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Part B
Fifth Third Funds
(formerly Fountain Square Funds)
Combined Statement of Additional Information
This Combined Statement of Additional Information (the "SAI") relates to
the following portfolios (the "Funds") of Fifth Third Funds (the "Trust"):
. Fifth Third Quality Growth Fund;
. Fifth Third Cardinal Fund;
. Fifth Third Pinnacle Fund;
. Fifth Third Equity Income Fund;
. Fifth Third Balanced Fund;
. Fifth Third Mid Cap Fund;
. Fifth Third International Equity Fund;
. Fifth Third Bond Fund For Income;
. Fifth Third Quality Bond Fund;
. Fifth Third U.S. Government Securities Fund;
. Fifth Third Municipal Bond Fund;
. Fifth Third Ohio Tax Free Bond Fund;
. Fifth Third Government Money Market Fund;
. Fifth Third Prime Money Market Fund;
. Fifth Third Tax Exempt Money Market Fund;
. Fifth Third U.S. Treasury Money Market Fund;
This SAI should be read with the Prospectuses for the Funds dated November 30,
1999. To receive a copy of any Prospectus, you may write the Trust or call
toll-free (888) 799-5353. This Statement is not a prospectus itself.
Fifth Third Funds
c/o Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
November 30, 1999, as revised
February 1, 2000
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Table of Contents
Page
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GENERAL INFORMATION ABOUT THE TRUST 1
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS 1
Types of Investments 2
Portfolio Turnover 14
Investment Limitations 14
Investment Risks (Ohio Tax Free Fund) 18
FIFTH THIRD FUNDS MANAGEMENT 20
Officers and Trustees 20
Trust Ownership 21
Trustees' Compensation 29
Trustee Liability 29
INVESTMENT ADVISORY SERVICES 29
Investment Advisors to the Trust 29
Advisory Fees 30
Sub-advisor 30
Sub-advisory Fees 30
Administrative Services 30
Transfer Agent and Dividend Disbursing Agent 32
BROKERAGE TRANSACTIONS 32
PURCHASING SHARES 34
Distribution Plan and Administrative Services Agreement
(Investment C Shares Only) 34
Conversion to Federal Funds 35
Exchanging Securities for Fund Shares 36
Payments to Dealers 36
DETERMINING NET ASSET VALUE 36
Determining Market Value of Securities 37
Valuing Municipal Bonds 37
Use of Amortized Cost 38
Trading in Foreign Securities 39
REDEEMING SHARES 39
Redemption in Kind 39
TAX STATUS 40
The Funds' Tax Status 40
Shareholders' Tax Status 40
Capital Gains 40
Foreign Taxes 41
TOTAL RETURN 41
YIELD 43
Tax Equivalency Table 44
PERFORMANCE COMPARISONS 45
FINANCIAL STATEMENTS 49
APPENDIX 49
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GENERAL INFORMATION ABOUT THE TRUST
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated September 15, 1988.
The Declaration of Trust permits the Trust to offer separate series of
shares of beneficial interest representing interests in separate portfolios of
securities, and it permits the Trust to offer separate classes of each such
series. Currently, the Trust offers the following Funds and the following
classes of each Fund:
. Investment A Shares, Investment C Shares and Institutional Class Shares of
the following Funds: Fifth Third U.S. Government Securities Fund
("Government Securities Fund"), Fifth Third Quality Bond Fund ("Quality
Bond Fund"), Fifth Third Ohio Tax Free Bond Fund ("Ohio Tax Free Fund"),
Fifth Third Quality Growth Fund ("Quality Growth Fund"), Fifth Third
Cardinal Fund ("Cardinal Fund"), Fifth Third Pinnacle Fund ("Pinnacle
Fund"), Fifth Third Mid Cap Fund ("Mid Cap Fund"), Fifth Third Balanced
Fund ("Balanced Fund"), Fifth Third International Equity Fund
("International Equity Fund"), Fifth Third Equity Income Fund ("Equity
Income Fund"), Fifth Third Bond Fund For Income ("Bond Fund For Income"),
and Fifth Third Municipal Bond Fund ("Municipal Bond Fund");
. Investment A Shares and Institutional Class Shares of the following Funds:
Fifth Third Government Money Market Fund ("Government Money Market Fund"),
Fifth Third Prime Money Market Fund ("Prime Money Market Fund") and Fifth
Third Tax Exempt Money Market Fund ("Tax Exempt Fund"); and
. Institutional Class Shares of Fifth Third U.S. Treasury Money Market Fund
("U.S. Treasury Money Market Fund").
All Funds are advised by Fifth Third Bank (the "Advisor"), except Pinnacle
Fund, which is advised by Heartland Capital Management, Inc. ("Heartland"),
Fifth Third Bank and Heartland are owned by Fifth Third Bancorp. Morgan Stanley
Asset Management, Inc. (the "Sub-advisor") serves as investment sub-advisor to
the International Equity Fund.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
The prospectuses discuss the objective of Funds and certain policies
employed to achieve those objectives. The following discussion supplements the
description of the Funds' investment policies in the prospectus. The Funds'
respective investment objectives cannot be changed without approval of
shareholders. Unless otherwise indicated, the investment policies described
below may be changed by the Board of Trustees (the "Trustees") without
shareholder approval.
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Types of Investments
Bank Instruments. The Prime Money Market Fund, the Tax Exempt Money Market
Fund, the Quality Bond Fund, the Quality Growth Fund, the Mid Cap Fund, the
Balanced Fund, the Equity Income Fund, the Bond Fund For Income, and the
Municipal Bond Fund may invest in the instruments of banks and savings and loans
whose deposits are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund, both of which are administered by the Federal Deposit Insurance
Corporation, such as certificates of deposit, demand and time deposits, savings
shares, and bankers' acceptances. However, these instruments are not necessarily
guaranteed by those organizations.
In addition to domestic bank obligations such as certificates of deposit;
demand and time deposits, and bankers' acceptances, the Prime Money Market Fund
may invest in:
. Eurodollar Certificates of Deposit issued by foreign branches of U.S.
or foreign banks;
. Eurodollar Time Deposits, which are U.S. dollar-denominated deposits
in foreign branches of U.S. or foreign banks; and
. Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
Futures and Options Transactions. All of the Funds except the Money Market
funds may engage in futures and options transactions as described below to the
extent consistent with their investment objectives and policies.
As a means of reducing fluctuations in the net asset value of Shares of the
Funds, the Funds may attempt to hedge all or a portion of their portfolio
through the purchase of put options on portfolio securities and put options on
financial futures contracts for portfolio securities. The Funds may attempt to
hedge all or a portion of their portfolio by buying and selling financial
futures contracts and writing call options on futures contracts. The Funds may
also write covered call options on portfolio securities to attempt to increase
current income.
The Funds will maintain their position in securities, options, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired. An option position may be closed out over-the-counter
or on an exchange which provides a secondary market for options of the same
series.
Futures Contracts. The Funds except the Money Market funds may enter into
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futures contracts. A futures contract is a firm commitment by, the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. However, a securities
index futures contract is an agreement pursuant to which two parties
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agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index was originally written. No physical
delivery of the underlying security in the index is made.
Financial futures contracts call for the delivery of particular debt
instruments issued or guaranteed by the U.S. Treasury or by specified agencies
or instrumentalities of the U.S. government at a certain time in the future.
The purpose of the acquisition or sale of a futures contract by a Fund is
to protect it from fluctuations in the value of securities caused by
unanticipated changes in interest rates or stock prices without necessarily
buying or selling securities. For example, in the fixed income securities
market, price moves inversely to interest rates. A rise in rates means a drop in
price. Conversely, a drop in rates means a rise in price. In order to hedge its
holdings of fixed income securities against a rise in market interest rates, a
Fund could enter into contracts to "go short" to protect itself against the
possibility that the prices of its fixed income securities may decline during
the Fund's anticipated holding period. The Fund would "go long" to hedge against
a decline in market interest rates. The International Equity Fund may also
invest in securities index futures contracts when the Sub-advisor believes such
investment is more efficient, liquid or cost-effective than investing directly
in the securities underlying the index.
Stock Index Options. The Funds other than Fifth Third Money Market Funds
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may purchase put options on stock indices listed on national securities
exchanges or traded in the over-the-counter market. A stock index fluctuates
with changes in the market values of the stocks included in the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the Funds' portfolio correlate with price
movements of the stock index selected. Because the value of an index option
depends upon movements in the level of the index rather than the price of a
particular stock, whether the Funds will realize a gain or loss from the
purchase of options on an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of certain indices, in an
industry or market segment, rather than movements in the price of a particular
stock. Accordingly, successful use by the Funds of options on stock indices will
be subject to the ability of the Advisors to predict correctly movements in the
direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
Put Options on Financial Futures Contracts. The Funds other than Fifth
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Third Money Market Funds may purchase listed (and, in the case of International
Equity Fund, over-the-counter) put options on financial futures contracts. The
Funds would use these options only to protect portfolio securities against
decreases in value resulting from market factors such as anticipated increase in
interest rates, or in the case of the International Equity Fund when the Sub-
advisor believes such investment is more efficient, liquid or cost-effective
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than investing directly in the futures contract or the underlying securities or
when such futures contracts or securities are unavailable for investment upon
favorable terms.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified price, the
purchase of a put option on a futures contract entitles (but does not obligate)
its purchaser to decide on or before a future date whether to assume a short
position at the specified price. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related futures contracts
will also decrease in value and the option will increase in value. In such an
event, a Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by a Fund upon the sale of the
second option will be large enough to offset both the premium paid by a Fund for
the original option plus the realized decrease in value of the hedged
securities.
Alternatively, a Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract of the
type underlying the option (for a price less than the strike price of the
option) and exercise the option. A Fund would then deliver the futures contract
in return for payment of the strike price. If a Fund neither closes out nor
exercises an option, the option will expire on the date provided in the option
contract, and only the premium paid for the contract will be lost.
The International Equity Fund may write listed put options on financial
futures contracts to hedge its portfolio or when the Sub-advisor believes such
investment is more efficient, liquid or cost-effective than investing directly
in the futures contract or the underlying securities or when such futures
contracts or securities are unavailable for investment upon favorable terms.
When the Fund writes a put option on a futures contract, it receives a premium
for undertaking the obligation to assume a long futures position (buying a
futures contract) at a fixed price at any time during the life of the option.
Call Options on Financial Futures Contracts. The Funds other than the Fifth
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Third Money Market Funds may write listed call options or over-the-counter call
options on futures contracts, to hedge their portfolios against an increase in
market interest rates, or in the case of International Equity Fund, when the
Sub-advisor believes such investment is more efficient, liquid or cost-effective
than investing directly in the futures contract or the underlying securities or
when such futures contracts or securities are unavailable for investment upon
favorable terms. When a Fund writes a call option on a futures contract, it is
undertaking the obligation of assuming a short futures position (selling a
futures contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise and cause the
price of futures to decrease, a Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing the value of
a Fund's call option position to increase.
In other words, as the underlying future's price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that a
Fund keeps the premium
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received for the option. This premium can help substantially offset the drop in
value of a Fund's portfolio securities.
Prior to the expiration of a call written by a Fund, or exercise of it by
the buyer, a Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of the second option will be less than the premium
received by a Fund for the initial option. The net premium income of a Fund will
then substantially offset the realized decrease in value of the hedged
securities.
The International Equity Fund may buy listed call options on financial
futures contracts to hedge its portfolio. When the Fund purchases a call option
on a futures contract, it is purchasing the right (not the obligation) to assume
a long futures position (buy a futures contract) at a fixed price at any time
during the life of the option.
Limitation on Open Futures Positions. A Fund will not maintain open
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positions in futures contracts it has sold or options it has written on futures
contracts if, in the aggregate, the value of the open positions (marked to
market) exceeds the current market value of its securities portfolio plus or
minus the unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the securities or securities index underlying
the futures contract and the futures contracts. If a Fund exceeds this
limitation at any time, it will take prompt action to close out a sufficient
number of open contracts to bring its open futures and options positions within
this limitation.
