3,313 Dean Witter Discover & Co...... 219,485
1,400 Federal Home Loan Mortgage
Corp......................... 154,174
5,700 Federal National Mortgage
Assoc........................ 212,324
8,400 Great Western Financial
Corp......................... 243,599
10,500 Green Tree Financial Corp...... 405,562
3,400 Merrill Lynch & Co., Inc....... 277,099
</TABLE>
Continued
B-47
<PAGE> 93
THE SESSIONS GROUP
1ST SOURCE MONOGRAM DIVERSIFIED EQUITY
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY
SHARES DESCRIPTION VALUE
- ---------- ------------------------------- ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Financial Services, continued:
7,800 MGIC Investment Corp........... $ 592,799
2,700 Salomon, Inc................... 127,237
9,000 Schwab, Charles Corp........... 287,999
------------
3,273,188
------------
Food & Related (0.9%):
9,791 Archer-Daniels-Midland Co...... 215,401
8,100 IBP, Inc....................... 196,424
4,800 Universal Foods Corp........... 169,199
------------
581,024
------------
Forest & Paper Products (0.7%):
1,300 Bowater, Inc................... 48,913
4,000 Kimberly-Clark Corp............ 381,000
------------
429,913
------------
Hospital Supply & Management (0.9%):
11,566 Columbia/HCA Healthcare
Corp......................... 471,315
6,000 Tenet Healthcare Corp. (b)..... 131,250
------------
602,565
------------
Hotels & Gaming (0.7%):
17,800 Hilton Hotels Corp............. 465,025
------------
Household--General Products (0.2%):
4,800 Premark International, Inc..... 106,800
------------
Human Resources (0.2%):
7,400 Olsten Corp.................... 111,925
------------
Insurance (5.5%):
15,800 Allstate Corp.................. 914,425
4,800 American General Corp.......... 196,200
5,100 American International
Group, Inc................... 552,075
3,200 Chubb Corp..................... 172,000
4,100 Everest Reinsurance
Holdings, Inc................ 117,875
11,500 Exel Ltd....................... 435,563
3,000 ITT Hartford Group, Inc........ 202,500
6,500 Old Republic International
Corp......................... 173,875
6,900 Providian Corp................. 354,488
3,400 ReliaStar Financial Corp....... 196,350
2,100 St. Paul Cos., Inc............. 123,113
2,100 Transatlantic Holdings, Inc.... 169,050
------------
3,607,514
------------
Linen Supply & Related Items (0.2%):
2,600 Cintas Corp.................... 152,750
------------
<CAPTION>
SECURITY
SHARES DESCRIPTION VALUE
- ---------- ------------------------------- ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Machine Tools & Related Products (0.5%):
9,200 Kennametal, Inc................ $ 357,650
------------
Machinery & Equipment (3.8%):
5,200 Case Corp...................... 283,400
2,000 Caterpillar, Inc............... 150,500
5,700 Deere & Co..................... 231,563
11,700 Halliburton Co................. 704,925
9,300 Harnischfeger Industries,
Inc.......................... 447,563
6,000 Tecumseh Products Co.,......... 344,250
8,100 Thermo Electron Corp. (b)...... 334,125
------------
2,496,326
------------
Manufacturing (1.4%):
5,600 Parker-Hannifin Corp........... 217,000
6,800 Service Corp. International.... 190,400
2,700 Springs Industries, Inc........ 116,100
10,700 TRINOVA Corp................... 389,213
------------
912,713
------------
Medical--HMO (0.5%):
6,800 Foundation Health Corp. (b).... 215,900
4,300 Maxicare Health Plans, Inc.
(b).......................... 95,675
------------
311,575
------------
Medical--Instruments/Products (3.1%):
7,300 Beckman Instruments Inc........ 280,138
10,100 Boston Scientific Corp. (b).... 606,000
6,100 Mallinckrodt, Inc.............. 269,163
12,800 Medtronic, Inc................. 870,400
1,500 Nellcor Puritan Bennrtt, Inc.
