PROSPECTUS
August 3, 1999
Firstar Stellar Science & Technology Fund
FIRSTAR
STELLAR
FUNDS
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
THE SCIENCE & TECHNOLOGY FUND
TABLE OF CONTENTS
INVESTMENT GOAL 2
INVESTMENT POLICIES AND PORTFOLIO SECURITIES 2
INVESTMENT RISKS 4
PAST PERFORMANCE AND EXPENSES 6
MANAGEMENT OF THE FUNDS 7
DISTRIBUTION OF SHARES 7
DESCRIPTION OF CLASSES 8
PRICE OF SHARES 9
PURCHASING SHARES 10
SELLING SHARES 12
EXCHANGING SHARES 13
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES 14
YEAR 2000 ISSUE 14
FOR MORE INFORMATION
See the last page for more information.
SCIENCE & TECHNOLOGY FUND
INVESTMENT GOAL
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The investment objective of the Science & Technology Fund is to maximize growth
and capital appreciation by investing in equity securities of companies related
to the science and technology industry.
INVESTMENT POLICIES AND PORTFOLIO SECURITIES
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The fund seeks to achieve its investment objective by investing primarily in
equity securities of companies related to the science and/or technology sectors.
Under normal market conditions, the fund will invest at least 65% of the value
of its total assets in common stock, preferred stocks and warrants of companies
of any size principally engaged in science and technology business activities.
The fund considers science and technology sectors to include companies that:
o make or sell products used in health care;
o make or sell medical equipment and devices and related technologies;
o make or sell software or information-based services and consulting,
communications and related services;
o design, manufacture or sell electronic components and systems;
o research, design, develop, manufacture or distribute products, processes or
services that relate to hardware technology within the computer industry;
o develop, produce or distribute products or services in the computer,
semi-conductor, electronics, communications, health care and biotechnology
sectors; and
o engage in the development, manufacturing or sale of communications services
or communications equipment.
The adviser believes that because of rapid advances in technology and science,
an investment in companies with business operations in these areas will offer
substantial opportunities for long-term capital appreciation. It is
important to note that prices of common stocks of even the best managed, most
profitable corporations are subject to market risk, which means their stock
prices can decline.
The adviser's overall stock selection for the fund is not based on the
capitalization or size of the company but rather on an assessment of the
company's fundamental prospects. The adviser will select securities while
attempting to maintain an acceptable level of risk largely through the use of
automated quantitative measurement techniques. The adviser will consider the
following factors when using this research technique:
o price/earnings ratios,
o historical and projected earnings growth rates,
o historical sales growth rates,
o historical return on equity,
o market capitalization,
o average daily trading volume, and
o credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The adviser will then use the quantitative model together with economic
forecasts and assessments of the risk and volatility of the company's industry.
When selling securities, the adviser considers three factors: (1) Have the
objectives of the fund been met? (2) Has the attractiveness of the securities
deteriorated? (3) Has the adviser's outlook changed? If the adviser can answer
each question positively, then the adviser will sell the securities.
TEMPORARY INVESTMENTS
To respond to adverse market, economic, political or other conditions, the fund
may invest up to 100% of its assets in high quality U.S..short-term money
market instruments. The fund may invest up to 35% of its assets in these
securities to maintain liquidity. Some of these short-term money market
instruments include:
o commercial paper
o certificates of deposit, demand and time deposits and bankers' acceptance
o U.S. government securities
o repurchase agreements (collateralized by U.S. Treasury obligations and U.S.
government agencies)
To the extent the fund engages in this temporary, defensive strategy, the fund
may not achieve its investment objective.
INVESTMENT RISKS
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STOCK MARKET
Risks Stock mutual funds are subject to stock market risks and significant
fluctuations in value. If the stock market declines in value, the fund is
likely to decline in value. Therefore, you may lose money if the value of the
fund declines.
STOCK SELECTION RISKS
The stocks selected by the investment adviser may decline in value or not
increase in value when the stock market in general is rising and may fail to
achieve the fund's investment objective.
LIQUIDITY RISKS
Liquidity risk is the risk that certain securities may be difficult or
impossible to sell at the time and price that the investment adviser would like
to sell. The adviser may have to lower the price, sell other securities instead
or forego an investment opportunity, any of which could have a negative effect
on fund management or performance.
INDUSTRY RISKS
Mutual funds that invest in a particular industry carry a risk that a group of
related stocks will decline in price due to industry specific developments.
Companies in the same or similar industries may share common characteristics
and are more likely to react to industry specific market or economic
developments.
SCIENCE & TECHNOLOGY CONCENTRATION RISKS
Science and technology related companies face special risks such as competitive
pressures and technological obsolescence and may be subject to greater
governmental regulation than many other industries. Technology and technology
related companies may be subject to short product cycles and aggressive pricing
which may increase their volatility. For example, their products or services
may not prove commercially successful or may become obsolete quickly. The value
of the fund's shares may be susceptible to factors affecting the science and
technology areas and to greater risk and market fluctuation than an investment
in a fund that invests in a broader range of portfolio securities not
concentrated in any particular industry. Furthermore, companies within the
science and technology industries face greater risks of competition from new
market entrances and increased research and development costs. Additionally,
companies in these areas are dependent upon consumer and business acceptance as
new technologies evolve.