"Margin" in Futures Transactions. Unlike the purchase or sale of a
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security, the Funds do not pay or receive money upon the purchase or sale of a
futures contract. Rather, the Funds are required to deposit an amount of
"initial margin" in cash or U.S. Treasury bills with its custodian (or the
broker, if legally permitted). The nature of initial margin in futures
transactions is different from that of margin in securities transactions in that
a futures contract's initial margin does not involve the borrowing by a Fund to
finance the transactions. Initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to a Fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day a Fund pays or
receives cash, called "variation margin, " equal to the daily change in value of
the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by a Fund but is instead
settlement between a Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, a Fund
will mark to market its open futures positions.
The Funds are also required to deposit and maintain margin when they write
call options on futures contracts.
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Purchasing Put Options on Portfolio Securities. The Funds other than the
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Fifth Third Money Market Funds may purchase put options on portfolio securities
to protect against price movements in particular securities in their respective
portfolios. A put option gives a Fund, in return for a premium, the right to
sell the underlying security to the writer (seller) at a specified price during
the term of the option.
Writing Covered Call Options on Portfolio Securities. The Funds other than
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the Fifth Third Money Market Funds may also write covered call options to
generate income. As the writer of a call option, a Fund has the obligation, upon
exercise of the option during the option period, to deliver the underlying
security upon payment of the exercise price. A Fund may sell call options either
on securities held in its portfolio or on securities which it has the right to
obtain without payment of further consideration (or securities for which it has
segregated cash in the amount of any additional consideration).
Over-the-Counter Options. The Funds other than the Fifth Third Money Market
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Funds may purchase and write over-the-counter options on portfolio securities in
negotiated transactions with the buyers or writers of the options for those
options on portfolio securities held by a Fund and not traded on an exchange.
Collateralized Mortgage Obligations ("CMOs"). The U.S. Government
Securities Fund, the Quality Bond Fund, the Balanced Fund and the Bond Fund For
Income may invest in CMOs. Privately issued CMOs generally represent an
ownership interest in a pool of federal agency mortgage pass-through securities
such as those issued by the Government National Mortgage Association. The terms
and characteristics of the mortgage instruments may vary among pass-through
mortgage loan pools.
The market for such CMOs has expanded considerably since its inception. The
size of the primary issuance market and the active participation in the
secondary market by securities dealers and other investors make government-
related pools highly liquid.
Convertible Securities. The Quality Growth Fund, the Mid Cap Fund, the
Balanced Fund, the International Equity Fund and the Equity Income Fund may
invest in convertible securities. Convertible securities include fixed-income
securities that may be exchanged or converted into a predetermined number of
shares of the issuer's underlying common stock at the option of the holder
during a specified period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures, units consisting
of "usable" bonds and warrants or a combination of the features of several of
these securities. The investment characteristics of each convertible security
vary widely, which allows convertible securities to be employed for a variety of
investment strategies. Each of these Funds will exchange or convert the
convertible securities held in its portfolio into shares of the underlying
common stock when, in the Advisor's opinion, the investment characteristics of
the underlying common shares will assist the Fund in achieving its investment
objectives. Otherwise the Fund may hold or trade convertible securities. In
selecting convertible securities for the Fund, the Advisor evaluates the
investment characteristics of the convertible security as a fixed income
instrument and the investment potential of the underlying equity security for
capital
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appreciation. In evaluating these matters with respect to a particular
convertible security, the Advisor considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
Warrants. The Quality Growth Fund, the Mid Cap Fund, the Balanced Fund, the
International Equity Fund, and the Equity Income Fund may invest in warrants.
Warrants are basically options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common stock at
issuance) valid for a specific period of time. Warrants may have a life ranging
from less than a year to twenty years or may be perpetual. However, most
warrants have expiration dates after which they are worthless. In addition, if
the market price of the common stock does not exceed the warrant's exercise
price during the life of the warrant, the warrant will expire as worthless.
Warrants have no voting rights, pay no dividends, and have no rights with
respect to the assets of the corporation issuing them. The percentage increase
or decrease in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock.
Municipal Securities. The Ohio Tax Free Fund may invest in Ohio municipal
securities which have the characteristics set forth in their respective
prospectus. The Municipal Bond Fund and the Tax Exempt Money Market Fund may
invest in municipal securities of any state which have the characteristics set
forth in the prospectus.
Examples of Municipal Securities are:
. governmental lease certificates of participation issued by state or
municipal authorities where payment is secured by installment payments
for equipment, buildings, or other facilities being leased by the
state or municipality. Government lease certificates purchased by the
Fund will not contain nonappropriation clauses;
. municipal notes and tax-exempt commercial paper;
. serial bonds;
. tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes at a later date;
. bond anticipation notes sold in anticipation of the issuance of
long-term bonds in the future;
. pre-refunded municipal bonds whose timely payment of interest and
principal is ensured by an escrow of U.S. government obligations; and
. general obligation bonds.
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Participation Interests. The Ohio Tax Free Fund, the Municipal Bond Fund
and the Tax Exempt Money Market Fund may invest in participation interests. The
financial institutions from which the Ohio Tax Free Fund, the Municipal Bond
Fund, and the Tax Exempt Money Market Fund may purchase participation interests
frequently provide or secure from another financial institution irrevocable
letters of credit or guarantees and give the Funds the right to demand payment
of the principal amounts of the participation interests plus accrued interest on
short notice (usually within seven days).
Variable Rate Municipal Securities. The Ohio Tax Free Fund, the Municipal
Bond Fund and the Tax Exempt Money Market Fund may invest in variable rate
municipal securities. Variable interest rates generally reduce changes in the
market value of municipal securities from their original purchase prices.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal securities than
for fixed income obligations. Many municipal securities with variable interest
rates purchased by the Funds are subject to repayment of principal (usually
within seven days) on the Funds' demand. The terms of these variable-rate demand
instruments require payment of principal and accrued interest from the issuer of
the municipal obligations, the issuer of the participation interests, or a
guarantor of either issuer.
Municipal Leases. The Ohio Tax Free Fund, the Municipal Bond Fund, and the
Tax Exempt Money Market fund may purchase municipal securities in the form of
participation interests which represent undivided proportional interests in
lease payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease obligations may
be subject to periodic appropriation. If the entity does not appropriate funds
for future lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default. The trustee would only be able to enforce lease
payments as they become due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment. In determining the liquidity of
municipal lease securities, the Advisor, under the authority delegated by the
Trustees, will base its determination on the following factors: (a) whether the
lease can be terminated by the lessee; (b) the potential recovery, if any, from
a sale of the leased property upon termination of the lease; (c) the lessee's
general credit strength (e.g., its debt, administrative, economic and financial
characteristics and, prospects); (d) the likelihood that the lessee will
discontinue appropriating funding for the leased property because the property
is no longer deemed essential to its operations (e.g., the potential for an
"event of nonappropriation"); and (e) any credit enhancement or legal recourse
provided upon an event of nonappropriation or other termination of the lease.
Cash. From time to time, such as when suitable securities are not
available, the Funds may invest a portion of their assets in cash. Any portion
of a Fund's assets maintained in cash will reduce the Fund's return and, in the
case of a bond fund and Money Market fund, the Fund's yield.
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Foreign Currency Transactions. The International Equity Fund may engage in
foreign currency transactions.
Currency Risks. The exchange rates between the U.S. dollar and foreign
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currencies are a function of such factors as supply and demand in the currency
exchange markets, international balances of payments, governmental intervention,
speculation and other economic and political conditions. Although the Fund
values its assets daily in U.S. dollars, the Fund may not convert its holdings
of foreign currencies to U.S. dollars daily. The Fund may incur conversion costs
when it converts its holdings to another currency. Foreign exchange dealers may
realize a profit on the difference between the price at which the Fund buys and
sells currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its portfolio investments. The Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or through forward
contracts to purchase or sell foreign currencies.
Forward Foreign Currency Exchange Contracts. The Fund may enter into
-------------------------------------------
forward foreign currency exchange contracts in order to protect against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and a foreign currency involved in an underlying transaction.
However, forward foreign currency exchange contracts may limit potential gains
which could result from a positive change in such currency relationships. The
Advisors believe that it is important to have the flexibility to enter into
forward foreign currency exchange contracts whenever it determines that it is in
the Fund's best interest to do so. The Fund will not speculate in foreign
currency exchange.
The Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts when it would be obligated to deliver
an amount of foreign currency in excess of the value of its portfolio securities
or other assets denominated in that currency or, in the case of a "cross-hedge"
denominated in a currency or currencies that the Advisors believe will tend to
be closely correlated with that currency with regard to price movements.
Generally, the Fund will not enter into a forward foreign currency exchange
contract with a term longer than one year.
Foreign Currency Options. A foreign currency option provides the option
------------------------
buyer with the right to buy or sell a stated amount of foreign currency at the
exercise price on a specified date or during the option period. The owner of a
call option has the right, but not the obligation, to buy the currency.
Conversely, the owner of a put option has the right, but not the obligation, to
sell the currency.
When the option is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the terms of the sold option. However, either the seller or
the buyer may, in the secondary market, close its position during the option
period at any time prior to expiration.
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A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on foreign currency
generally rises in value if the underlying currency depreciates in value.
Although purchasing a foreign currency option can protect the Fund against an
adverse movement in the value of a foreign currency, the option will not limit
the movement in the value of such currency. For example, if the Fund was holding
securities denominated in a foreign currency that was appreciating and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, the Fund would not have to exercise their put option. Likewise, if the
Fund were to enter into a contract to purchase a security denominated in foreign
currency and, in conjunction with that purchase, were to purchase a foreign
currency call option to hedge against a rise in value of the currency, and if
the value of the currency instead depreciated between the date of purchase and
the settlement date, the Fund would not have to exercise its call. Instead, the
Fund could acquire in the spot market the amount of foreign currency needed for
settlement.
Special Risks Associated with Foreign Currency Options. Buyers and sellers
------------------------------------------------------
of foreign currency options are subject to the same risks that apply to options
generally. In addition, there are certain additional risks associated with
foreign currency options. The markets in foreign currency options are relatively
new, and the Fund's ability to establish and close out positions on such options
is subject to the maintenance of a liquid secondary market. Although the Fund
will not purchase or write such options unless and until, in the opinion of the
Advisors, the market for them has developed sufficiently to ensure that the
risks in connection with such options are not greater than the risks in
connection with the underlying currency, there can be no assurance that a liquid
secondary market will exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Available
quotation information is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. option markets are closed while the markets for the underlying
currencies remain open,
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significant price and rate movements may take place in the underlying markets
that cannot be reflected in the options markets until they reopen.
Foreign Currency Futures Transactions. By using foreign currency futures
-------------------------------------
contracts and options on such contracts, the Fund may be able to achieve many of
the same objectives as it would through the use of forward foreign currency
exchange contracts. The Fund may be able to achieve these objectives possibly
more effectively and at a lower cost by using futures transactions instead of
forward foreign currency exchange contracts.
Special Risks Associated with Foreign Currency Futures Contracts and
--------------------------------------------------------------------
Related Options. Buyers and sellers of foreign currency futures contracts are
- ---------------
subject to the same risks that apply to the use of futures generally. In
addition, there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options on
currencies, as described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts is
relatively new. The ability to establish and close out positions on such options
is subject to the maintenance of a liquid secondary market. To reduce this risk,
the Fund will not purchase or write options on foreign currency futures
contracts unless and until, in the opinion of the Advisors, the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with transactions in the
underlying foreign currency futures contracts. Compared to the purchase or sale
of foreign currency futures contracts, the purchase of call or put options on
futures contracts involves less potential risk to the Fund because the maximum
amount at risk is the premium paid for the option (plus transaction costs).
However, there may be circumstances when the purchase of a call or put option on
a futures contract would result in a loss, such as when there is no movement in
the price of the underlying currency or futures contract.
U.S. Government Obligations. The types of U.S. government obligations in
which any of the Funds may invest include direct obligations of the U.S.