(b).......................... 32,813
------------
2,058,514
------------
Medical Services & Supplies (0.8%):
14,100 HEALTHSOUTH Corp. (b).......... 544,613
------------
Mining (0.3%):
5,100 Cyprus Amax Minerals Co........ 119,213
1,100 Potash Corp. of
Saskatchewan, Inc............ 93,500
------------
212,713
------------
Motor Vehicles (1.3%):
13,300 Ford Motor Co.................. 423,938
7,300 General Motors Corp............ 406,975
------------
830,913
------------
Multi--Media (0.4%):
3,500 Walt Disney Co................. 243,688
------------
Office Supplies & Forms (0.2%):
3,400 Standard Register Co........... 110,500
------------
</TABLE>
Continued
B-48
<PAGE> 94
THE SESSIONS GROUP
1ST SOURCE MONOGRAM DIVERSIFIED EQUITY
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY
SHARES DESCRIPTION VALUE
- ---------- ------------------------------- ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Oil & Gas--Domestic (2.5%):
3,300 Amoco Corp..................... $ 265,650
4,400 Atlantic Richfield Co.......... 583,000
2,300 British Petroleum Co., Plc..... 325,163
3,400 Panenergy Corp................. 153,000
13,000 USX--Marathon Group............ 310,375
------------
1,637,188
------------
Oil & Gas--Exploration/Production (4.3%):
16,100 Anadarko Petroleum Corp........ 1,042,475
5,600 Burlington Resources, Inc...... 282,100
8,600 Cross Timbers Oil Co........... 216,075
18,200 Enron Oil & Gas Co............. 459,550
4,300 Repsol SA...................... 163,938
2,700 Transocean Offshore, Inc....... 169,088
5,400 Ultramar Diamond
Shamrock Corp................ 170,775
10,600 Union Pacific Resources Group,
Inc.......................... 310,050
------------
2,814,051
------------
Oil & Gas--Services (5.8%):
25,400 Baker Hughes, Inc.............. 876,300
2,700 El Paso Natural Gas Co......... 136,350
8,400 IMC Global, Inc................ 328,650
35,800 Rowan Cos., Inc. (b)........... 809,975
16,900 Schlumberger Ltd............... 1,687,888
------------
3,839,163
------------
Pharmaceuticals (6.4%):
3,600 American Home Products Corp.... 211,050
8,900 Amgen, Inc. (b)................ 483,938
7,700 Bergen Brunswig Corp. Class
A............................ 219,450
20,400 Biogen, Inc. (b)............... 790,500
3,750 Cardinal Health, Inc........... 218,438
9,900 Lilly, Eli & Co................ 722,700
7,800 Johnson & Johnson.............. 388,050
9,500 Merck & Co., Inc............... 752,875
3,700 Pfizer Inc..................... 306,638
11,200 Somatogen, Inc. (b)............ 123,200
------------
4,216,839
------------
Photographic Equipment (0.7%):
5,500 Eastman Kodak Co............... 441,375
------------
Restaurants (0.7%):
13,700 Boston Chicken, Inc. (b)....... 491,488
------------
Retail (4.7%):
8,500 AutoZone, Inc. (b)............. 233,750
5,700 Dillard Department Stores,
Inc.......................... 175,988
4,000 Home Depot, Inc................ 200,500
<CAPTION>
SECURITY
SHARES DESCRIPTION VALUE
- ---------- ------------------------------- ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Retail, continued:
15,700 PETsMART, Inc. (b)............. $ 343,438
14,000 Price/Costco, Inc. (b)......... 351,750
5,500 Safeway, Inc. (b).............. 235,125
19,100 Staples, Inc. (b).............. 344,994
14,900 Starbucks Corp. (b)............ 426,513
8,200 TJX Cos., Inc.................. 388,475
12,800 Toys "R" Us, Inc. (b).......... 384,000
------------
3,084,533
------------
Shoes--Leather (0.4%):
4,700 Nike, Inc., Class B............ 280,825
------------
Steel (0.2%):
2,200 Nucor Corp..................... 112,200
------------
Telecommunications (5.6%):
6,400 Ascend Communications, Inc.
(b).......................... 397,600
8,000 Cascade Communications
Corp. (b).................... 441,000
6,350 Glenayre Technologies, Inc.
(b).......................... 136,921
10,300 Lucent Technologies, Inc....... 476,375
8,200 MCI Communications Corp........ 268,037
11,300 QUALCOMM, Inc. (b)............. 450,588
5,000 Sprint Corp.................... 199,375
6,400 Tellabs, Inc. (b).............. 240,800
5,400 U.S. Robotics Corp. (b)........ 388,800
26,300 WorldCom, Inc. (b)............. 685,444
------------
3,684,940
------------
Tires & Rubber Products (0.7%):
9,300 Goodyear Tire & Rubber Co...... 477,788
------------
Tobacco (1.5%):
7,300 Philip Morris Cos., Inc........ 822,163
5,200 RJR Nabisco Holdings Corp...... 176,800
------------
998,963
------------
Transportation--Air (1.4%):
3,300 AMR Corp. Del (b).............. 290,813
16,100 Southwest Airlines Co.......... 356,213
4,500 UAL Corp. (b).................. 281,250
------------
928,276
------------
Transportation--Rail (0.6%):
2,600 Burlington Northern Santa Fe... 224,575
3,500 CSX Corp....................... 147,875
------------
372,450
------------
Utilities--Electric (1.5%):
7,400 Central Maine Power Co......... 86,025
3,100 CINergy Corp................... 103,463
4,800 DTE Energy Co.................. 155,400
</TABLE>
Continued
B-49
<PAGE> 95
THE SESSIONS GROUP
1ST SOURCE MONOGRAM DIVERSIFIED EQUITY
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY
SHARES DESCRIPTION VALUE
- ---------- ------------------------------- ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Utilities--Electric, continued:
5,600 Entergy Corp................... $ 155,400
4,600 GPU, Inc....................... 154,675
6,400 Peco Energy Co................. 161,600
5,500 Unicom Corp.................... 149,188
------------
965,751
------------
Utilities--Gas & Pipeline (0.5%):
6,500 Sonat, Inc..................... 334,750
------------
Total Common Stocks............ 62,508,458
------------
PREFERRED STOCKS (0.4%):
Forest & Paper Products (0.1%):
2,200 Westvaco Corp.................. 63,250
------------
Oil & Gas (0.3%):
6,700 YPF Sociedad Anonima-Spondored
ADR.......................... 169,175
------------
Total Preferred Stocks......... 232,425
------------
SECURITY
SHARES DESCRIPTION VALUE
- ---------- ------------------------------- ------------
MUTUAL FUNDS (4.5%):
2,094,909 Fountain Square Treasury
Fund......................... $ 2,094,909
847,656 Fountain Square Commercial
Paper Fund................... 847,656
------------
Total Mutual Funds............. 2,942,565
------------
Total (Cost-$55,146,136)....... $ 65,683,448
==========
</TABLE>
- ---------
Percentages indicated are based on net assets of $65,680,647.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $11,793,034
Unrealized depreciation.......................... (1,255,722)
-----------
Net unrealized appreciation...................... $10,537,312
==========
</TABLE>
(b) Non-income producing securities.