PORTFOLIO TURNOVER RISKS
The adviser may engage in active trading of its portfolio securities to achieve
its investment goals. This practice could result in the fund experiencing a high
turnover rate (100% or more). High portfolio turnover rates lead to increased
costs, could cause you to pay higher taxes and could negatively affect the
fund's performance.
FUTURES AND OPTIONS ON FUTURES RISKS
The fund may use futures and options on futures for hedging purposes only. The
hedging strategy may not be successful if the portfolio manager is unable to
accurately predict movements in the prices of individual securities held by the
fund or if the strategy does not correlate well with the fund's investments.
The use of futures and options on futures may produce a loss for the fund, even
when used only for hedging purposes.
SMALL AND MEDIUM-SIZE COMPANIES RISKS
The fund may invest in the stocks of small, medium and large-sized companies.
Small and medium-size companies often have narrower markets and more limited
managerial and financial resources than larger, more established companies. As a
result, their performance can be more volatile and they face greater risk of
business failure, which could increase the volatility of the fund's portfolio.
NON-DIVERSIFICATION RISKS
As a non-diversified investment company, more of the fund's assets may be
concentrated in the common stock of any single issuer, which may make the value
of the fund's shares more susceptible to adverse developments affecting any
single issuer, and more susceptible to greater losses because of these
developments than shares of a more diversified mutual fund.
WHO MAY WANT TO INVEST
This fund may be appropriate for investors who wish to invest for the long term
and want to diversify their portfolios. Investors who want to allocate some
portion of their long-term investments to aggressive equity investing and are
willing to accept a high degree of volatility and risk in exchange for the
opportunity to realize greater financial gains in the future would be most
suitable for this fund.
The Statement of Additional Information contains more information about the fund
and the types of securities in which it may invest.
An investment in the fund is not a deposit of Firstar Bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
PAST PERFORMANCE AND EXPENSES
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PAST PERFORMANCE
Although past performance of a fund is no guarantee of how it will perform in
the future, historical performance may give you some indication of the risk of
investing in the fund because it demonstrates how its returns have varied over
time. To date, there is no prior performance information for the fund.
FEES AND EXPENSES FOR THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
Shareholder Fees Class B Class Y
(fees paid directly from your investment)
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Maximum Sales Charge (Load) Imposed on None None
Purchases
(as a percentage of offering price)
Maximum Deferred Sales Charge (Load)(1)<F1> 6.00% None
(as a percentage of offering price)
Maximum Sales Charge (Load) Imposed on None None
Reinvested Dividends
Redemption Fee None None
Exchange Fee None None
Estimated Annual Fund Operating Expenses(2)<F2> Class B Class Y
(expenses deducted from fund assets)
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Management Fees 0.90% 0.90%
Distribution and Service (12b-1) Fees (3)<F3> 0.75% None
Other Expenses(4)<F4> 0.79% 0.79%
Total Annual Fund Operating Expenses 2.44% 1.69%
1<F1> The contingent deferred sales charge is 6.00% in the first year, declining
to 1.00% in the sixth year and 0.00% thereafter. See "Price of Share."
2<F2> Annual Fund Operating Expenses are estimated based on average expenses
expected to be incurred during the fiscal year ended November 30, 1999. During
the course of this period, expenses may be more or less than the average amount
shown.
3<F3> The B shares are subject to a 12b-1 fee of 0.75 of 1.00% of average daily
net assets. The Y shares are not subject to a Rule 12b-1 plan.
4<F4> "Other Expenses" includes (1) administration fees, transfer agency fees
and all other ordinary operating expenses of the fund not listed above which are
estimated to total 0.54% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. For the
foreseeable future, the fund plans to limit the shareholder servicing fee to an
annual rate of 0.10% of average daily net assets but may adjust the fee at any
time it deems it necessary.
EXAMPLE The example below is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds.
This example assumes that:
1. You invest $10,000 in the fund for the time periods indicated and then redeem
all of your shares at the end of those periods,
2. You reinvested all dividends and capital gain distributions,
3. Your investment has a 5% return each year, and
4. The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years
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Class B $847 $1,161
Class Y $172 $533
If you did not redeem your shares, you would pay the following expenses:
1 Year 3 Years
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Class B $247 $761
Class Y $172 $533
Class descriptions are on page 6.
MANAGEMENT OF THE FUNDS
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INVESTMENT ADVISER
The investment adviser for the fund is Firstar Bank, N.A. The adviser is located
at 425 Walnut Street, Cincinnati, Ohio 45202. The investment decisions made by
Firstar Bank are subject to direction of the fund's board of trustees. (The
Statement of Additional Information contains more information regarding the
board of trustees.) The adviser conducts investment research and supervision for
the fund and is responsible for the purchase and sale of securities for the
fund's portfolio. The adviser receives an annual fee from the fund for its
services of 0.90% of the average daily net assets.
Firstar Bank's assets under management, including mutual funds, have a market
value in excess of $12 billion. As part of its regular banking operations,
Firstar Bank may make loans to public companies. As a result, it may be possible
for the fund to hold or acquire securities of companies that are also lending
clients of Firstar Bank. The lending relationship will not be a factor in the
selection of securities.