Treasury, such as U.S. Treasury bills, notes, and bonds, and obligations issued
or guaranteed by U.S. government agencies or instrumentalities. These securities
are backed by:
. the full faith and credit of the U.S. Treasury;
. the issuer's right to borrow from the U.S. Treasury;
. the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentality issuing the obligations.
Variable Rate U.S. Government Securities. Some of the short-term U.S.
----------------------------------------
government securities that the Money Market Fund may purchase carry variable
interest rates. These securities have a rate of interest subject to adjustment
at least annually. This adjusted interest rate is ordinarily tied to some
objective standard, such as the 91-day U.S. Treasury bill rate.
11
<PAGE>
Variable interest rates will reduce the changes in the market value of such
securities from their original purchase prices. Accordingly, the potential for
capital appreciation or capital depreciation should not be greater than the
potential for capital appreciation or capital depreciation of fixed interest
rate U.S. government securities having maturities equal to the interest rate
adjustment dates of the variable rate U.S. government securities.
When-Issued and Delayed Delivery Transactions. Each Fund may enter into
when-issued and delayed delivery transactions. These transactions are made to
secure what is considered to be an advantageous price or yield for a Fund. No
fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of a Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
assets are marked-to-market daily and are maintained until the transaction has
been settled. The Funds do not intend to engage in when-issued and delayed
delivery transactions to an extent that would cause the segregation of more than
20% of the total value of their assets.
Repurchase Agreements. Each Fund may enter into repurchase agreements. A
repurchase agreement is an agreement whereby a fund takes possession of
securities from another party in exchange for cash and agrees to sell the
security back to the party at a specified time and price. To the extent that the
original seller does not repurchase the securities from a Fund, a Fund could
receive less than the repurchase price on any sale of such securities. In the
event that such a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by a Fund might be delayed pending court action.
The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Advisors to be creditworthy pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements. The Funds may also enter into reverse
repurchase agreements. These transactions are similar to borrowing cash. In a
reverse repurchase agreement, a Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash and
agrees that on a stipulated date in the future it will repurchase the portfolio
instrument by remitting the original consideration plus interest at an agreed
upon rate. The use of reverse repurchase agreements may enable a Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that a Fund will be able to avoid selling portfolio instruments
at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated on a Fund's records at the trade date. These securities are
marked to market daily and maintained until the transaction is settled.
12
<PAGE>
Lending of Portfolio Securities. Each Fund (other than U.S. Treasury Money
Market Fund) may lend portfolio securities. The collateral received when a Fund
lends portfolio securities must be valued daily and, should the market value of
the loaned securities increase, the borrower must furnish additional collateral
to the Fund. During the time portfolio securities are on loan, the borrower pays
the Fund any dividends or interest paid on such securities. Loans are subject to
termination at the option of a Fund or the borrower. A Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent collateral
to the borrower or placing broker. A Fund would not have the right to vote
securities on loan, but would terminate the loan and regain the right to vote if
that were considered important with respect to the investment.
Restricted And Illiquid Securities. Each Fund may invest in securities
issued in reliance on the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933. Section 4(2) securities are restricted as to
disposition under the federal securities laws and are generally sold to
institutional investors, such as the Funds, who agree that they are purchasing
such securities for investment purposes and not with a view to public
distributions. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) securities are normally resold to other institutional investors
like the Funds through or with the assistance of the issuer or investment
dealers who make a market in such securities, thus providing liquidity. The
Funds believe that Section 4(2) securities and possibly certain other restricted
securities which meet the criteria for liquidity established by the Trustees are
quite liquid. The Funds intend, therefore, to treat the restricted securities
which meet the criteria for liquidity established by the Trustees, including
Section 4(2) securities, as determined by the Advisors, as liquid and not
subject to the investment limitation applicable to illiquid securities.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under the Securities and Exchange commission
("SEC") staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive safe harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under Rule
144A. The Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities to the Trustees. The
Trustees consider the following criteria in determining the liquidity of certain
restricted securities: the frequency of trades and quotes for the security; the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; dealer undertakings to make a market in the security;
and the nature of the security and the nature of the marketplace trades.
13
<PAGE>
Portfolio Turnover
The Funds will not attempt to set or meet portfolio turnover rates since
any turnover would be incidental to transactions undertaken in an attempt to
achieve the Funds' investment objectives. The following is a list of the
portfolio turnover rates for the Funds except the Money Market funds:
Fiscal year ended Fiscal year ended
July 31, 1999 July 31, 1998
------------------ ------------------
Government Securities Fund 93% 155%
Quality Bond Fund 349% 279%
Ohio Tax Free Fund 47% 42%
Quality Growth Fund 34% 45%
Mid Cap Fund 49% 44%
Balanced Fund 128% 135%
International Equity Fund 42% 39%
Equity Income Fund 69% 41%
Bond Fund For Income 104% 127%
Municipal Bond Fund 110% 121%
Cardinal Fund 15%* 15%**
Pinnacle Fund 51% 38%
Portfolio turnover for the Quality Bond Fund increased during the past fiscal
year from the immediately prior fiscal year because the Fund restructured its
portfolio to take advantage of the competitive pricing among new issues.
*reflects period October 1, 1998 through July 31, 1999.
** for the fiscal year ended September 30, 1998
Investment Limitations
Issuing Senior Securities and Borrowing Money. The Funds will not issue
senior securities except that a Fund may borrow money directly or through
reverse repurchase agreements in amounts up to one-third of the value of its
total assets, including the amount borrowed and except to the extent that a Fund
(with the exception of Ohio Tax Free Fund and Municipal Bond Fund) may enter
into futures contracts, as applicable. The Funds will not borrow money or engage
in reverse repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate management of
the portfolio by enabling a Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. No Fund (other than the Prime
14
<PAGE>
Money Market Fund and U.S. Treasury Money Market Fund) will purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding.
Selling Short and Buying on Margin. The Funds will not sell any securities
short or purchase any securities on margin, but may obtain such short-term
credits as are necessary for clearance of purchases and sales of securities.
The deposit or payment by the Funds (with the exception of Ohio Tax Free
Fund and Municipal Bond Fund) of initial or variation margin in connection with
futures contracts or related options transactions is not considered the purchase
of a security on margin.
Pledging Assets. The Prime Money Market Fund will not mortgage, pledge or
hypothecate any assets. The other Funds will not mortgage, pledge, or
hypothecate any assets, except to secure permitted borrowings. The Government
Money Market Fund, Tax Exempt Money Market Fund and U.S. Treasury Money Market
Fund only may pledge having a value not exceeding the lesser of the dollar
amounts borrowed or 10% of the value of total assets at the time of the pledge.
For purposes of this limitation, where applicable, (a) the deposit of assets in
escrow in connection with the writing of covered put or call options and the
purchase of securities on a when-issued basis and (b) collateral arrangements
with respect to: (i) the purchase and sale of stock options (and options on
stock indices) and (ii) initial or variation margin for futures contracts, will
not be deemed to be pledges of a Fund's assets.
Investing in Commodities. None of the Funds will purchase or sell
commodities, commodity contracts, or commodity futures contracts except to the
extent that the Funds (with the exception of Ohio Tax Free Fund, Government
Securities Fund and Municipal Bond Fund) may engage in transactions involving
futures contracts or options on futures contracts.
Investing in Real Estate. None of the Funds will purchase or sell real
estate, including limited partnership interests, although the Funds (with the
exception of Government Securities Fund) may invest in securities of issuers
whose business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
Diversification of Investments. With respect to 75% of the value of their
respective total assets (and with respect to 100% of their total assets with
respect to Tax Exempt Money Market Fund, Government Money Market Fund and U.S.
Treasury Money Market Fund) a Fund (with the exception of Ohio Tax Free Fund),
will not purchase securities issued-by any one issuer (other than cash, cash
items or securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements collateralized by
such securities), if as a result more than 5% of the value of their total assets
would be invested in the securities of that issuer. A Fund will not acquire more
than 10% of the outstanding voting securities of any one issuer.
Dealing in Puts and Calls. The Ohio Tax Free Fund, the Municipal Bond Fund
and the Tax Exempt Money Market Fund will not buy or sell puts, calls,
straddles, spreads, or any combination of these.
15
<PAGE>
Concentration of Investments. The Government Securities Fund, Quality Bond
Fund, Quality Growth Fund, Mid Cap Fund, Balanced Fund and International Equity
Fund will not invest 25% or more of the value of their respective total assets
in any one industry, except that these Funds may invest more than 25% of the
value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities and repurchase agreements
collateralized by such securities.
The Prime Money Market Fund will not invest more than 25% of the value of
its total assets in any one industry except commercial paper of finance
companies. However, the Prime Money Market Fund reserves the right to invest
more than 25% of its net assets in domestic bank instruments (such as time and
demand deposits and certificates of deposit), U.S. government obligations or
instruments secured by these Money Market instruments, such as repurchase
agreements. The Prime Money Market Fund will not invest more than 25% of its net
assets in instruments of foreign banks.
The Ohio Tax Free Fund, the Municipal Bond Fund and the Tax Exempt Money
Market Fund will not purchase securities if, as a result of such purchase, 25%
or more of the value of their respective total assets would be invested in any
one industry or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects. However,
the Funds may invest as temporary investments more than 25% of the value of
their respective assets in cash or cash items, securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities, or instruments
secured by these Money Market instruments, i.e., repurchase agreements.
Underwriting. A Fund will not underwrite any issue of securities, except as
a Fund may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
The above limitations cannot be changed with respect to a Fund without
approval of the holders or a majority of that Fund's Shares. The following
limitations may be changed by the Trustees without shareholder approval.
Shareholders will be notified before any material change in these limitations
becomes effective.
Investing in Restricted Securities. The Funds will not invest more than 10%
of the value of their respective net assets in securities that are subject to
restrictions on resale under federal securities law.
Investing in Illiquid Securities. The Funds other than the Money Market
funds, will not invest more than 15% of the value of their respective net assets
in illiquid securities, including, as applicable, repurchase agreements
providing for settlement more than seven days after notice, over-the-counter
options, certain restricted securities not determined by the Trustees to be
liquid, and non-negotiable time deposits with maturities over seven days. The
Money Market funds will not invest more than 10% of the value of their
respective net assets in illiquid securities.
16
<PAGE>
Investing in Securities of Other Investment Companies. With respect to 100%
of their total assets (and for the Money Market Funds, with respect to 75% of
the Funds' total Assets), the Funds will limit their respective investments in
other investment companies to no more than 3% of the total outstanding voting
stock of any investment company, invest no more than 5% of their respective
total assets in any one investment company, and will invest no more than 10% of
their respective total assets in investment companies in general. The Funds will
purchase securities of closed-end investment companies only in open market
transactions involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets. It should be noted that
investment companies incur certain expenses such as management fees and,
therefore, any investment by a Fund in shares of another investment company
would be subject to such expenses.
Investing in New Issuers. The Government Securities Fund, Quality Bond
Fund, Quality Growth Fund, Mid Cap Fund, Balanced Fund, International Equity
Fund and the Prime Money Market Fund will not invest more than 5% of the value
of their respective total assets in securities of issuers which have records of
less than three years of continuous operations, including the operation of any
predecessor.
The Ohio Tax Free Fund, the Municipal Bond Fund and the Tax Exempt Money
Market Fun will not invest more that 5% of the value of their respective total
assets in industrial development bonds where the principal and interest are the
responsibility of companies (or guarantors, where applicable) with less than
three years of continuous operations, including the operation of any
predecessor.
Investing in Issuers Whose Securities are Owned by Officers and Trustees of
the Trust. No Fund (other than the U.S. Treasury Money Market Fund, the Prime
Money Market Fund and the Government Money Market Fund) may purchase or retain
the securities of any issuer if the officers and Trustees of the Trust or its
investment advisor, owning individually more than 1/2 of 1% of the issuer's
securities, together own more than 5% of the issuer's securities.