See notes to financial statements.
B-50
<PAGE> 96
THE SESSIONS GROUP
1ST SOURCE MONOGRAM SPECIAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ---------- ------------------------------- ------------
<C> <S> <C>
COMMERCIAL PAPER (4.8%):
$ 600,000 General Electric Capital Corp.
5.40%, 1/31/97............... $ 600,000
645,000 General Electric Capital Corp.
5.25%, 1/3/97................ 645,000
------------
Total Commercial Paper 1,245,000
------------
COMMON STOCKS (83.2%):
Apparel Manufacturers (2.7%):
19,900 Sport-Haley, Inc. (b).......... 249,993
10,400 St. John Knits, Inc............ 452,400
------------
702,393
------------
Banking (2.8%):
11,000 Bank United Corp., Class A..... 294,250
29,000 Commonwealth Bancorp, Inc...... 435,000
------------
729,250
------------
Beer, Wine & Distilled Beverages (0.8%):
20,000 Boston Beer Co., Inc. (b)...... 205,000
------------
Commercial Goods & Services (4.8%):
21,000 CCC Information Services Group
(b).......................... 336,000
25,400 ICTS Holland Productions....... 257,175
10,950 Sykes Enterprises, Inc. (b).... 410,625
21,900 Warrentec Corp. (b)............ 251,850
------------
1,255,650
------------
Communications Equipment (3.6%):
21,000 TALX Corp. (b)................. 173,250
19,000 Sawtek, Inc. (b)............... 752,875
------------
926,125
------------
Computer Software (18.5%):
12,200 Citrix Systems, Inc. (b)....... 476,563
21,000 Digex, Inc. (b)................ 217,875
7,000 ForeFront Group, Inc. (b)...... 38,500
19,000 Geoworks (b)................... 465,500
40,000 Microware Systems Corp. (b).... 570,000
13,100 Netscape Communications
Corp. (b).................... 745,063
91,000 Oak Technology, Inc. (b)....... 1,023,750
35,000 Platinum Technology, Inc.
(b).......................... 476,875
84,500 Ross Systems, Inc. (b)......... 813,312
------------
4,827,438
------------
Educational Services (0.9%):
18,200 Childrens Comprehensive
Services, Inc. (b)........... 238,875
------------
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ---------- ------------------------------- ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Electronic Components (11.7%):
21,000 Chips & Technologies, Inc.
(b).......................... $ 383,250
518 Comptronix Corp., Class A
(b).......................... 5
14,700 Micron Technology, Inc......... 428,137
40,900 S 3, Inc. (b).................. 664,625
55,200 Sonic Solutions, Inc. (b)...... 372,600
20,000 Triquint Semiconductor, Inc.
(b).......................... 527,500
14,500 Vitesse Semiconductor (b)...... 659,750
------------
3,035,867
------------
Emerging Technology (1.0%):
19,000 Electric Fuel Corp. (b)........ 133,000
12,000 General Scanning, Inc. (b)..... 141,000
------------
274,000
------------
Environmental Services (0.9%):
7,000 U.S. Filter Corp. (b).......... 222,250
------------
Human Resources (0.9%):
21,900 SOS Staffing Services, Inc.
(b).......................... 229,950
------------
Leisure & Recreational Products (2.4%):
17,600 Cannondale Corp. (b)........... 396,000
12,000 North Face, Inc. (b)........... 231,000
------------
627,000
------------
Medical--Hospitals (0.7%):
49,000 Integrated Medical
Resources (b)................ 189,875
------------
Medical Services & Supplies (10.3%):
8,200 Agouron Pharmaceuticals, Inc. (b).. 555,550
18,000 Cephalon, Inc. (b)............. 369,000
16,000 HEALTHSOUTH Corp. (b).......... 618,000
29,000 ICOS Corp. (b)................. 221,125
28,000 Innotech, Inc. (b)............. 217,000
7,200 Sola International, Inc. (b)... 273,600
12,000 Vivus, Inc. (b)................ 435,000
------------
2,689,275
------------
Oil--Field Services (2.6%):
28,700 Pride Petroleum
Services, Inc. (b)........... 667,275
------------
Retail--Specialty Stores (0.7%):
6,500 Insight Enterprises, Inc.