PORTFOLIO MANAGER
Donald L. Keller, Senior Vice President and Chief Investment Officer of Firstar
Bank since 1998, has been employed by Firstar Bank in various capacities since
1982. Mr. Keller has managed the Science & Technology Fund since its inception.
Mr. Keller has managed the domestic equity securities components of three of the
other Firstar Stellar Funds between 1991 and 1999 and became the lead manager of
the three funds starting in 1999. Mr. Keller also supported the international
equity and fixed-income components of one of the Firstar Stellar Funds since
1994. Mr. Keller earned a Bachelor of Business Administration Degree in Finance
and Accounting from the University of Cincinnati. He earned his Masters in
Finance from Xavier University.
FUND ADMINISTRATION, FUND ACCOUNTING, DIVIDEND DISBURSEMENT, AND CUSTODY
SERVICES
Firstar Mutual Fund Services, LLC, an affiliate of the fund's investment
adviser, provides administrative, accounting and dividend disbursement services
to the fund and other Firstar Stellar Funds and is located in Milwaukee,
Wisconsin. Firstar Bank, N.A., the fund's investment adviser, also serves as
custodian for the funds.
DISTRIBUTION OF SHARES
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DISTRIBUTOR
Edgewood Services, Inc. is the distributor for shares of the fund. Edgewood is
based in Pittsburgh, Pennsylvania and is the distributor for a number of
investment companies around the country.
RULE 12B-1 PLAN
The fund has adopted a Rule 12b-1 Plan under the Investment Company Act of 1940.
Under the Rule 12b-1 Plan, B shares may pay up to an annual rate of 0.75% of the
average daily net asset value of shares to Edgewood. Edgewood uses this fee to
finance activities that promote the sale of the fund's shares. Such activities
include, but are not necessarily limited to, advertising, printing and mailing
prospectuses to persons other than current shareholders, printing and mailing
sales literature, and compensating underwriters, dealers and sales personnel.
Whenever Edgewood deems it appropriate, Edgewood may, from time to time,
voluntarily reduce its compensation under the Rule 12b-1 Plan to the extent
expenses of the shares exceed a certain limit. Rule 12b-1 fees are paid out of
fund assets on an on-going basis. Over time, these fees will increase the cost
of your investment and may cost you more than paying other types of sales
charges.
Edgewood may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers and broker/dealers as agents to
provide sales or administrative services for their clients or customers who
beneficially own shares of the fund. Financial institutions will receive fees
from the distributor based upon shares owned by their clients or customers.
Edgewood will determine the schedule of such fees and the basis upon which such
fees will be paid.
DESCRIPTION OF CLASSES
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CLASS B SHARES
Class B shares are regular retail shares and may be purchased by individuals or
IRAs. With class B shares, a sales charge up to 6.00% of offering price may be
imposed if you redeem your shares within a certain time period. If you redeem
your class B shares within six full years of the date you purchased, a
contingent deferred sales charge (CDSC) may be charged by the funds'
distributor. Certain class B shares also impose a Rule 12b-1 fee. For more
information on the CDSC, see "Price of Shares."
Class Y Shares
The Y class of shares is available only to Firstar Bank's trust or institutional
investors. With class Y shares, you do not pay any sales charges, nor is a 12b-1
fee imposed. Similar to the B class, the class Y shares do pay investment
management fees and other expenses.
PRICE OF SHARES
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NAV =
Assets - Liabilities
--------------------
# outstanding shares
HOW NAV IS DETERMINED
The net asset value (NAV) is calculated by taking the value of the fund's
assets, including interest on dividends accrued, but not yet collected, less all
liabilities and dividing the result by the number of shares outstanding. The net
asset value for the fund is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on days the New York Stock Exchange is not open.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the fund's portfolio securities are determined as
follows:
1. For equity securities: according to the last quoted sale price of the day
on a national securities exchange or on the NASDAQ National Market System.
2. In the absence of recorded sales for listed equity securities: according to
the mean between the last closing bid and asked prices.
3. For unlisted equity securities: latest bid prices.
4. For bonds and other fixed-income securities: as determined by an independent
pricing service.
5. For short-term obligations: according to the mean between bid and asked
prices as furnished by an independent pricing service.
6. For short-term obligations with remaining maturities of 60 days or less at
the time of purchase: at amortized cost.
7. For all other securities: at fair value as determined in good faith by the
fund's 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.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times that vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
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 underlying fund's board of trustees, although the actual
calculation may be done by others.
WHAT SHARES COST - CLASS Y SHARES
If you purchase class Y shares of the Science & Technology Fund, you will pay
the NAV next determined after your order is received. There is no sales charge
on this class at the time you purchase your shares.