Investing in Minerals. No Fund (other than the U.S. Treasury Money Market
Fund or the Government Money Market Fund may purchase interests in oil, gas, or
other mineral exploration or development programs or leases, except they may
purchase the securities of issuers which invest in or sponsor such programs.
Investing in Commodities, Commodity Contracts, or Real Estate. The Prime
Money Market Fund will not invest in commodities, commodity contracts, or real
estate, except that it may purchase Money Market instruments issued by companies
that invest in real estate or sponsor such interests. The Tax Exempt Money
Market Fund will not purchase or sell commodities, commodity contracts,
commodity futures contracts or real estate, including limited partnership
interests, although the Tax Exempt Money Market Fund may invest in the
securities of issuers whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or interests in real
estate.
17
<PAGE>
Arbitrage Transactions. No Fund (other than the Money Market funds) may
enter into transactions for the purpose of engaging in arbitrage.
Purchasing Securities to Exercise Control. No Fund (other than the Money
Market funds) may purchase securities of a company for the purpose of exercising
control or management.
Investing in Warrants. The Quality Growth Fund, Cardinal Fund, Mid Cap
Fund, Balanced Fund, International Equity Fund, and Equity Income Fund may not
invest more than 5% of their net assets in warrants, including those acquired in
units or attached to other securities. To comply with certain state
restrictions, a Fund will limit its investment in such warrants not listed on
the New York or American Stock Exchanges to 2% of its net assets. (If state
restrictions change, this latter restriction may be revised without notice to
shareholders.) For purposes of this investment restriction, warrants will be
valued at the lower of cost or market, except that warrants acquired by a Fund
in units with or attached to securities may be deemed to be without value.
Investing in Put Options. The International Equity Fund will not purchase
put options on securities or futures contracts, unless the securities or futures
contracts are held in the Fund's portfolio or unless the Fund in entitled to
them in deliverable form without further payment or after segregating cash in
the amount of any further payment.
Writing Covered Call Options. The International Equity Fund will not write
call options on securities or futures contracts unless the securities of futures
contracts are held in the Fund's portfolio or unless the Fund is entitled to
them in deliverable form without further payment or after segregating cash in
the amount of any further payment.
Except with respect to the Funds' policy of borrowing money, if a
percentage limitation is adhered to at the time of investment, a later increase
or decrease in percentage resulting from any change in value or net assets will
not result in a violation of such restriction. For purposes of its policies and
limitations, the Funds consider certificates of deposit and demand and time
deposits issued by a U.S. branch of a domestic bank or savings and loan having
capital, surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
The Ohio Tax Free Fund and the Municipal Bond Fund do not expect to borrow
money or pledge securities in excess of 5% of the value of their respective net
assets during the coming fiscal year.
Investment Risks (Ohio Tax Free Fund)
The State of Ohio's economy is a leading industrial state and exporter of
manufactured goods. During the past two decades, both the number and percentage
of manufacturing jobs, particularly in durable goods, has been declining. Job
growth in the state has been primarily in
18
<PAGE>
business services and distribution sectors. The state is largely concentrated in
motor vehicles and equipment, steel, rubber products and household appliances.
Because the State of Ohio and certain municipalities have large exposure to
these industries, trends in these industries, over the long term, may impact the
demographic and financial position of the State of Ohio and its municipalities.
To the degree that domestic manufacturers in industries to which Ohio
municipalities have exposure fail to make competitive adjustments, employment
statistics and disposable income of residents in Ohio may deteriorate, possibly
leading to population declines and erosion of municipality tax bases.
Both the economic trends above and the political climate in various
municipalities may have contributed to the decisions of various businesses and
individuals to relocate outside the state. A municipality's political climate in
particular may affect its own credit standing. For both the State of Ohio and
underlying Ohio municipalities, adjustment of credit ratings by the ratings
agencies may affect the ability to issue securities and thereby affect the
supply of obligations meeting the quality standards for investment by the Fund.
The state ended fiscal year 1998 with a positive budgetary fund balance of
approximately $953 million. Personal taxes have been cut in recent years, a
result of the strong economy. As of March 1998 the Budget Stabilization Fund had
a balance of $862 million, up from $828 million the end of fiscal year 1997. A
March 24, 1997, Ohio Supreme Court decision requires major changes in Ohio's
school funding arrangements. These changes pose significant but manageable
challenges and should not threaten the overall fiscal stability of the state.
The state has established procedures for municipal fiscal emergencies under
which joint state/local commissions are established to monitor the fiscal
affairs of a financially troubled municipality. The act, established in 1979,
requires the municipality to develop a financial plan to eliminate deficits and
cure any defaults. These procedures have been applied to approximately twenty-
four cities and villages, including the city of Cleveland; in nineteen of these
communities, the fiscal situation has been resolved and the procedures
terminated. This fiscal emergency legislation has been amended to include
counties and townships.
The foregoing discussion only highlights some of the significant financial
trends and problems affecting the State of Ohio and underlying municipalities.
Special Restriction on Fifth Third Government Money Market Fund
The Fund will invest at least 65% of total assets in short-term obligations
issued or guaranteed as to principal or interest by the U.S. Government, its
agencies or instrumentalities.
Special Restriction on Fifth Third U.S. Treasury Money Market Fund
The Fund will invest at least 65% of total assets in short-term obligations
issued by the U.S. Treasury.
19
<PAGE>
FIFTH THIRD FUNDS MANAGEMENT
Officers and Trustees
Officers and Trustees of the Trust are listed with their addresses,
principal occupations, and present positions. None of the Trustees are
"interested persons" of Fifth Third Bank (the "Advisor"), Fifth Third Bancorp,
The BISYS Group, Inc., BISYS Fund Services, Inc., BISYS Fund Services Ohio,
Inc., or BISYS Fund Services Limited Partnership, as that term is defined in
Section 2(a)(19) of the 1940 Act.
Albert E. Harris, 5905 Graves Road, Cincinnati, OH 45243. Birthdate: July
2, 1932. Chairman of the Board of Trustees of the Trust, formerly Chairman
of the Board EDB Holdings, Inc. (retired July, 1993).
Edward Burke Carey, 394 East Town Street, Columbus, OH 43215. Birthdate:
July 2, 1945. Member of the Board of Trustees, President of Carey Leggett
Realty Advisors.
Lee A. Carter, 425 Walnut Street, Cincinnati, OH 45202. Birthdate: December
17, 1938. Member of the Board of Trustees, formerly President, Local
Marketing Corporation (retired December 31, 1993).
Stephen G. Mintos, 3435 Stelzer Road, Columbus, Ohio 43219-3035. Birthdate:
February 5, 1954. President of the Trust, employee of BISYS Fund Services,
Inc.
Jeffrey C. Cusick, 3435 Stelzer Road, Columbus, Ohio 43219-3035. Birthdate:
May 19, 1959. Vice President of the Trust, and formerly the Secretary and
Treasurer of the Trust, employee of BISYS Fund Services, Inc.; from
September 1993 to July 1995, Assistant Vice President, Federated
Administrative Services.
Rodney L. Ruehle, 3435 Stelzer Road, Columbus, Ohio 43219-3035. Birthdate:
April 26, 1968. Secretary of the Trust, and employee of BISYS Fund
Services, Limited Partnership.
Gary R. Tenkman, 3435 Stelzer Road, Columbus, Ohio 43219-3035. Birthdate:
September 16, 1970. Treasurer of the Trust, and employee of BISYS Fund
Services, Limited Partnership.
Karen L. Blair, 3435 Stelzer Road, Columbus, Ohio 43219-3035. Birthdate:
February 26, 1966. Assistant Secretary and Assistance Treasurer of the
Trust, and employee of BISYS Fund Services, Limited Partnership.
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<PAGE>
Trust Ownership
As of November 15, 1999, the Officers and Trustees owned less than 1% of
any class of any Fund.
As of November 15, 1999, the following persons owned 5% or more of any
class of Shares of a Fund:
Fifth Third Quality Growth Fund-Investment A Shares
BHC Securities Inc. 5,471,985.874 97.97%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market St. #1200
Philadelphia, PA 19103-3212
Fifth Third Quality Growth Fund-Investment C Shares:
BHC Securities Inc. 434,322.406 99.02%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market St. #1200
Philadelphia, PA 19103-3212
Fifth Third Quality Growth Fund-Institutional Shares:
Fifth Third Bank 13,032,501.704 50.24%
Trust and Investment Services (C)
Attn: Trust Accounting Dept MD 1090F2
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 7,615,585.271 29.36%
Trust and Investment Services (R)
Attn: Trust Accounting Dept MD 1090F2
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 5,263,915.724 20.29%
Expediter
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Cardinal Fund-Investment A Shares:
BHC Securities Inc. 4,821,224.517 40.24%
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
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<PAGE>
Fifth Third Cardinal Fund-Investment C Shares:
BHC Securities Inc. 31,495.021 64.78%
Trade House Accounting
Attn: Mutual Fund Department
2005 Market St., 11th Floor
Philadelphia, PA 19103
Fifth Third Cardinal Fund-Institutional Shares:
Fifth Third Bank 69,187.802 34.93%
Trust and Investment Services (C)
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 128,859.808 65.07%
Trust and Investment Services (R)
Attn: Trust Accounting Dept MD 109048
38 Fountain Square
Cincinnati, OH 45263
Fifth Third Pinnacle Fund-Investment A Shares:
BHC Securities Inc. 1,357,067.476 98.46%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Pinnacle Fund-Investment C Shares:
BHC Securities Inc. 162,106.472 98.74%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Pinnacle Fund-Institutional Shares:
Fifth Third Bank 509,230.517 29.71%
Trust and Investment Services (C)
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
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<PAGE>
Fifth Third Bank 171,364.642 10.02%
Trust and Investment Services (R)
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 371,291.536 21.70%
Expediter
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Equity Income Fund-Investment A Shares:
BHC Securities Inc. 1,230,390.979 99.13%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Equity Income Fund-Investment C Shares:
BHC Securities Inc. 81,777.165 98.76%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Equity Income Fund-Institutional Shares:
Fifth Third Bank 8,552,904,954 95.01%
Trust and Investment Services (C)
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Balanced Fund-Investment A Shares:
BHC Securities Inc. 4,596,080.766 91.95%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Balanced Fund-Investment C Shares:
BHC Securities Inc. 412,368.705 98.52%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
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<PAGE>
Fifth Third Balanced Fund-Institutional Shares:
Fifth Third Bank 1,075,790.554 12.17%
Trust and Investment Services (C)
Attn: Trust Accounting Dept MD 1090F2
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 4,131,679.723 46.75%
Trust and Investment Services (R)
Attn: Trust Accounting Dept MD 1090F2
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 3,625,357.975 41.02%
Expediter
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Mid Cap Fund-Investment A Shares:
BHC Securities Inc. 1,562,232.821 91.60%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Mid Cap Fund-Investment C Shares:
BHC Securities Inc. 48,105.524 100.00%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Mid Cap Fund-Institutional Shares:
Fifth Third Bank 6,274,297.844 51.66%
Trust and Investment Services (C)
Attn: Trust Accounting Dept MD 1090F2