(b).......................... 182,000
------------
Savings & Loans (10.6%):
18,000 Dime Community
Bancorp, Inc. (b)............ 265,500
13,300 First Bell Bancorp, Inc........ 176,225
</TABLE>
Continued
B-51
<PAGE> 97
THE SESSIONS GROUP
1ST SOURCE MONOGRAM SPECIAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ---------- ------------------------------- ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Savings & Loans, continued
18,700 First Federal Savings Bank of
Colorado..................... $ 317,900
16,000 First Savings Bank of
Washington Bancorp, Inc...... 294,000
7,000 GreenPoint Financial Corp...... 330,750
14,000 Home Bancorp of Elgin, Inc.
(b).......................... 189,000
17,500 PFF Bancorp, Inc. (b).......... 260,313
20,000 Provident Financial
Holdings, Inc. (b)........... 280,000
11,700 St. Paul Bancorp, Inc.......... 343,688
7,000 Washington Mutual, Inc......... 303,188
------------
2,760,564
------------
Steel (0.5%):
7,000 Steel Dynamics, Inc. (b)....... 133,875
------------
Telecommunications--Equipment (6.8%):
7,000 Ascend Communications, Inc. (b)... 434,875
16,700 InterVoice, Inc. (b)........... 204,575
17,200 Verilink Corp. (b)............. 571,900
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ---------- ------------------------------- ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Telecommunications--Equipment, continued
22,000 WorldCom, Inc. (b)............. $ 573,375
------------
1,784,725
------------
Total Common Stocks 21,681,387
------------
U.S. TREASURY BILLS (6.1%):
$1,600,000 5.04%, 1/30/97................. 1,593,827
------------
Total U.S. Treasury Bills 1,593,827
------------
WARRANTS (0.0%):
5,000 Alza Corp...................... 625
------------
Total Warrants 625
------------
MUTUAL FUNDS (6.0%):
1,164,640 Fountain Square Treasury
Fund......................... 1,164,640
386,103 Fountain Square Commercial
Paper Fund................... 386,103
------------
Total Mutual Funds 1,550,743
------------
Total (cost-$24,173,510)(a) $ 26,071,582
==========
</TABLE>
- ---------
Percentages indicated are based on net assets of $26,058,467.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $ 3,737,578
Unrealized depreciation.......................... (1,839,506)
-----------
Net unrealized appreciation...................... $ 1,898,072
==========
</TABLE>
(b) Non-income producing securities.
See notes to financial statements.
B-52
<PAGE> 98
THE SESSIONS GROUP
1ST SOURCE INCOME FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<C> <S> <C>
CORPORATE BONDS (37.7%):
Banking (2.1%):
$ 1,000,000 Firstar Corp., 7.15%, 9/1/00,
Callable 9/1/98 @ 100 $ 1,007,661
------------
Financial Services (15.3%):
1,000,000 Associates Corp., 6.75%,
7/15/01..................... 1,004,869
1,000,000 Bear Stearns Co., Inc., 7.63%,
4/15/00..................... 1,031,797
1,250,000 General Electric Capital
Corp., 8.65%, 5/15/09,
Callable 5/15/97 @ 100...... 1,430,690
2,000,000 Lehman Brothers Holding Co.,
7.25%, 10/15/03............. 2,005,968
1,000,000 Salomon, Inc., 7.00%,
1/20/98..................... 1,007,685
1,000,000 Smith Barney Holdings, Inc.,
7.88%, 10/1/99.............. 1,035,493
------------
7,516,502
------------
Industrial Goods & Services (9.3%):
1,500,000 Smithkline Beecham Corp.,
7.50%, 5/1/02............... 1,530,366
2,000,000 Texas Instruments, Inc.,
6.88%, 7/15/00.............. 2,022,616
1,000,000 Union Pacific Resources,
7.00%, 10/15/06............. 1,003,154
------------
4,556,136
------------
Retail--Department Stores (2.6%):
1,250,000 J.C. Penney Co., Inc., 7.38%,
8/15/08..................... 1,268,032
------------
Paper Products (2.1%):
1,000,000 International Paper Co.,
7.00%, 6/1/01............... 1,014,203
------------
Tobacco (4.0%):
2,000,000 Philip Morris Cos., Inc.,