WHAT SHARES COST - CLASS B SHARES
If you purchase class B shares of the Science & Technology Fund, you will pay
the net asset value next determined after your order is received. There is no
sales charge on this class at the time you purchase your shares. However, there
is a contingent deferred sales charge (CDSC) on Class B shares at the time you
redeem. Any applicable CDSC will be imposed on the lesser of the net asset value
of the redeemed shares at the time of purchase or the net asset value of the
redeemed shares at the time of redemption in the amount indicated by the table
below:
Year of Redemption Contingent Deferred
After Purchase Sales Charge
--------------------- ---------------------
Year 1 6.00%
Year 2 5.00%
Year 3 4.00%
Year 4 3.00%
Year 5 2.00%
Year 6 1.00%
Year 7 0.00%
In computing the amount of CDSC you could be charged, redemptions are
deemed to have occurred in the following order:
1. shares of the fund you purchased by reinvesting your dividends and long-term
capital gains
2. shares of a fund you held for more than six full years from the date of
purchase
3. shares of a fund you held for fewer than six full years on a first-in,
first-out basis
Redemptions made under the Systematic Withdrawal Plan (see "Selling Shares")
will not be assessed CDSC as long as the annual total amount withdrawn does not
exceed 10% of your initial balance. CDSC is also not charged on:
o shares purchased by reinvesting your dividends or distributions of short or
long-term capital gains
o shares held for more than six full years after purchase
o redemptions made following death or disability (as defined by the IRS)
o redemptions made as minimum required distributions under an IRA or other
retirement plan to a shareholder who is 70 1/2 years old or older
o redemptions made in shareholder accounts that do not have the required
minimum balance
PURCHASING SHARES
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OPENING AN ACCOUNT
To open an account, first determine if you are buying class B or Y shares
(see page 6 for class descriptions). The minimum initial investment amounts for
the fund are as follows:
- ------------------------------------------------------------
Class B Shares
- ------------------------------------------------------------
o $1,000 for individuals
o $500 for Education IRA customers
o $25 for Firstar Bank Connections Group Banking customers and Firstar Bank
employees and members of their immediate family, participants in the
Firstar Bank Student Finance 101 Program who establish an automatic
investment program and persons contributing to SIMPLE IRAs
- ---------------------------------------------------------
Class Y Shares
- ---------------------------------------------------------
o $1,000 for trust or institutional customers of Firstar Bank ($1,000 may be
determined by combining the amount in all mutual fund accounts you maintain
with Firstar Bank)
Additional investments may be made in any amount.
RECEIPT OF ORDERS
Shares may only be purchased on days the New York Stock Exchange is open for
business. Your order will be considered received after your check is converted
into federal funds and received by Firstar Bank (usually the next business day).
If you are paying with federal funds (wire), your order will be considered
received when Firstar Bank receives the federal funds.
When making a purchase request, make sure your request is in good order. "Good
order" means your purchase request includes:
o the name of the fund
o the dollar amount of shares to be purchased
o purchase application or investment stub
o check payable to Firstar Stellar Funds
TIMING OF REQUESTS
The price per share will be the net asset value next computed after the time
your request is received in good order and accepted by the fund or the fund's
authorized agent. All requests (telephone orders and federal funds wire)
received in good order by the fund before 4:00 p.m. (Eastern time) will be
executed on that same day. Requests received after 4:00 p.m. will be processed
on the next business day.
Methods of Buying
<TABLE>
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To Open an Account To Add to an Account
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<S> <C> <C>
BY TELEPHONE Call Firstar Stellar Funds at 1-800-677-FUND to Call Firstar Stellar Funds at 1-800-677-FUND
(Firstar Bank customers only) place the order. (Note: For security reasons, to place the order. (Note: For security
requests by telephone will be recorded.) reasons, requests by telephone will be
recorded.)
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BY MAIL Make your check payable to "Firstar Stellar Fill out the investment stub from an account
Funds." Forward the check and your application statement, or indicate the fund name and
to the address below. No third party checks account number on your check. Make your
will be accepted. If your check is returned check payable to "Firstar Stellar Funds."
for any reason, a $25 fee will be assessed Forward the check and stub to the address
against your account. below.
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BY FEDERAL FUNDS WIRE Forward your application to Firstar Stellar Call Firstar Stellar Funds at 1-800-677-FUND
Funds at the address below. Call to notify of incoming wire. Use the
1-800-677-FUND to obtain an account number. following instructions:
Wire funds using the instructions to the Firstar Bank, N.A.
right. Milwaukee, WI 53202
ABA #: 075000022
Credit: Firstar Mutual Fund Services, LLC
Account #: 112-952-137
Further Credit: (name of fund, share class)
(name/title on the account)
(account #)
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AUTOMATIC INVESTMENT PLAN Open a fund account with one of the other If you didn't set up an automatic investment
methods. If by mail, be sure to include your plan with your original application, call
checking account number on the appropriate Firstar Stellar Funds at 1-800-677-FUND.
section of your application and enclose a Additional investments (minimum of $25 per
voided check or deposit slip. period) will be taken automatically monthly
or quarterly from your checking account.
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THROUGH SHAREHOLDER To purchase shares for another investor, call To purchase shares for another investor,
SERVICE ORGANIZATIONS Firstar Stellar Funds at 1-800-677-FUND. call Firstar Stellar Funds at 1-800-677-FUND.
- ----------------------------------------------------------------------------------------------------------------------------------
BY EXCHANGE Call 1-800-677-FUND to obtain exchange Call 1-800-677-FUND to obtain exchange
information. See page 10. information. See page 10.