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 3,696,217.356 30.43%
Trust and Investment Services (R)
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 2,174,051.562 17.90%
Expediter
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Fifth Third International Equity Fund-Investment A Shares:
BHC Securities Inc. 454,600.589 99.19%
Trade House Accounting
2005 Market Street
Philadelphia, PA 19103
Fifth Third International Equity Fund-Investment C Shares:
BHC Securities Inc. 15,999.731 89.81%
Trade House Accounting
2005 Market Street
Philadelphia, PA 19103
Donaldson Lufkin Jenrette 1,813.644 10.18%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Fifth Third International Equity Fund-Institutional Shares:
Fifth Third Bank & Investment Services 8,542,921.012 63.16%
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank & Investment Services 4,439,013.025 32.82%
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bond Fund for Income-Investment A Shares:
BHC Securities Inc. 1,440,670.401 46.14%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Bond Fund for Income-Investment C Shares:
BHC Securities Inc. 44,771.550 100.00%
Trade House Account
Attn: Mutual Funds
1 commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Bond Fund for Income-Institutional Shares:
Fifth Third Bank 16,170,312.747 96.25%
Trust and Investment Services (C)
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Fifth Third Quality Bond Fund-Investment A Shares:
BHC Securities Inc. 1,036,245.699 99.38%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street, #1200
Philadelphia, PA 19103-3212
Fifth Third Quality Bond Fund-Investment C Shares:
BHC Securities Inc. 84,061.408 100.00%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street, #1200
Philadelphia, PA 19103-3212
Fifth Third Quality Bond Fund Institutional Shares:
Fifth Third Bank 6,440,162.376 43.52%
Trust and Investment Services (C)
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 6,895,616.810 46.60%
Trust and Investment Services (R)
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 1,319,843.686 8.92%
Expediter
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Government Securities Fund-Investment A Shares:
BHC Securities Inc. 372,011.440 98.54%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Government Securities Fund-Investment C Shares:
BHC Securities Inc. 39,248.088 100.00%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C>
Fifth Third Government Securities Fund-Institutional Shares:
Fifth Third Bank 2,453,533.790 53.49%
Trust and Investment Securities (C)
Attn: Trust Account Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 1,475,293.138 32.17%
Trust and Investment Securities (R)
Attn: Trust Account Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Bank 657,737.631 14.34%
Expediter
Attn: Trust Account Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Municipal Bond Fund-Investment A Shares:
BHC Securities Inc. 25,948.211 95.08%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Municipal Bond Fund-Institutional Shares:
Fifth Third Bank 9,827,948.746 99.73%
Trust and Investment Securities (C)
Attn: Trust Account Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Ohio Tax Free Fund-Investment A Shares:
BHC Securities Inc. 2,113,994.104 99.91%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
Fifth Third Ohio Tax Free Fund-Investment C Shares:
BHC Securities Inc. 117,594.773 99.59%
Trade House Account
Attn: Mutual Funds
1 Commerce Square 2005 Market Street #1200
Philadelphia, PA 19103-3212
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
Fifth Third Ohio Tax Free Fund-Institutional Shares:
Fifth Third Bank 18,008,713.416 98.43%
Trust and Investment Services (C)
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Government Money Market Fund-Investment A Shares:
Fifth Third Bank Trust Dept 320,532,227.900 91.94%
Attn: Kim Haney
38 Fountain Square Plaza
Cincinnati, OH 45202
Fifth Third Government Money Market Fund-Institutional Shares:
Fifth Third Bank Trust Dept 251,071,044.300 100.00%
Attn: Kim Haney
38 Fountain Square Plaza
Cincinnati, OH 45202
Fifth Third Prime Money Market Fund-Investment A Shares:
Fifth Third Bank Trust Dept 101,267,670.830 99.98%
Attn: Kim Haney
38 Fountain Square Plaza
Cincinnati, OH 45202
Fifth Third Prime Money Market Fund-Institutional Shares:
Fifth Third Bank Trust Dept 347,733,272.620 92.92%
Attn: Kim Haney
38 Fountain Square Plaza
Cincinnati, OH 45202
Fifth Third Tax Exempt Money Market Fund-Investment A Shares:
Fifth Third Bank 22,696,917.270 86.07%
Trust and Investment Services
Attn: Diame Harmening MD 1090F2
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third Tax Exempt Money Market Fund-Institutional Shares:
Fifth Third Bank 70,729,868.250 100.00%
Trust and Investment Services (C)
Attn: Trust Accounting Dept MD 109048
38 Fountain Square Plaza
Cincinnati, OH 45263
Fifth Third U.S. Treasury Money Market Fund-Institutional Shares:
Fifth Third Bank Trust Dept 750,239,637.870 84.19%
Attn: Kim Haney
38 Fountain Square Plaza
Cincinnati, OH 45202
</TABLE>
28
<PAGE>
Trustees' Compensation
Aggregate Compensation
Name and Position with Trust from Trust*+
- ---------------------------- ------------
Edward Burke Carey, Trustee $7,800
Lee A. Carter, Trustee $7,800
Albert E. Harris, Trustee, Chairman of the Board $9,800
- ----------------
* Information is furnished for the fiscal year ended July 31, 1999. The Trust
is the only investment company in the Fund complex.
+ The aggregate compensation is provided for the Trust which is comprised of
sixteen portfolios.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
Investment Advisors to the Trust
The Trust's investment advisors to all Funds other than the Pinnacle Fund
is Fifth Third Bank. It provides investment advisory services through its Trust
and Investment Division. The Trust's advisor to the Pinnacle Fund is Heartland.
Fifth Third Bank and Heartland are wholly-owned subsidiaries of Fifth Third
Bancorp.
Neither advisor shall be liable to the Trust, a Fund, or any shareholder of
any of the Funds for any losses that may be sustained in the purchase, holding,
or sale of any security or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the Trust.
Because of the internal controls maintained by Fifth Third Bank and
Heartland to restrict the flow of non-public information, a Fund's investments
are typically made without any knowledge of Fifth Third Bank's, Heartland's or
affiliates' lending relationship with an issuer.
29
<PAGE>
Advisory Fees
For its advisory services, Fifth Third Bank receives an annual investment
advisory fee as described in the prospectus. The following shows all investment
advisory fees incurred by the Funds and the amounts of those fees that were
voluntarily waived or reimbursed by the Advisor for the fiscal years ended July
31, 1999, July 31, 1998, and July 31, 1997 (amounts in thousands):
<TABLE>
<CAPTION>
Year ended Amount Year ended Amount Year ended Amount
Fund Name July 31, 1999 Waived-1999 July 31, 1998 Waived-1998 July 31, 1997 Waived-1997
<S> <C> <C> <C> <C> <C> <C>
Government Securities Fund $ 261 $ 38 $ 228 $ 33 $ 234 $ 46
Quality Bond Fund 680 -- 545 -- 483 --
Ohio Tax Free Bond Fund 1,122 79 980 -- 813 --
Quality Growth Fund 4,920 -- 3,810 -- 2,328 --
Mid Cap Fund 1,753 -- 1,725 -- 1,146 --
Balanced Fund 1,673 -- 1,217 -- 861 --
International Equity Fund 1,634 -- 1,471 -- 1,361 --
Equity Income Fund 1,311 -- 1,088 -- 442 --
Bond Fund For Income 1,369 -- 938 -- 411 --
Municipal Bond Fund 661 -- 591 -- 282 --
Cardinal Fund 1,364* -- n/a n/a n/a n/a
Pinnacle Fund 586 -- 129 -- n/a n/a
Government Money Market Fund 2,789 -- 1,284 52 986 135
Prime Money Market Fund 1,657 83 1,762 88 1,358 139
Tax Exempt Money Market Fund 185* 60 n/a n/a n/a n/a
U.S. Treasury Money Market Fund 3,707 1,298 2,795 978 1,966 655
</TABLE>
*Reflects operations for the period October 1, 1998 through July 31, 1999.
Sub-advisor
Morgan Stanley Asset Management, Inc. is the sub-advisor to International
Equity Fund under the terms of a Sub-advisory Agreement between Fifth Third Bank
and Morgan Stanley Asset Management, Inc.
Sub-advisory Fees
For its sub-advisory services, Morgan Stanley Asset Management, Inc.
receives an annual sub-advisory fee paid by the Advisor as described in the
prospectus.
For the year ended July 31, 1997, the Sub-advisor earned fees from
International Equity Fund of $680,483, none of which was waived. For the year
ended July 31, 1998, the Sub-advisor earned fees from International Equity Fund
of $777,259, none of which was waived. For the year ended July 31, 1999, the
Sub-advisor earned fees from International Equity Fund of $735,375, none of
which was waived.
Administrative Services
30
<PAGE>
BISYS Fund Services L.P., 3435 Stelzer Road, Columbus, Ohio 43219, provided
administrative personnel and services to the Funds for the fees set forth in the
prospectus. The following shows all fees earned by BISYS and the amounts of
those fees that were voluntarily waived. For the years ended July 31, 1997 and
July 31, 1998 and July 31, 1999 (Amounts in Thousands):
<TABLE>
<CAPTION>
Year ended Amount Year ended Amount Year ended Amount
Fund Name July 31, 1999 Waived-1999 July 31, 1998 Waived-1998 July 31, 1997 Waived-1997
<S> <C> <C> <C> <C> <C> <C>
Government Securities Fund $ 83 $ 46 $ 76 $ 41 $ 55 $ 14
Quality Bond Fund 217 120 180 99 114 30
Ohio Tax Free Fund 358 176 324 142 198 11
Quality Growth Fund 1,079 290 865 100 397 17
Mid Cap Fund 385 156 383 116 192 16
Balanced Fund 367 91 277 116 141 30
International Equity Fund 292 -- 265 -- 166 --
Equity Income Fund 288 75 247 113 85 37
Bond Fund For Income 437 70 310 111 114 50
Municipal Bond Fund 211 116 196 108 77 33
Cardinal Fund 400* 25 n/a n/a n/a n/a
Pinnacle Fund 129 9 22 11 n/a n/a
Government Money Market Fund 1,245 697 582 321 301 84
Prime Money Market Fund 741 372 801 441 426 128
Tax Exempt Money Market Fund 66* 37 n/a n/a n/a n/a
U.S. Treasury Money Market Fund 1,659 927 1,267 699 610 177
</TABLE>
*Reflects operations for the period October 1, 1998 through July 31, 1999.
Fifth Third Bank performs sub-administration services on behalf of each
Fund, for which it receives compensation from BISYS Fund Services L.P. For the
years ended July 31, 1997, July 31, 1998 and July 31, 1999, Fifth Third Bank
earned the following sub-administrative fees (amounts in thousands):
Year Ended Year Ended Year Ended
Fund Name July 31, 1997 July 31, 1998 July 31, 1999
Government Securities Fund $11 $10 $12
Quality Bond Fund
Ohio Tax Free Fund
Quality Growth Fund
Mid Cap Fund
Balanced Fund
International Equity Fund
Equity Income Fund
Bond Fund for Income
Municipal Bond Fund
Cardinal Fund n/a n/a
Pinnacle Fund n/a
Government Money Market Fund
Prime Money Market Fund
Tax Exempt Money Market Fund n/a n/a
U.S. Treasury Money Market Fund
31
<PAGE>
Under the custodian agreement, Fifth Third Bank holds each Fund's portfolio
securities and keeps all necessary records and documents relating to its duties.
Pursuant to an agreement with Fifth Third Bank, The Bank of New York, acts as
the International Equity Fund's sub-custodian for foreign assets held outside
the United States and employs sub-custodians. Fees for custody services are
based upon the market value of Fund securities held in custody plus out-of-
pocket expenses. For fiscal years ended July 31, 1997, July 31, 1998 and July
31, 1999 (amounts in thousands), those fees were approximately $388,000 $449,000
and $510,000 respectively, none of which was waived.
Transfer Agent and Dividend Disbursing Agent
Fifth Third Bank serves as transfer agent and dividend disbursing agent for
the Funds. The fee paid to the transfer agent is based upon the size, type and
number of accounts and transactions made by shareholders.
Fifth Third Bank also maintains the Trust's accounting records. The fee
paid for this service is based upon the level of the Funds' average net assets
for the period plus out-of-pocket expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Advisors and Sub-advisor look for prompt execution of
the order at a favorable price. In working with dealers, the Advisors and Sub-
advisor will generally use those who are recognized dealers in specific
portfolio instruments, except when a better price and execution of the order can
be obtained elsewhere. The Advisors and Sub-advisor make decisions on portfolio
transactions and selects brokers and dealers subject to guidelines established
by the Trustees.
The Advisors and Sub-advisor may select brokers and dealers who offer
brokerage and research services. These services may be furnished directly to the
Funds or to the Advisors and Sub-advisor and may include, advice as to the
advisability of investing in securities, security analysis and reports, economic
studies, industry studies, receipt of quotations for portfolio evaluations, and
similar services.