6.80%, 12/1/03.............. 1,970,992
------------
Transportation & Shipping (4.3%):
2,000,000 Norfolk Southern, 7.88%,
2/15/04....................... 2,117,584
------------
Total Corporate Bonds 19,451,110
------------
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<C> <S> <C>
PREFERRED STOCKS (4.0%):
Electrical & Electronic (2.0%):
40,000 Southwestern Public Services,
Series A, 7.85%, 10/21/01,
Callable 10/21/01 @ 25.00... $ 995,000
------------
Food Related (2.0%):
40,000 McDonald's Corp., 7.50%,
9/30/36, Callable 12/31/01 @
25.00....................... 980,000
------------
Total Preferred Stocks 1,975,000
------------
U.S. TREASURY NOTES (27.0%):
$ 1,000,000 5.38%, 5/31/98................ 992,500
2,000,000 5.88%, 11/15/99............... 1,993,750
2,000,000 6.25%, 5/31/00................ 2,008,750
3,000,000 7.75%, 2/15/01................ 3,170,625
5,000,000 6.50%, 10/15/06............... 5,028,125
------------
Total U.S. Treasury Notes 13,193,750
------------
U.S. TREASURY BONDS (6.1%):
3,000,000 5.63%, 11/30/98............... 2,984,064
------------
Total U.S. Treasury Bonds 2,984,064
------------
U.S. GOVERNMENT AGENCIES (20.3%):
Federal Home Loan Mortgage Corp.:
3,000,000 6.89%, 9/26/05................ 2,978,292
2,000,000 6.00%, 9/25/06................ 1,958,080
1,000,000 7.02%, 4/10/06................ 999,094
1,000,000 7.00%, 8/15/07................ 993,300
1,000,000 6.50%, 2/15/08................ 981,805
Government National Mortgage Assoc.:
2,000,000 7.00%, 12/16/06............... 1,995,580
------------
Total U.S. Government Agencies 9,906,151
------------
INVESTMENT COMPANIES (1.6%):
793,135 Fountain Square Treasury
Fund........................ 793,134
------------
Total Investments Companies 793,134
------------
Total (Cost-$48,295,225)(a) $48,303,209
==========
</TABLE>
- ---------
Percentages indicated are based on net assets of $48,959,269
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $ 340,509
Unrealized depreciation.......................... (332,525)
---------
Net unrealized appreciation...................... $ 7,984
=========
</TABLE>
See notes to financial statements.
B-53
<PAGE> 99
THE SESSIONS GROUP
1ST SOURCE MONOGRAM INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS (82.6%):
Aerospace/Defense (2.8%):
8,000 Raytheon Co................... $ 385,000
12,500 Sundstrand Corp............... 531,250
------------
916,250
------------
Automobiles (1.5%):
15,000 Ford Motor Co................. 478,125
------------
Automotive Parts (1.4%):
28,000 Excel Industries, Inc......... 465,500
------------
Banking (2.4%):
8,800 Fort Wayne National Corp...... 334,400
15,000 Magna Group, Inc.............. 442,500
------------
776,900
------------
Chemicals & Allied Parts (6.5%):
9,000 Betz Laboratories, Inc........ 526,500
20,000 Calgon Carbon Corp............ 245,000
10,000 Great Lakes Chemical Corp..... 467,500
11,000 Lubrizol Corp................. 341,000
25,000 Hanna (M. A.) Co.............. 546,875
------------
2,126,875
------------
Communications Equipment (5.7%):
9,000 General Motors Corp.--Class
H........................... 506,250
5,000 Harris Corp................... 343,125
16,700 L. M. Ericsson Telephone Co.
ADR......................... 504,131
8,000 Motorola, Inc................. 491,000
------------
1,844,506
------------
Computer Services (1.5%):
11,000 Electronic Data Systems
Corp........................ 475,750
------------
Construction--Engineering (1.1%):
10,000 Foster Wheeler Corp........... 371,250
------------
Cosmetics & Toiletries (1.4%):
8,000 Avon Products, Inc............ 457,000
------------
Electrical Equipment (4.9%):
12,000 AMP, Inc...................... 460,500
6,200 Emerson Electric Co........... 599,850
21,000 Esterline Technologies, Corp.