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</TABLE>
ADDRESS FOR FIRSTAR STELLAR FUNDS
You should use the following addresses when sending documents by mail or by
overnight delivery:
BY MAIL BY OVERNIGHT DELIVERY
- -------- ------------------------
Firstar Stellar Funds Firstar Stellar Funds
c/o Firstar Mutual Fund Services, LLC c/o Firstar Mutual Fund Services, LLC
P.O. Box 701 615 E. Michigan Street, Third Floor
Milwaukee, Wisconsin 53201-0701 Milwaukee, Wisconsin 53202
NOTE: The fund does not consider the U.S. Postal Service or other independent
delivery services to be its agents. Therefore, deposits in the mail or with such
services, or receipt at Firstar Mutual Fund Services, LLC's post office box of
purchase applications or redemption requests do not constitute receipt by
Firstar Mutual Fund Services, LLC or the fund.
SELLING SHARES
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Methods of Selling
To Sell Some or All of Your Shares
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BY TELEPHONE Call Firstar Stellar Funds at 1-800-677-FUND to
sell any amount of shares.
(NOTE: For security reasons, requests by
telephone will be recorded.)
- --------------------------------------------------------------------------------
BY MAIL Send a letter instructing the Firstar Stellar
Funds to redeem the dollar amount or number of
shares you wish. The letter should contain the
fund's name, the account number and the number
of shares or the dollar amount of shares to be
redeemed. Be sure to have all shareholders sign
the letter. If your account is an IRA, your
signature must be guaranteed and your request
must indicate whether or not 10% withholding
should apply. Requests submitted without an
election whether or not to withhold will be
subject to withholding.
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BY FEDERAL FUNDS WIRE Call Firstar Stellar Funds at 1-800-677-FUND to
request the amount of money you want. Be sure
to have all necessary information from your
bank. Your bank may charge a fee to receive
wired funds.
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REDEMPTION IN-KIND Call Firstar Stellar Funds at 1-800-677-FUND to
request the amount of money you want. If the
amount is over the lesser of $250,000 or 1% of
the class's net asset value, the fund has the
right to redeem your shares by giving you the
amount that exceeds $250,000 or 1% of the
class's net asset value in securities instead
of cash.
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SYSTEMATIC WITHDRAWAL PLAN Call Firstar Stellar Funds at 1-800-677-FUND to
arrange for regular monthly or Plan quarterly
fixed withdrawal payments. The minimum payment
you may receive is $25 per period. Note that
this plan may deplete your investment and
affect your income or yield. Also, it isn't
wise to make purchases of class B shares while
participating in this plan because of the sales
charges.
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SHAREHOLDER SERVICE Consult your account agreement for information
ORGANIZATION on redeeming shares.
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BY EXCHANGE Call 1-800-677-FUND to obtain exchange
information. See page 10 for further
information.
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WHEN REDEMPTION PROCEEDS ARE SENT TO YOU
Your shares may only be redeemed on days on which the fund computes its net
asset value. Your redemption request cannot be processed on days the New York
Stock Exchange is closed or on federal holidays which restrict wire transfers.
All requests received in good order by Firstar Stellar Funds before 3:30 p.m.
(Eastern time) will normally be wired to the bank you indicate or mailed on the
following day to the address of record. In no event will proceeds be wired or a
check mailed more than 7 calendar days after Firstar receives a proper
redemption request.
If you purchase shares using a check and soon after request
a redemption, Firstar Stellar Funds will honor the redemption request, but will
not mail the proceeds until your purchase check has cleared (usually within 12
days).
When making a redemption request, make sure your request is in good order.
"Good order" means your letter of instruction indluces:
o the name of the fund
o the number of shares or the dollar amount of shares to be redeemed
o signatures of all registered shareholders exactly as the shares are
registered (signature guaranteed for IRAs)
o the account registration number
VALUE OF SHARES SOLD
Your shares will be redeemed at the net asset value
next determined after Firstar Stellar Funds receives your redemption request in
good order. In the case of class B shares, the applicable contingent deferred
sales charge will be subtracted from your redemption amount or your account
balance, per your instructions.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, Firstar Stellar
Funds may mail you a notice if your account falls below $1,000 requesting that
you bring the account back up to $1,000 or close it out. If you do not respond
to the request within 30 days, Firstar Stellar Funds may close the account on
your behalf and send you the proceeds. If you have an account through a
shareholder service organization, consult your account agreement for information
on accounts with low balances.
SIGNATURE GUARANTEES
A signature guarantee assures that a signature is genuine and protects you from
unauthorized account transfers. You will need your signature guaranteed if:
o you are redeeming shares from an IRA account
o you request a redemption to be made payable to a person not on record with
the funds, or
o you request that a redemption be mailed to an address other than that on
record with the funds
The fund may also require signature guarantees for other redemptions. You may
obtain signature guarantees from most trust companies, commercial banks or other
eligible guarantor institutions. A notary public cannot guarantee signatures.
EXCHANGING SHARES
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You can exchange shares between the Firstar Stellar Funds within the same class.
You also may exchange class C shares (no-load money market funds) for class A or
B shares of any Firstar Stellar Fund. However, you may not exchange shares from
class B to class C and then to class A.
Exercising the exchange privilege is really two transactions: a sale of one fund
and the purchase of another. The same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Keep in mind that some
funds may have higher sales charges than other funds and you may have to pay the
difference in fee. Exchanges also have the same tax consequences as ordinary
sales and purchases, and you could realize short or long-term capital gains or
losses. Generally, exchanges may only be made between identically registered
accounts unless you send written instructions with a signature guarantee.