The Advisors and Sub-advisor and their affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research services
to execute securities transactions. They determine in good faith that
commissions charged by such persons are reasonable in relationship to the value
of the brokerage and research services provided. For the fiscal year ended July
31, 1999, the Funds paid brokerage commissions in exchange for brokerage and
research services described above in the following amounts: Ohio Tax Free Bond,
$2,767 of $2,767 total brokerage commissions paid; Quality Growth, $87,290 of
the $438,887 total brokerage commissions paid; Mid Cap, $44,181 of the $309,794
total brokerage commissions paid; Balanced, $26,749 of the $142,315 total
brokerage commissions
32
<PAGE>
paid; Equity Income, $67,699 of the $263,461 total brokerage commissions paid;
Bond Fund for Income, $700 of the $700 total brokerage commissions paid;
Municipal Bond, $2,740 of the $2,740 total brokerage commissions paid; Cardinal,
$196,608 of the $196,608 total brokerage commissions paid; and Pinnacle,
$134,823 of the $134,823 total brokerage commissions paid.
Research services provided by brokers may be used by the Advisors and Sub-
advisor in advising the Funds and other accounts. To the extent that receipt of
these services may supplant services for which the Advisors and Sub-advisor or
their affiliates might otherwise have paid, it would tend to reduce their
expenses.
Although investment decisions for the Funds are made independently from
those of the other accounts managed by the Advisors and Sub-advisor, the
Advisors and Sub-advisor may invest Fund assets in the same securities and at
the same time as they invest assets of other accounts that they manage. When one
of the Funds and one or more other accounts managed by the Advisors and Sub-
advisor are prepared to invest in, or desire to dispose of, the same security,
available investments or opportunities for sales will be allocated in a manner
believed by the Advisors and Sub-advisor to be equitable to each. In some cases,
this procedure may adversely affect the price paid or received by the Funds or
the size of the position obtained or disposed of by the Funds. In other cases,
however, it is believed that coordination and the ability to participate in
volume transactions will be to the benefit of the Funds.
During the fiscal year ended July 31, 1999, some of the Funds acquired
securities of the Funds' regular brokers or dealers or their parents as follows
(Amounts in Thousands):
<TABLE>
<CAPTION>
Fund Security Principal/Shares Market Value
- ---- -------- ---------------- ------------
<S> <C> <C> <C>
Quality Bond Fund Bear Stearns Co., Inc., 6.45% $5,000,000 $4,909,000
due 08/01/02
Balanced Fund Salomon Smith Barney Holdings, $3,000,000 $3,005,000
7.38%, due 05/15/07
T. Rowe Price Associates, Inc. 80,000 $2,800,000
common stock
A.G. Edwards, Inc. 30,000 $ 829,000
common stock
International Equity Deutsche Bank, AG 9,383 $ 595,000
Fund common stock
Equity Income Fund A.G. Edwards, Inc. 78,000 $2,155,000
common stock
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C> <C>
Cardinal Fund T. Rowe Price Associates, Inc. 60,000 $2,100,000
common stock
Mid Cap Fund A.G. Edwards, Inc. 170,000 $4,696,000
common stock
T. Rowe Price Associates, Inc. 220,000 $7,700,000
common stock
</TABLE>
PURCHASING SHARES
Shares of the Funds are sold at their net asset value with an applicable
sales charge or contingent deferred sales charge on days the New York Stock
Exchange and the Federal Reserve Bank of Cleveland are open for business. The
procedure for purchasing Investment A Shares, Investment C Shares or
Institutional Class Shares of the Funds is explained in the prospectus for such
Fund and Class under "Investing in the Funds."
Distribution Plan and Administrative Services Agreement (Investment C Shares
Only)
With respect to Investment A Shares and Investment C Shares of the Funds,
the Trust has adopted a Plan pursuant to Rule l2b-1 which was promulgated by the
Securities and Exchange Commission pursuant to the Investment Company Act of
1940. The Plan provides for payment of fees to the distributor to finance any
activity which is principally intended to result in the sale of a Fund's Shares
subject to the Plan. Such activities may include the advertising and marketing
of Shares; preparing printing, and distributing prospectuses and sales
literature to prospective shareholders, brokers, or administrators; and
implementing and operating the Plan. Pursuant to the Plan, the distributor may
enter into agreements to pay fees to brokers for distribution and administrative
support services and to other participating financial institutions and persons
for distribution assistance and support services to the Funds and their
shareholders. The administrative services are provided by a representative who
has knowledge of the shareholder's particular circumstances and goals, and
include, but are not limited to: communicating account openings; communicating
account closings; entering purchase transactions; entering redemption
transactions; providing or arranging to provide accounting support for all
transactions, wiring funds and receiving funds for Share purchases and
redemptions, confirming and reconciling all transactions, reviewing the activity
in Fund accounts, and providing training and supervision of broker personnel;
posting and reinvesting dividends to Fund accounts or arranging for this service
to be performed by the Funds' transfer agent; and maintaining and distributing
current copies of prospectuses and shareholder reports to the beneficial owners
of Shares and prospective shareholders.
The Trustees expect that the Plan will result in the sale of a sufficient
number of Shares so as to allow a Fund to achieve economic viability. It is also
anticipated that an increase in
34
<PAGE>
the size of a Fund will facilitate more efficient portfolio management and
assist a Fund in seeking to achieve its investment objective.
Pursuant to the Plan, with respect to Investment A Shares, the Funds are
authorized to pay the distributor a monthly distribution fee computed at the
annual rate of up to 0.25% of the average aggregate net asset value of the
Investment A Shares of each applicable Fund held during the month. As of the
date of this Statement of Additional Information, the Funds are not accruing or
paying l2b-1 fees for Investment A Shares. The Funds do not intend to accrue or
pay 12b-1 fees with respect to Investment A Shares until either separate
classes of shares have been created for certain fiduciary investors for the
Funds or a determination is made that such investors will be subject to the
12b-1 fees.
Pursuant to the Plan, with respect to Investment C Shares, the Funds are
authorized to pay the distributor a monthly distribution fee computed at the
annual rate of up to 0.75% of the average aggregate net asset value of the
Investment C Shares of each applicable Fund held during the month. For the
fiscal year ended July 31, 1999, the distributor received $119,000 pursuant to
the Plan.
With respect to Investment C Shares, the Trust may enter into an
Administrative Service Agreement to permit the payment of fees to financial
institutions, including Fifth Third Bank, to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. Benefits to shareholders of Investment C
Shares of the Funds may include: (1) providing personal services to
shareholders; (2) investing shareholder assets with a minimum of delay and
administrative detail; (3) enhancing shareholder recordkeeping systems; and (4)
responding promptly to shareholders' requests and inquiries concerning their
accounts.
For the fiscal year ended July 31, 1999, the Funds paid $59,000 to Fifth
Third Bank to compensate BHC Securities, Inc. for providing administrative
services to Investment C Shares of the Funds.
Purchases with Proceeds from Redemptions of Unaffiliated Mutual Funds Shares
Investors may purchase Investment A Shares of the Funds at net asset value,
without a sales charge, with the proceeds from the redemption of shares of an
unaffiliated mutual fund that is not a money market or stable net asset value
fund. If the purchase of Investment A Shares is made with proceeds from the
redemption of mutual fund shares that were not sold with a sales charge or
commission, the investor must have held such mutual fund shares for at least 90
days to be eligible for the purchase of Investment A Shares at net asset value.
The purchase must be made within 60 days of the redemption, and the Funds must
be notified by the investor in writing, or by his financial institution at the
time the purchase is made.
Conversion to Federal Funds
It is the Funds' policy to be as fully invested as possible so that maximum
interest or dividends may be earned. To this end, all payments from shareholders
must be in federal funds or be converted into federal funds. Fifth Third Bank
acts as the shareholder's agent in depositing checks and converting them to
federal finds.
35
<PAGE>
Exchanging Securities for Fund Shares
Investors may exchange securities they already own for Shares of a Fund or
they may exchange a combination of securities and cash for Fund Shares. Any
securities to be exchanged must meet the investment objective and policies of
each Fund, must have a readily ascertainable market value, must be liquid, and
must not be subject to restrictions on resale. An investor should forward the
securities in negotiable form with an authorized letter of transmittal to Fifth
Third Bank. A Fund will notify the investor of its acceptance and valuation of
the securities within five business days of their receipt by the advisor.
A Fund values such securities in the same manner as a Fund values its
assets. The basis of the exchange will depend upon the net asset value of Shares
of a Fund on the day the securities are valued. One Share of a Fund will be
issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription,
conversion, or other rights attached to the securities become the property of a
Fund, along with the securities.
Payments to Dealers.
Financial professionals who sell shares of Fifth Third Funds and perform
services for fund investors may receive sales commissions, annual fees and other
compensation. Such compensation is paid by the Distributor using money from
sales charges, distribution/service (12b-1) fees and its other resources. From
time to time, the Distributor may elect to pay up to the following amounts:
<TABLE>
<CAPTION>
AMOUNT OF INVESTMENT ($) INVESTMENT SHARES AMOUNT OF INVESTMENT ($) INVESTMENT SHARES
- ------------------------------------------ ------------------ ------------------------ ------------------
<S> <C> <C> <C>
Under 50,000 3.825% Any Amount 1%
50,000 but under 100,000 3.40
100,000 but under 150,000 2.55
150,000 but under 250,000 1.70
250,000 but under 500,000 0.85
500,000 and above 0.50*
</TABLE>
* A 1% contingent deferred sales charge shall apply on any portion redeemed
within one year or purchase. Such charge will be applied to value of the assets
redeemed at the time of purchase or at the time of redemption, whichever is
lower. Payment is available to those financial professionals with an agreement
with the Distributor which provides for such payment. A Distributor currently
imposes no additional conditions on any financial professional to amend its
agreement with the Distributor to provide for such payment.
Brokers and agents may charge a transaction fee on the purchase or sale of
shares by shareholders.
DETERMINING NET ASSET VALUE
Net asset values of the Funds generally, other than the Money Market funds,
change each day. The days on which the net asset value is calculated by these
Funds are described in the prospectus. The Money Market funds attempt to
maintain a net asset value per share of $1.00.
36
<PAGE>
Determining Market Value of Securities
The value of the Funds' portfolio securities (with the exception of Ohio
Tax Free Fund, Municipal Bond Fund and the Money Market funds) are determined as
follows:
. for equity securities, according to the last sale price on a national
securities exchange, if available;
. in the absence of recorded sales for listed equity securities, according
to the mean between the last closing bid and asked prices;
. for unlisted equity securities, the latest bid prices;
. for bonds and other fixed income securities, as determined by an
independent pricing service;
. for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost; or
. for all other securities, at fair value as determined in good faith by
the Board of Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Funds will value futures contracts, options and put options on
financial futures at their market values established by the exchanges at the
close of option trading on such exchanges unless the Trustees determine in good
faith that another method of valuing option positions is necessary to appraise
their fair value.
Valuing Municipal Bonds
With respect to Ohio Tax Free Fund and Municipal Bond Fund, the Trustees
use an independent pricing service to value municipal bonds. The independent
pricing service takes into consideration yield, stability, risk, quality, coupon
rate, maturity, type of issue, trading characteristics, special circumstances of
a security or trading market, and any other factors or market data it considers
relevant in determining valuations for normal institutional size trading units
of debt securities, and does not rely exclusively on quoted prices.
37
<PAGE>
Use of Amortized Cost
The Trustees have decided that the fair value of debt securities authorized
to be purchased by the Money Market funds and by the other Fund with remaining
maturities of 60 days or less at the time of purchase may be their amortized
cost value, unless the particular circumstances of the security indicate
otherwise. Under this method, portfolio instruments and assets are valued at the
acquisition cost as adjusted for amortization of premium or accumulation of
discount rather than at current market value. The Trustees continually assess
this method of valuation and recommends changes where necessary to assure that
the Fund's portfolio instruments are valued at their fair value as determined in
good faith by the Trustees.