(b)......................... 548,625
------------
1,608,975
------------
Environmental Services (1.7%):
21,100 Browning-Ferris Industries,
Inc......................... 553,875
------------
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Financial Services (3.7%):
11,000 H & R Block, Inc.............. $ 319,000
10,000 Morgan Stanley Group, Inc..... 571,250
14,480 PIMCO Advisors L. P........... 325,800
------------
1,216,050
------------
Insurance (6.5%):
20,000 Le Salle RE Holdings 585,000
9,000 Lincoln National Corp......... 472,500
17,000 Travelers/Aetna Property &
Casualty Corp............... 601,375
22,000 USF&G Corp.................... 459,250
------------
2,118,125
------------
Machinery & Equipment (1.7%):
6,000 Deere & Co.................... 243,750
15,900 Keystone International,
Inc......................... 319,987
------------
563,737
------------
Medical Equipment & Supplies (0.9%):
10,000 Bard (C. R.), Inc............. 280,000
------------
Mining (4.0%):
30,000 Homestake Mining Co........... 427,500
11,000 IMC Global Strypes............ 441,375
5,000 Potash Corp. of
Saskatchewan, Inc........... 425,000
------------
1,293,875
------------
Oil--Integrated Companies (1.6%):
4,000 Atlantic Richfield Co......... 530,000
------------
Pharmaceuticals (5.8%):
9,000 Abbott Laboratories........... 456,750
6,000 Bristol-Myers Squibb Co....... 652,500
14,700 IVAX Corp..................... 150,675
8,000 Merck & Co., Inc.............. 634,000
------------
1,893,925
------------
Petroleum Refining (3.6%):
8,000 MAPCO, Inc.................... 272,000
10,000 Phillips Petroleum Co......... 442,500
19,000 USX--Marathon Group........... 453,625
------------
1,168,125
------------
Office--Automation & Equipment (0.8%):
5,000 Xerox Corp.................... 263,125
------------
</TABLE>
Continued
B-54
<PAGE> 100
THE SESSIONS GROUP
1ST SOURCE MONOGRAM INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Publishing (3.2%):
17,000 American Greetings Corp....... $ 482,375
7,000 Tribune Co.................... 552,125
------------
1,034,500
------------
Railroad (1.4%):
10,000 Kansas City Southern
Industries, Inc............. 450,000
------------
Real Estate Investment Trust (6.2%):
22,000 Burnham Pacific Properties,
Inc. 330,000
12,000 Hospitality Properties
Trust....................... 348,000
10,000 Prentiss Properties Trust..... 250,000
24,000 Thornburg Mortgage Asset
Corp........................ 513,000
23,800 Wellsford Residential Property
Trust....................... 577,150
------------
2,018,150
------------
Retail (2.9%):
9,000 J.C. Penney Co., Inc.......... 438,750
10,000 Long's Drug Stores, Inc....... 491,250
1 Price/Costco Inc. (b)......... 25
------------
930,025
------------
Steel (1.1%):
10,000 Carpenter Technology Corp..... 366,250
------------
Tires & Rubber Products (1.5%):
25,000 Cooper Tire & Rubber Co....... 493,750
------------
Telecommunications (2.6%):
10,000 Alltel Corp................... 313,750
17,000 US West Communications,
Inc......................... 548,250
------------
862,000
------------
Utilities--Electric (4.2%):
13,000 American Electric Power,
Co.......................... 534,625
16,000 Houston Industries, Inc....... 362,000
22,000 Montana Power Co.............. 470,250
------------
1,366,875
------------
Total Common Stocks 26,923,518
------------
PREFERRED STOCKS (6.3%):
Financial Services (2.1%):
6,000 Conseco, Inc., 7.00%, 2/1/00,
Callable 2/1/99 @ 62.20..... 682,500
------------
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<C> <S> <C>
PREFERRED STOCKS, CONTINUED:
Industrial (1.7%):
8,000 Airtouch Communications,
Series B, 6.00%, 8/16/99.... $ 218,000
14,000 Snyder Oil Corp., Callable
3/31/ 97 @ 25.90............ 339,500
------------
557,500
------------
Retail Stores (0.9%):
6,000 K Mart Preferred, 7.75%,
6/15/16, Callable 6/17/99 @
52.71....................... 292,500
------------
Toys (1.6%):
50,000 Tyco Toys, Inc., Series C,
Callable 7/1/99 @ 5.10...... 506,250
-----------
Total Preferred Stocks 2,038,750
------------
MUTUAL FUNDS (6.1%):
1,037,698 Fountain Square Treasury Fund 1,037,698
950,287 Fountain Square Commercial
Paper Fund.................. 950,287
------------
1,987,985
------------
CONVERTIBLE BONDS (8.1%):
Industrial Goods & Services (4.4%):
$ 300,000 General Instrument Corp.,
5.00%, 6/15/00, Callable
6/15/97 @ 102.14............ 319,500
150,000 IVAC Corp. 6.50%, 11/15/01,
Callable 11/15/97 @
100.93...................... 139,688
450,000 Mascotech 4.50%, 12/15/03,
Callable 12/15/97, @
102.50...................... 363,375
285,000 Oryx Energy Co. 7.50%,
5/15/14, Callable 5/15/98 @
101.50...................... 274,313
400,000 Park Electrochem 5.50%,
3/1/06, Callable 3/1/99 @
102.75...................... 350,000
------------
1,446,876
------------
Metals And Mining (1.2%):
400,000 Coeur D'Alene Mines Corp.
6.38%, 1/31/04, Callable
1/31/97 @ 103.64............ 370,500
------------
Technology (2.5%):
450,000 Integrated Device Technology
5.50%, 6/1/02, Callable
6/2/98 @ 102.75............. 397,125
</TABLE>
Continued
B-55
<PAGE> 101
THE SESSIONS GROUP
1ST SOURCE MONOGRAM INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<C> <S> <C>
CONVERTIBLE BONDS, CONTINUED:
Technology, continued:
$ 500,000 Telxon Cvt. 5.75%, 1/1/03,
Callable 1/5/99 @ 103.29.... $ 411,875
------------
809,000
------------
Total Convertible Bonds 2,626,376
------------
Total (Cost--$28,424,948) $ 33,576,629
==========
</TABLE>
- ---------
Percentages indicated are based on net assets of $32,580,369.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $ 5,839,635
Unrealized depreciation.......................... (687,954)
-----------
Net unrealized appreciation...................... $ 5,151,681
==========
</TABLE>
(b) Non-income producing securities.