Exercising the exchange privilege is really two transactions: a sale of one fund
and the purchase of another.
REINSTATEMENT PRIVILEGE
If you sell shares of a Firstar Stellar Fund or Firstar Fund you may reinvest
some or all of the proceeds in the class A shares of any Firstar Stellar Fund
within 60 days without a sales charge, as long as your investment professional
is notified before you reinvest. All accounts involved must have the same
registration. You may be subject to taxes as a result of a redemption. Consult
your tax adviser concerning the results of a redemption or reinvestment.
The SAI contains more information on exchanges. You may also call 1-800-677-FUND
to learn more about exchanges, the Firstar Funds, a separate family of funds
offered by Firstar Corporation or other Firstar Stellar Funds.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES
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DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Science & Technology Fund declares and pays dividends on an annual basis.
Unless you provide a written request to receive payments in cash, your dividends
will automatically be reinvested in additional shares of the fund. Dividends
paid in cash will be mailed to you via the U.S. Postal Service. Keep in mind,
undeliverable checks or checks not deposited within six months will be
reinvested in additional shares of the fund at the then current net asset value.
Dividends paid in cash or in additional shares are treated the same for tax
purposes. If the fund realizes capital gains, they will be distributed once
every 12 months.
TAX INFORMATION
The fund will pay no federal income tax because it expects to meet certain
Internal Revenue Code requirements. The fund will be treated as a single,
separate entity for federal income tax purposes so that income (including
capital gains, if any) and losses realized by one fund of the Firstar Stellar
Funds will not be combined for tax purposes with those realized by the other
funds. The fund will provide you with detailed tax information for reporting
purposes. You should consult your own tax adviser regarding tax consequences
under your state and local laws.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. All dividends paid by the fund and distributions of net
realized short-term capital gains are taxable as ordinary income. Distributions
paid by the fund from net realized long-term capital gains are taxable as
long-term capital gains. The capital gain holding period and the applicable tax
rate is determined by the length of time that the fund has held the security and
not the length of time that you have held shares in the fund. The fund expects
that, because of its investment objectives, distributions will consist primarily
of long- and short-term capital gains. The fund will provide you with detailed
tax information for reporting purposes.
An exchange is not a tax-free transaction. An exchange of shares pursuant to the
fund's exchange privilege is treated the same as an ordinary sale and purchase
for federal income tax purposes and you will realize a capital gain or loss.
You should consult your own tax adviser regarding the status of your accounts
under state and local tax laws.
TAXPAYER IDENTIFICATION NUMBER
On the account application, you will be asked to certify that your social
security number or taxpayer identification number is correct and that you are
not subject to backup withholding for failing to report income to the IRS. If
you are subject to backup withholding or you did not certify your taxpayer
identification number, the IRS requires the fund to withhold 31% of any
dividend, redemption or exchange proceeds. The fund reserves the right to reject
any application that does not include a certified social security or taxpayer
identification number.
YEAR 2000 ISSUE
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Like all financial service providers, the fund's investment adviser, the
distributor and other third party service providers utilize systems that may be
affected by year 2000 transition or other date related issues. The services
provided to you and the fund by these service providers depend on the smooth
functioning of their computer systems and those of other parties they deal with.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such an
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although there can be no
assurance at this time that there will be no adverse impact on the fund, the
fund's service providers have advised the fund that they have been actively
working on necessary changes to their computer systems to prepare for the year
2000. The fund's service providers expect that their systems, and those of other
parties they deal with, will be adapted in time for that event. However, there
can be no assurance that the computer systems of the companies in which the fund
invests will be timely converted or that the value of such investments will not
be adversely affected by the year 2000 issue. Furthermore, there can be no
assurance that the computer systems of foreign companies, capital markets and
economies in which the fund invests will be timely converted or that the value
of the fund's investments will not be adversely affected by the year 2000 issue.
Additionally, foreign companies, capital markets and economies may be more
susceptible to year 2000 issues than domestic companies.
FIRSTAR
STELLAR
FUNDS
FOR MORE INFORMATION
YOU MAY OBTAIN THE FOLLOWING AND OTHER INFORMATION ON THE FIRSTAR STELLAR
FUNDS FREE OF CHARGE:
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS
The fund does not have an annual or semi-annual report at this time. The
fund's annual report will be made available after the end of the fund's
fiscal year. The annual and semi-annual reports provide the fund's most
recent financial statements and portfolio listings. The annual report
contains a discussion of the market conditions and investment strategies
that affected the fund's performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI) DATED AUGUST 3, 1999
The SAI is incorporated into this prospectus by reference (i.e., legally
made a part of this prospectus). The SAI provides more details about the
fund's policies and management.
TO RECEIVE ANY OF THESE DOCUMENTS OR PROSPECTUSES ON THE OTHER FIRSTAR
STELLAR FUNDS:
BY TELEPHONE
1-800-677-FUND
BY MAIL:
Firstar Stellar Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
ON THE INTERNET:
Text only versions of fund documents can be viewed online or downloaded
from: http://www.sec.gov and http://www.firstarstellarfunds.com
You may review and obtain copies of fund information (including the SAI)
at the SEC Public Reference Room in Washington, D.C. Please call
1-800-SEC-0330 for information relating to the operation of the Public
Reference Room. Copies of the information may be obtained for a fee
by writing the Public Reference Section, Securities and Exchange
Commission, Washington, D.C. 20549-6009.