Monitoring Procedures
For the Money Market funds, the Trustees' procedures include monitoring the
relationship between the amortized cost value per share and the net asset value
per share based upon available indications of market value. The Trustees will
decide what, if any, steps should be taken if there is a difference of more than
0.50% of 1% between the two value. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the average
portfolio maturity) to minimize any material dilution or other unfair results
arising from differences between the two methods of determining net asset value.
Investment Restrictions
For the Money Market funds, the Rule requires that a Money Market fund
limit its investments to instruments that, in the opinion of the Trustees,
present minimal credit risks and if rated, have received the requisite rating
from one or more nationally recognized statistical rating organizations. If the
instruments are not related, the Trustees must determine that they are of
comparable quality. Shares of investment companies purchased by a Money Market
fund will meet these same criteria and will have investment policies consistent
with the Rule. The Rule also requires a Money Market fund to maintain a dollar-
weighted average portfolio maturity (not more than 90 days) appropriate to the
objective of maintaining a stable net asset value of $1.00 per share. In
addition, no instruments with a remaining maturity of more than 397 days can be
purchased by a Money Market fund.
Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days, a Money Market fund will invest
its available cash to reduce the average maturity to 90 days or less as soon as
possible.
A Money Market fund may attempt to increase yield by trading portfolio
securities to take advantage of short-term market variations. This policy may,
from time to time, result in high portfolio turnover. Under the amortized cost
method of valuation, neither the amount of daily income nor the net asset value
is affected by any unrealized appreciation or depreciation of the portfolio.
38
<PAGE>
In periods of declining interest rates, the indicated daily yield on shares
of a Money Market fund computed by dividing the annualized daily income on the
Fund's portfolio by the net asset value computed as above may tend to be higher
than a similar computation made by using a method of valuation based upon market
prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares of
a Money Market fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices and
estimates.
Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
International Equity Fund values foreign securities at the latest closing price
on the exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also be
determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated into
U.S. dollars at current rates. Occasionally, events that affect these values and
exchange rates may occur between the times at which they are determined and the
closing of the New York Stock Exchange. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the Trustees, although the actual
calculation may be done by others.
REDEEMING SHARES
Shares are redeemed at the next computed net asset value after a Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Although Fifth Third Bank does not charge
for telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions.
Investment C Shares redeemed within one year of purchase may be subject to
a contingent deferred sales charge. The contingent deferred sales charge may be
reduced with respect to a particular shareholder where a financial institution
selling Investment C Shares elects not to receive a commission from the
distributor with respect to its sale of such Shares.
Redemption in Kind
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Trust is obligated to redeem Shares for any
one shareholder in cash only up to the lesser of $250,000 or 1% of a Fund's net
asset value during any 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Trust will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way as the Fund
39
<PAGE>
determines net asset value. The portfolio instruments will be selected in a
manner that the Trustees deem fair and equitable.
Postponement of Redemptions
- ---------------------------
No Fund may suspend the right of redemption or postpone the date of payment
of redemption proceeds for more than seven days, except that (a) it may elect to
suspend the redemption of shares or postpone the date of payment of redemption
proceeds: (1) during any period that the NYSE is closed (other than customary
weekend and holiday closings) or trading on the NYSE is restricted; (2) during
any period in which an emergency exists as a result of which disposal of
portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the SEC may by order permit for the protection of investors;
and (b) the payment of redemption proceeds may be postponed as otherwise
provided in this Statement of Additional Information.
TAX STATUS
The Funds' Tax Status
The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements: derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities; invest in securities within certain
statutory limits; and distribute to its shareholders at least 90% of its net
income earned during the year.
Shareholders' Tax Status
With respect to all Funds except the Ohio Tax Free Fund, the Municipal Bond
Fund and the Tax Exempt Money Market Fund, shareholders are subject to federal
income tax on dividends received as cash or additional Shares. No portion of any
income dividend paid by a Fund is eligible for the dividends received deduction
available to corporations. These dividends, and any short-term capital gains,
are taxable as ordinary income.
With respect to Ohio Tax Free Fund, Municipal Bond Fund and the Tax Exempt
Money Market Fund, no portion of any income dividend paid by a Fund is eligible
for the dividends received deduction available to corporations.
Capital Gains
With respect to all Funds except the Ohio Tax Free Fund, the Municipal Bond
Fund and the Tax Exempt Money Market Fund, long-term capital gains distributed
to shareholders will be treated as long-term capital gains regardless of how
long shareholders have held Shares.
With respect to Ohio Tax Free Fund and Municipal Bond Fund, capital gains
or losses may be realized by a Fund on the sale of portfolio securities and as a
result of discounts from par value on securities held to maturity. Sales would
generally be made because of: the availability of higher relative yields;
differentials in market values; new investment opportunities; changes in
creditworthiness of an issuer; or an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned Shares. Any loss by a shareholder on Shares held for less
than six months and sold after a capital
40
<PAGE>
distribution will be treated as a long-term capital loss to the extent of the
capital gains distribution.
State and Local Taxes
The Government Money Market Fund intends to limit its investments to U.S.
government securities paying interest which, if owned directly by shareholders
of the Fund, would generally be exempt from state personal income tax. However,
from time to time, the Fund may also invest in other U.S. government securities
if the Advisor deems it advantages to do so. Moreover, under the laws of some
states, the net investment income generally distributed by the Fund may be
taxable to shareholders. State laws differ on this issue, and shareholders are
urged to consult their own tax advisors regarding the status of their accounts
under state and local tax laws.
Foreign Taxes
Investment income on certain foreign securities in which International
Equity Fund may invest may be subject to foreign withholding or other taxes that
could reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the amount of
foreign taxes to which the Fund would subject.
TOTAL RETURN
Institutional Shares
Average Annual Total Return
Fiscal Year Ended July 31, 1999
<TABLE>
<CAPTION>
Since
Fund Name 1 Year 5 Years 10 Years Inception
- ---------------------------------------------------------- ------ ------- -------- ---------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund 3.16% 5.67% 5.83% 5.95%
Quality Bond Fund 1.48% 6.18% 6.47% 8.02%
Ohio Tax Free Bond Fund 1.86% 5.00% 5.42% 4.97%
Quality Growth Fund 26.80% 25.34% 17.13% 17.50%
Mid Cap Fund 7.61% 16.28% 13.38% 14.98%
Balanced Fund 14.57% 16.94% 13.75% 15.95%
International Equity Fund 4.52% n/a n/a 9.24%
Equity Income Fund 10.24% 20.16% 13.20% 15.13%
Bond Fund for Income 2.79% 6.09% 6.40% 8.20%
Municipal Bond Fund 1.68% 4.43% 5.17% 6.79%
Cardinal Fund 21.21% 21.37% 14.66% 16.01%
Pinnacle Fund 17.44% 26.21% 16.25% 16.81%
Government Money Market Fund 4.60% 5.01% n/a 4.39%
Prime Money Market Fund 4.76% 5.12% 5.07% 5.12%
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Tax Exempt Money Market Fund 2.73% 2.72% 3.03% 3.68%
U.S. Treasury Money Market Fund 4.68% 5.10% 5.05% 5.28%
</TABLE>
Investment A Shares
Average Annual Total Returns
Fiscal Year Ended July 31, 1999
<TABLE>
<CAPTION>
Since
Fund Name 1 Year 5 Years 10 Years Inception
- ---------------------------------------------------------- ------ ------- -------- ---------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund -1.71% 4.65% 5.32% 5.57%
Quality Bond Fund -3.30% 5.16% 5.96% 7.70%
Ohio Tax Free Bond Fund -2.92% 3.98% 4.92% 4.57%
Quality Growth Fund 20.82% 24.12% 16.56% 17.16%
Mid Cap Fund 2.48% 15.14% 12.83% 14.60%
Balanced Fund 9.13% 15.81% 13.20% 15.61%
International Equity Fund -0.45% n/a n/a 8.17%
Equity Income Fund 4.98% 18.99% 12.65% 14.79%
Bond Fund for Income -2.16% 5.05% 5.87% 7.89%
Municipal Bond Fund -3.04% 3.44% 4.68% 6.49%
Cardinal Fund 14.90% 20.06% 14.05% 15.75%
Pinnacle Fund 11.93% 25.00% 15.69% 16.42%
Government Money Market Fund 4.41% 4.98% n/a 4.33%
Prime Money Market Fund 4.53% 5.07% n/a 4.45%
Tax Exempt Money Market Fund 2.58% 2.73% 3.03% 3.68%
U.S. Treasury Money Market Fund n/a n/a n/a n/a
</TABLE>
Investment C Shares
Average Annual Total Return
Fiscal Year Ended July 31, 1999
<TABLE>
<CAPTION>
Since
Fund Name 1 Year 5 Years 10 Years Inception
- ---------------------------------------------------------- ------ ------- -------- ---------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund 2.31% 5.09% 5.39% 5.46%
Quality Bond Fund 0.81% 5.66% 6.06% 7.59%
Ohio Tax Free Bond Fund 1.13% 4.48% 4.99% 4.46%
Quality Growth Fund 25.76% 24.74% 16.70% 17.04%
Mid Cap Fund 6.79% 15.76% 12.96% 14.42%
Balanced Fund 13.78% 16.42% 13.33% 15.50%
International Equity Fund 3.87% n/a n/a 8.80%
Equity Income Fund 9.34% 19.14% 12.19% 14.07%
Bond Fund for Income 1.92% 5.16% 5.39% 7.16%
Cardinal Fund 19.29% 20.97% 14.47% 15.93%
Pinnacle Fund 16.60% 25.58% 15.96% 16.61%
</TABLE>
42
<PAGE>
YIELD
In addition to total returns, the Funds may advertise SEC yields for each
of the share classes. The 30-day SEC yield for the 30 days ended July 31, 1999
were as follows:
<TABLE>
<CAPTION>
Institutional Shares Investment A Shares Investment C Shares
-------------------- ------------------- -------------------
<S> <C> <C> <C>
U.S. Government Securities Fund 4.84% 4.59% 4.09%
Quality Bond Fund 5.34% 5.09% 4.59%
Ohio Tax Free Bond Fund .59% 3.34% 2.84%
Balanced Fund 1.52% 1.27% 1.06%
Bond Fund for Income 5.25% 5.00% 4.50%
Municipal Bond Fund 3.72% 3.47% n/a
</TABLE>
For each share class, the yield for a Fund is determined by dividing the
net investment income per share (as defined by the SEC) earned by the Fund over
a thirty-day period by the maximum offering price per share of the Fund on the
last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the thirty-
day period is assumed to be generated each month over a 12-month period and is
reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the SEC
and, therefore, may not correlate to the dividends or other distributions paid
to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders paying those fees.
Tax-Equivalent Yield
The Ohio Tax Free Bond Fund and the Municipal Bond Fund may also advertise
tax-equivalent yield. The tax-equivalent yield for the Ohio Tax Free Bond Fund
for the 30-day period ended July 31, 1999, was 6.62%, while the tax-equivalent
yield for the Municipal Bond fund for the 30-day period ended July 31, 1999, was
6.55%. The tax-equivalent yield of a Fund is calculated similarly to the yield,
but is adjusted to reflect the taxable yield that the Fund would have had to
earn to equal its actual yield, assuming a 39.6% tax rate and assuming that
income is 100% tax-exempt.