See notes to financial statements.
B-56
<PAGE> 102
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
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.
The Group is authorized to issue an unlimited number of shares, which are
units of beneficial interest, without par value. The Group offers shares of
a number of different series or portfolios including the following series
for which 1st Source Bank serves as investment adviser: shares of the 1st
Source Monogram Diversified Equity Fund, 1st Source Monogram Special Equity
Fund, 1st Source Monogram Income Fund, and the 1st Source Monogram Income
Equity Fund (collectively, the "Funds" and individually, a "Fund").
The investment objective for each of the Diversified Equity Fund and the
Special Equity Fund is capital appreciation. The investment objectives of
the Income Equity Fund are capital appreciation with current income as a
secondary objective. The investment objective of the Income Fund is current
income consistent with preservation of capital.
Sales of shares of the Funds may be made to customers of 1st Source Bank
and its affiliates, to all accounts of correspondent banks of 1st Source
Bank and to the general public.
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 in common and preferred stocks, corporate bonds, commercial
paper, municipal securities and U.S. Government securities of the
Diversified Equity Fund, the Special Equity Fund, the Income Fund, the
Income Equity Fund are valued at their market values determined on the
basis of the latest available bid quotation in the principal market
(closing sales prices if the principal market is an exchange or NASDAQ
Market) 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.
Continued
B-57
<PAGE> 103
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1996
(Unaudited)
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 1st Source Bank 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 borrowing 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 debt obligations, interest rate and currency swaps, future
contracts, options, and forward currency contracts. The 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
Continued
B-58
<PAGE> 104
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1996
(Unaudited)
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' limitation on
investments in illiquid securities as set forth in the Funds' investment
restrictions.
DIVIDENDS TO SHAREHOLDERS:
A dividend for each of the Funds, other than the Special Equity Fund, is
declared monthly at the close of business on the day of declaration and
is paid monthly. A dividend for the Special Equity Fund is declared
quarterly at the close of business on the day of declaration and is paid
quarterly. Each such dividend consists of an amount of accumulated
undistributed net income of that Fund as determined necessary or
appropriate by the appropriate officers of the Group.
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.
FEDERAL INCOME TAXES:
It is the policy of each of the Funds to qualify or continue to qualify
as a regulated 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 five years
commencing with the date of the initial public offering.
Continued
B-59
<PAGE> 105
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1996
(Unaudited)
3. PURCHASES AND SALES OF PORTFOLIO SECURITIES:
Purchases and sales of portfolio securities (excluding short-term
securities) for the period ended December 31, 1996 are as follows
(Commencement of operations for the funds was September 20, 1996, September
19, 1996, September 23, 1996, and September 24, 1996, respectively):
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Diversified Equity Fund........................................ $17,556,643 $13,899,698
Special Equity Fund............................................ 9,742,055 7,820,298
Income Fund.................................................... 34,272,558 31,542,418
Income Equity Fund............................................. 8,024,617 4,222,759
</TABLE>
4. RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to the Funds by 1st Source Bank.
Under the terms of the investment advisory agreement, 1st Source Bank is
entitled to receive fees based on a percentage of the average net assets of
each Fund. 1st Source Bank 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, 1st Source Bank will refund to the
Funds, or otherwise bear, such excess. Such limitation did not affect the
calculation of the investment advisory fees during the period ended
December 31, 1996.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), an Ohio limited partnership, and BISYS Fund Services, Inc.
("BISYS Services") are subsidiaries of The BISYS Group, Inc.
BISYS, with whom certain officers and trustees of the Group are affiliated,
serves the Funds as administrator and distributor. 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 Services serves the Funds as Transfer Agent and Fund
Accountant.
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 1st Source Bank, 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.
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 1st Source Bank, its correspondent and
affiliated banks and BISYS, for providing ministerial, recordkeeping and/or
adminis-
Continued
B-60
<PAGE> 106
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1996
(Unaudited)
trative 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. The Group has
not implemented such plan as of December 31, 1996.