Investment Company Act File # 811-05762
FIRSTAR STELLAR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
August 3, 1999
Firstar Stellar Science & Technology Fund
This Statement of Additional Information is not a
prospectus and should be read together with the
prospectus of the Science & Technology Fund dated
August 3, 1999. To receive a copy of the prospectus,
write to Firstar Stellar Funds or call 1-800-677-FUND.
FIRSTAR STELLAR FUNDS
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
TABLE OF CONTENTS
General Information about Firstar Stellar Funds................................3
Capital Stock..................................................................3
Description of the Fund, Investment and Risks..................................4
The Fund's Investments and Risks...............................................4
The Fund's Investment Limitations.............................................16
Temporary Investments.........................................................18
Management of the Fund........................................................18
Control Persons and Principal Holders of Securities...........................20
Advisory Services.............................................................21
Brokerage Transactions........................................................21
Distributor...................................................................22
Administrative Services.......................................................22
Fund Accounting and Dividend Paying Agent Services............................22
Custodian.....................................................................22
Distribution Plan.............................................................23
Determining Net Asset Value...................................................23
Purchase, Exchange and Pricing of Shares......................................24
Tax Status....................................................................27
Calculation of Performance Data...............................................27
Performance Comparisons.......................................................28
Independent Public Accountants................................................29
Financial Statements..........................................................29
Appendix......................................................................30
FIRSTAR STELLAR FUNDS
GENERAL INFORMATION ABOUT FIRSTAR STELLAR FUNDS
- --------------------------------------------------------------------------------
Firstar Stellar Funds (the "Trust") is a Massachusetts business trust
established under a Declaration of Trust dated January 23, 1989. The Trust
consists of a series of mutual funds, which are all open-ended investment
management companies. The Trust was organized under the name "Value Plus Funds,"
but was changed on March 29, 1989 to "Losantiville Fund." On May 1, 1993, the
name of the Trust was changed again to "Star Funds." On November 20, 1998, Star
Banc Corporation, the parent company of Star Bank, N.A., merged with Firstar
Corporation. Star Bank, N.A. was the investment adviser of the Trust. After the
merger, Star Bank changed its name to Firstar Bank, N.A. On February 11, 1999,
the Board of Trustees of the Trust approved changing the Trust's name to
"Firstar Stellar Funds" effective March 1, 1999.
CAPITAL STOCK
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TITLE AND DESCRIPTION OF SHARE CLASSES
The Declaration of Trust permits the Trust to offer separate series of shares of
beneficial interest representing interests in separate portfolios of securities.
The Trust currently consists of 12 individual fund portfolios. Under the
Declaration of Trust and a Multiple Class Plan developed pursuant to Rule 18f-3
under the 1940 Act, each fund is permitted to offer several classes of shares as
follows: Class A, Class B, Class C and Class Y. Class A shares are subject to a
front-end sales load as described in the prospectus and a Rule 12b-1 fee. Class
B shares are subject to a contingent deferred sales load as described in the
prospectus and a Rule 12b-1 fee. Class C shares are not subject to a sales load,
but are subject to a Rule 12b-1 fee. Class Y shares are not subject to a sales
load or a Rule 12b-1 fee. The table below lists the fund together with their
share classes. Please note that throughout this Statement of Additional
Information ("SAI"), the individual fund series will be referred to by their
short name (i.e., without the "Firstar Stellar" preface).
- ---------------------------------------------
Money Market Fund
- ---------------------------------------------
Treasury Fund - C, Y
Tax-Free Money Market Fund - C
Ohio Tax-Free Money Market Fund - C
- ------------------------------------------
Bond Fund
- ------------------------------------------
Insured Tax-Free Bond Fund - A
U.S. Government Income Fund - A, B
Strategic Income Fund - B
- --------------------------------------
Stock Fund
- --------------------------------------
Growth Equity Fund - B, Y
Relative Value Fund - A, B, Y
The Stellar Fund - A, Y
Capital Appreciation Fund - A
International Equity Fund - A
Science & Technology Fund - B, Y
Classes A, B and C shares are sold primarily to individuals who purchase shares
through Firstar Bank, N.A. Class Y shares are offered to trusts, fiduciaries and
other institutions through Firstar Bank, N.A. The expenses incurred pursuant to
the Rule 12b-1 Plan will be borne solely by Classes A, B and C shares of the
applicable fund and constitute the only expenses allocated to one class and not
the other.
RIGHTS OF EACH SHARE CLASS
Each share of the common stock of a fund is entitled one vote in electing
Trustees and other matters that may be submitted to shareholders for a vote. All
shares of all classes of the fund in the Trust have equal voting rights.
However, matters affecting only one particular fund or class, can be voted on
only by shareholders in that fund or class. Only shareholders of Class A, B or C
shares will be entitled to vote on matters submitted to a shareholder vote with
respect to the Rule 12b-1 Plan applicable to such class. All shareholders are
entitled to receive dividends when and as declared by the Trustees from time to
time and as further discussed in the Prospectus.