43
<PAGE>
Tax Equivalency Table
The Ohio Tax Free Fund and Municipal Bond Fund may also use a tax-
equivalency table in advertising and sales literature. The interest earned by
the municipal obligations in the Ohio Tax Free Fund's portfolio generally
remains free from federal regular income tax and is free from income taxes
imposed by the State of Ohio. The interest earned by the Municipal Bond Fund's
portfolio is generally free from federal regular income tax. As the tables below
indicates, a "tax-free" investment in the Ohio Tax Free Fund is an attractive
choice for investors, particularly in times of narrow spreads between "tax-free"
and taxable yields.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1999
STATE OF OHIO
<S> <C> <C> <C> <C> <C>
FEDERAL TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE TAX BRACKET:
19.457% 33.201% 37.900% 43.500% 47.100%
SINGLE $ 1- $23,351- $56,551- $117,951- OVER
RETURN 23,350 56,550 117,950 256,500 256,500
Tax-Exempt Yield Taxable Yield Equivalent
1.50% 1.86% 2.25% 2.42% 2.65% 2.84%
2.00% 2.48% 2.99% 3.22% 3.54% 3.78%
2.50% 3.10% 3.74% 4.03% 4.42% 4.73%
3.00% 3.72% 4.49% 4.83% 5.31% 5.67%
3.50% 4.35% 5.24% 5.64% 6.19% 6.62%
4.00% 4.97% 5.99% 6.44% 7.08% 7.56%
4.50% 5.59% 6.74% 7.25% 7.96% 8.51%
5.00% 6.21% 7.49% 8.05% 8.85% 9.45%
5.50% 6.83% 8.23% 8.86% 9.73% 10.40%
6.00% 7.45% 8.98% 9.66% 10.62% 11.34%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional
state and local taxes paid on comparable taxable investments were not
used to increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of Ohio Tax Free Bond Fund Shares.
44
<PAGE>
* Some portion of Ohio Tax Free Fund's and Municipal Bond Fund's income
may be subject to the federal alternative minimum tax and state and
local income taxes.
PERFORMANCE COMPARISONS
Each Fund's performance depends upon such variables as: portfolio quality;
average portfolio maturity; type of instruments in which the portfolio is
invested; changes in interest rates and market value of portfolio securities;
changes in each Fund's expenses; and various other factors.
Each Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings and net
asset value per share are factors in the computation of yield and total return
as described above.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Funds use in advertising may include:
. Dow Jones Industrial Average (the "DJIA") represents share prices of
selected blue-chip industrial corporations. The DJIA indicates daily changes in
the average price of stock of these corporations. Because it represents the top
corporations of America, the DJIA index is a leading economic indicator for the
stock market as a whole. (Quality Growth, Balanced, Mid Cap, and Equity Income
Funds)
. Europe, Australia, and Far East ("EAFE") is a market capitalization
weighted foreign securities index, which is widely used to measure the
performance of European, Australian, New Zealand, and Far Eastern stock markets.
The index covers approximately 1,020 companies drawn from 18 countries in the
above regions. The index values its securities daily in both U.S. dollars and
local currency and calculates total returns monthly. EAFE U.S. dollar total
return is a net dividend figure less Luxembourg withholding tax. EAFE is
monitored by Capital International, S.A., Geneva, Switzerland. (International
Equity Fund)
. Lehman Muni Bond Fund Index is a broad-based total return index comprised
of 8,000 Investment grade, fixed rate, tax-exempt, with a remaining maturity of
at least one year, including state and local general obligation, revenue,
insured and pre-refunded bonds and are selected from issues larger than $50
million dated since January 1984. Bonds are added to the index and weights are
updated monthly, with a one month lag.
. Lehman Brothers Aggregate Bond Index is a total return index measuring
both the capital price changes and income provided by the underlying universe of
securities, weighted by market value outstanding. The Aggregate Bond Index is
comprised of the Lehman
45
<PAGE>
Brothers Government Bond Index, Corporate Bond Index, Mortgage-Backed Securities
Index and the Yankee Bond Index. These indices include: U.S. Treasury
obligations, including bonds and notes; U.S. agency obligations, including those
of the Federal Farm Credit Bank, Federal Land Bank and the Bank for
Co-Operatives; foreign obligations, U.S. investment-grade corporate debt and
mortgage-backed obligations. All corporate debt included in the Aggregate Bond
Index has a minimum S&P rating of BBB, a minimum Moody's rating of Baa, or a
Fitch rating of BBB. (Balanced, Quality Bond and Bond Fund For Income)
. Lehman Brothers 5-Year Municipal Bond Index includes fixed-rate debt
obligations of state and local government entities. The securities have
maturities not less than four years but no more than six years, are investment
grade and are selected from issues larger than $50 million dated since 1984.
(Ohio Tax Free and Municipal Bond Funds)
. Lehman Brothers Government Index is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or any
agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included. (Government Securities, Balanced, Quality Bond, and Bond Fund For
Income)
. Lehman Brothers Government/Corporate (Total) Index is comprised of
approximately 5,000 issues which include non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi-federal corporations; and publicly issued, fixed rate, non-
convertible domestic bonds of companies in industry, public utilities and
finance. The average maturity of these bonds approximates nine years. Tracked by
Shearson Lehman Brothers, Inc., the index calculates total returns for one
month, three month, twelve month and ten year periods and year-to-date.
(Government Securities, Balanced, Quality Bond, and Bond Fund For Income)
. Lehman Brothers Intermediate Government/Corporate Bond Index: An
unmanaged index comprised of all the bonds issued by the Lehman Brothers
Government/Corporate Bond Index with maturities between 1 and 9.99 years. Total
return is based on price appreciation/depreciation and income as a percentage of
the original investment. Indices are rebalanced monthly by market
capitalization. (Balanced, Quality Bond, Government Securities, and Bond Fund
For Income)
. Lehman Brothers 7-Year Municipal Bond Index includes fixed-rate debt
obligations of state and local government entities. The securities have
maturities between seven and eight years, are investment grade and are selected
from issues larger than $50 million dated since 1984. (Ohio Tax Free Bond and
Municipal Bond Funds)
. Lipper, Inc. ranks funds in various fund categories by making comparative
calculations using total return. Total return assumes the reinvestment of all
capital gains distributions and income dividends and takes into account any
change in net asset value over a
46
<PAGE>
specific period of time. From time to time, the Fund will quote its Lipper
ranking in the applicable funds category in advertising and sales literature.
(All of the Funds)
. Merrill Lynch Composite 1-5 Year Treasury Index is comprised of
approximately 66 issues of U.S. Treasury securities maturing between 1 and 4.99
years, with coupon rates of 4.25% or more. These total return figures are
calculated for one, three, six, and twelve month periods and year-to-date and
include the value of the bond plus income and any price appreciation or
depreciation. (Government Securities Fund)
. Merrill Lynch Corporate and Government Index includes issues which
must be in the form of publicly placed, nonconvertible, coupon-bearing domestic
debt and must carry a term of maturity of at least one year. Par amounts
outstanding must be no less than $10 million at the start and at the close of
the performance measurement period. Corporate instruments must be rated by S&P
or by Moody's as investment grade issues (i.e., in the BBB/Baa major rating
category or better). (Balanced, Quality Bond, and Bond Fund For Income)
. Merrill Lynch Domestic Master Index includes issues which must be in
the form of publicly placed, nonconvertible, coupon-bearing domestic debt and
must carry a term to maturity of at least one year. Par amounts outstanding must
be no less than $10 million at the start and at the close of the performance
measurement period. The Domestic Master Index is a broader index than the
Merrill Lynch Corporate and Government Index and includes, for example, mortgage
related securities. The mortgage market is divided by agency, type of mortgage
and coupon and the amount outstanding in each agency/type/coupon subdivision
must be no less than $200 million at the start and at the close of the
performance measurement period. Corporate instruments must be rated by S&P or by
Moody's as investment grade issues (i.e., in the BBB/Baa major rating category
or better). (Balanced, Quality Bond and Bond Fund For Income)
. Merrill Lynch 3-Year Treasury Yield Curve Index is an unmanaged index
comprised of the most recently issued 3-year U.S. Treasury notes. Index returns
are calculated as total returns for periods of one, three, six, and twelve
months as well as year-to-date. (Government Securities Fund)
. Merrill Lynch 3-5 Year Treasury Index is comprised of approximately 24
issues of intermediate-term U.S. government and U.S. Treasury securities with
maturities between 3 and 4.99 years and coupon rates above 4.25%. Index returns
are calculated as total returns for periods of one, three, six and twelve months
as well as year-to-date. (Government Securities Fund)
. Morningstar, Inc., an independent rating service, is the publisher of
the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks. (All Funds)
47
<PAGE>
. Salomon Brothers AAA-AA Corporate Index calculates total returns of
approximately 775 issues which include long-term, high-grade domestic corporate
taxable bonds, rated AAA-AA with maturities of twelve years or more and
companies in industry, public utilities, and finance. (Balanced, Quality Bond,
and Bond Fund For Income)
. Salomon Brothers 3-5 Year Government Index quotes total returns for
U.S. Treasury issues (excluding flower bonds) which have maturities of three to
five years. These total returns are year-to-date figures which are calculated
each month following January 1. (Government Securities Fund)
. S&P/BARRA Growth Index is a sub-index of the S&P 500 composite index
of common stocks. The index represents approximately fifty percent of the S&P
500 market capitalization and is comprised of those companies with higher price-
to-book ratios (one distinction associated with "growth stocks"). The index is
maintained by Standard and Poor's in conjunction with BARRA, an investment
technology firm. (Quality Growth, Balanced, Mid Cap, and Equity Income Funds)
. S&P Mid Cap 400 Index is comprised of the 400 common stocks issued by
medium-sized domestic companies whose market capitalizations range from $200
million to $5 billion. The stocks are selected on the basis of the issuer's
market size, liquidity and industry group representation. (Mid Cap Fund)
. Standard & Poor's Ratings Group Daily Stock Price Indices of 500 and
400 Common Stocks are composite indices of common stocks in industry,
transportation, and financial and public utility companies that can be used to
compare to the total returns of funds whose portfolios are invested primarily in
common stocks. In addition, the S&P indices assume reinvestment of all dividends
paid by stocks listed on its indices. Taxes due on any of these distributions
are not included, nor are brokerage or other fees calculated in the S&P figures.
(Quality Growth, Balanced, Mid Cap, Cardinal, Pinnacle and Equity Income Funds)
. Wilshire Mid Cap 750 Index is a subset of the Wilshire 5000 index of
common stocks. The Mid Cap 750 index consists of those Wilshire 5000 companies
ranked between 501 and 1,250 according to market capitalization. The index
ranges in market capitalization from $400 million to $1.7 billion. (Mid Cap
Fund)
Advertisements and other sales literature for the Funds may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in the
Funds based on monthly/quarterly reinvestment of dividends over a specified
period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
48
<PAGE>
FINANCIAL STATEMENTS
The financial statements for the Funds for the fiscal year ended July 31,
1999 are incorporated herein by reference to the Annual Report to Shareholders
of the Fifth Third Equity and Income Mutual Funds dated July 31, 1999. (File
Nos. 33-24848 and 811-5669.) A copy of the Annual Report may be obtained without
charge by contacting the Trust at the address located on the back cover of the
prospectus.
APPENDIX
Standard and Poor's Ratings Group Corporate and Municipal Bond Rating
Definitions
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy. S&P may apply a plus (+) or
minus (-) to the above rating classifications to show relative standing within
the classifications,
Moody's Investors Service, Inc. Corporate and Municipal Bond Rating Definitions
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which 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
49
<PAGE>
may be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
NR--Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3
in each generic rating classification from Aa through B in its bond rating
system. The modifier 1 indicates that the security 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 issue ranks in the lower end of its generic
rating category.
Fitch Investors Service, Inc. Long-Term Debt Rating Definitions
AAA--Bonds 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.
AA--Bonds considered to be investment grade and of very high 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 issuers is generally rated F- I +.
A--Bonds 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.
NR--NR indicates that Fitch does not rate the specific issue. Plus (+) or
Minus (-): Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA category.
Standard and Poor's Ratings Group Municipal Note Rating Definitions
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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 sign (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
SP-3--Speculative capacity to pay principal and interest.
Moody's Investors Service Short-Term Loan Rating Definitions
MIG1/VMIGI--This designation denotes best quality. There is a present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
Fitch Investors Service, Inc. Short-Term Debt Rating Definitions
F-1 +--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-I+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as the F- I + and F- 1 categories.
Standard and Poor's Ratings Group Commercial Paper Rating Definitions
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus (+) sign.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Moody's Investors Service, Inc. Commercial Paper Rating Definitions
Prime-1 --Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will often be evidenced by the following
characteristics:
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. 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.
. Well-established access to a range of financial markets and assured
sources of alternate liquidity.
P-2--Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