BISYS is also entitled to receive commissions on sales of shares of the
variable net asset value funds. For the period ended December 31, 1996,
BISYS received $1,222 from commissions earned on sales of shares of the
variable net asset value funds, of which $995 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 period ended
December 31, 1996:
<TABLE>
<CAPTION>
DIVERSIFIED SPECIAL INCOME
EQUITY EQUITY INCOME EQUITY
FUND FUND FUND FUND
----------- ------- ------- -------
<S> <C> <C> <C> <C>
INVESTMENT ADVISORY:
Annual fee before voluntary fee reductions
(percentage of average net assets)........ 1.10% .80% .55% .80%
Voluntary fee reductions.................... -- -- -- --
ADMINISTRATION FEES:
Annual fee before voluntary fee reductions
(percentage of average net assets)........ .20% .20% .20% .20%
Voluntary fee reductions.................... -- -- -- --
12B-1 FEES:
Annual fee before voluntary fee reductions
(percentage of average net assets)........ .25% .25% .25% .25%
Voluntary fee reductions.................... $46,151 $18,094 $33,240 $21,178
FUND ACCOUNTANT FEES........................ $ 8,168 $ 5,087 $ 3,626 $ 3,170
TRANSFER AGENT FEES......................... $ 7,760 $ 6,489 $ 6,465 $ 6,626
</TABLE>
5. ACQUISITION OF COMMON TRUST FUNDS
On September 20, 1996, September 19, 1996, September 23, 1996, September
24, 1996, respectively, the Diversified Equity, Special Equity, Income, and
Income Equity Funds acquired all of the assets of the Diversified Equity,
Special Equity Income, and Income Equity Common Trust Funds of 1st Source
Continued
B-61
<PAGE> 107
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1996
(Unaudited)
Bank. The following is a summary of shares issued, net assets acquired, net
asset value per share and unrealized appreciation (depreciation) as of the
dates of acquisition:
<TABLE>
<CAPTION>
DIVERSIFIED SPECIAL INCOME
EQUITY EQUITY INCOME EQUITY
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares................................ 6,620,301 2,687,767 3,096,895 4,788,284
Net Assets............................ $66,203,008 $26,877,666 $30,968,953 $47,882,850
Net Asset Value....................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
Unrealized Appreciation
(Depreciation)...................... $ 8,888,125 $ 2,343,983 $ (926,960) $ 3,626,554
</TABLE>
Continued
B-62
<PAGE> 108
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
FINANCIAL HIGHLIGHTS
(Unaudited)
<TABLE>
<CAPTION>
DIVERSIFIED SPECIAL INCOME
EQUITY EQUITY INCOME EQUITY
------------ ------------ ------------ ------------
FOR PERIOD FOR PERIOD FOR PERIOD FOR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 (C) 1996 (C) 1996 (C) 1996 (C)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................. $ 10.00 $ 10.00 $ 10.00 $ 10.00
------------ ------------ ------------ ------------
INVESTMENT ACTIVITIES
Net investment income.............................. -- -- 0.16 0.08
Net realized gains (losses) on investments......... 0.42 0.16 (0.02) 0.30
Net unrealized gains (losses) on investments....... 0.26 (0.16) 0.19 0.48
------------ ------------ ------------ ------------
Total from Investment Activities................. 0.68 0.00 0.33 0.86
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net investment income.............................. -- -- (0.16) (0.08)
In excess of net investment income................. -- -- -- --
Net realized gains................................. (0.22) (0.16) -- (0.05)
In excess of realized gains........................ -- (0.15) -- --
------------ ------------ ------------ ------------
Total Distributions.............................. (0.22) (0.31) (0.16) (0.13)
------------ ------------ ------------ ------------
Capital transactions................................. -- -- -- --
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD....................... $ 10.46 $ 9.69 $ 10.17 $ 10.73
============= ============= ============= =============
Total Return (excludes sales charge)................. 8.61%(a) -2.30%(a) 4.38%(a) 10.25%(a)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (000)................. $ 65,681 $ 26,058 $ 48,959 $ 32,580
Ratio of expenses to average net assets............ 1.57%(b) 1.33%(b) 1.01%(b) 1.32%(b)
Ratio of net investment income to average net
assets........................................... -0.08%(b) -0.11%(b) 1.31%(b) 2.39%(b)
Ratio of expenses to average net assets*........... 1.82%(b) 1.58%(b) 1.26%(b) 1.57%(b)
Ratio of net investment income to average net
assets*.......................................... -0.33%(b) -0.36%(b) 1.06%(b) 2.14%(b)
Portfolio Turnover Rate............................ 23% 37% 71% 14%
</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) Not annualized. The quoted return of the Portfolio includes performance of
certain collective trust portfolio ("Commingled") accounts for the periods
from June 30, 1985, November 30, 1985, June 30, 1985, and November 30, 1985,
respectively, to the mutual fund's commencement of operations.
(b) Annualized
(c) Commencement of the Funds began September 20, September 19, September 23,
and September 24, respectively.
See notes to financial statements.
B-63
<PAGE> 109
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> 110
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> 111
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.
The following summarizes the three 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 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
A-3
<PAGE> 112
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.
Moody's applies numerical modifiers (1, 2, and 3) with respect to
bonds rated Aa through A. 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 three 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.
To provide more detailed indications of credit quality, the ratings
from AA to A 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 three 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 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.
The following summarizes IBCA's three 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
A-4
<PAGE> 113
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.
The following summarizes Thomson's description of its three 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.
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.
A-5
<PAGE> 114
"SP-3": Speculative capacity to pay principal and interest.
The following summarizes the three 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 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.
The following summarizes the three 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.
A-6
<PAGE> 115
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
A-7
<PAGE> 116
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.
A-8