MASSACHUSETTS LAW
Under certain circumstances, shareholders may be held personally liable under
the law of Massachusetts for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
DESCRIPTION OF THE FUND, INVESTMENT AND RISKS
- --------------------------------------------------------------------------------
The investment objective below is a fundamental objective and therefore cannot
be changed without the approval of shareholders.
The Science & Technology Fund is a non-diversified fund and its goal is to
maximize growth and capital appreciation by investing in equity securities of
companies in the science and technology industries.
THE FUND'S INVESTMENTS AND RISKS
- --------------------------------------------------------------------------------
The respective prospectus describes the principal strategies and risks of the
fund. This section provides additional information regarding investments and
transactions that the fund is permitted to make.
REPURCHASE AGREEMENTS
The fund may invest in repurchase agreements which are arrangements with
banks, broker/dealers, and other recognized financial institutions to sell
securities to the fund and agree to repurchase them at a mutually agreed
upon time and price within one year from date of acquisition. The fund or
its custodian will take possession of the securities subject to repurchase
agreements, and these securities will be marked to market daily. 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 fund believes that under the
regular procedures normally in effect for custody of the fund's portfolio
securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the fund and allow retention or
disposition of such securities. The fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the fund's adviser to be creditworthy
pursuant to guidelines established by the Board of Trustees.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The fund may purchase short-term obligations on a when-issued or delayed
delivery basis. These transactions are arrangements in which a fund
purchases securities with payment and delivery scheduled for a future
time. The seller's failure to complete these transactions may cause a fund
to miss a price or yield considered advantageous. Settlement dates may be
a month or more after entering into these transactions and the market
values of the securities purchased may vary from the purchase prices.
A fund may dispose of a commitment prior to settlement if the investment
adviser deems it appropriate to do so. In addition, a fund may enter into
transactions to sell its purchase commitments to third parties at current
market values and simultaneously acquire other commitments to purchase
similar securities at later dates. A fund may realize short-term profits
or losses upon the sale of such commitments.
These transactions are made to secure what is considered to be an
advantageous price or yield for the 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 a fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction is settled. The
fund does 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 respective assets.
RESTRICTED AND ILLIQUID SECURITIES
The fund may invest in a limited amount of restricted securities.
Restricted securities are securities that are thinly traded or whose
resale is restricted by federal securities laws. Restricted securities are
any securities in which the fund may invest pursuant to their investment
objective and policies but which are subject to restrictions on resale
under federal securities laws. The fund's Board of Trustees has
established criteria that allows the adviser to consider certain
restricted securities as liquid.
The fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act
of 1933. Section 4(2) commercial paper is restricted as to disposition
under federal securities law and is generally sold to institutional
investors, such as the fund, who agree that they are purchasing the paper
for investment purposes and not with a view to public distribution. Any
resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors like
the fund through or with the assistance of the issuer or investment
dealers who make a market in Section 4(2) commercial paper, thus providing
liquidity.
The Trustees may consider the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
U.S. GOVERNMENT OBLIGATIONS
The fund may invest in U.S. government obligations. The types of U.S. government
obligations in which the fund may invest generally include direct obligations of
the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds) and
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. These securities are backed by the:
o full faith and credit of the U.S. Treasury;
o issuer's right to borrow from the U.S. Treasury;
o discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
o credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive financial
support from the U.S. government are:
o Federal Home Loan Banks;
o Federal National Mortgage Association;
o Student Loan Marketing Association; and
o Federal Home Loan Mortgage Corporation.
OTHER INVESTMENT COMPANIES
As an efficient means of carrying out their investment policies, the fund
may invest in the securities of other investment companies. A disadvantage
to investing in other investment companies is that they also carry certain
expenses such as management fees. As a result, any investment by a fund in
shares of other investment companies may duplicate shareholder expenses.
DERIVATIVES
Derivatives include options, futures, forward contracts and financial
indexes. The fund intends to invest in options and financial indexes to
increase the fund's income and enhance the fund's return. The fund intends
to use these derivatives for hedging and non-hedging purposes.
The use of derivative instruments exposes the fund to additional risks and
transaction costs. Successful use of these instruments depends on the
adviser's ability to correctly forecast the direction of market movements.
If the adviser's judgment proves incorrect the fund's performance could be
worse than if the fund had not used these instruments. In addition, even
if the adviser's forecast is correct there may be an imperfect correlation
between the price of derivative instruments and movements in the prices of
the securities, interest rates or currencies being hedged.
SYNTHETICS
Synthetic securities are a form of securities where fixed rate bonds of a
single state or municipal issuer are deposited in a trust by a sponsor and
interests in the trust are sold to investors. The use of synthetic
securities exposes the fund to additional risks and transaction losses.
Furthermore, synthetic securities are subject to the greater risks
inherent in bond investing (i.e., varying interest rates and credit
quality rating).
WARRANTS
The 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. Warrants acquired in units or attached
to securities may be deemed to be without value for purposes of this
policy.
CONVERTIBLE SECURITIES
The fund may invest in convertible securities. Convertible securities are
fixed-income securities that may be exchanged or converted into a
predetermined number of shares of the issuer's underlying common stock.
These shares are converted at the option of the holder during a specified
time 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.
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds of appropriate rating or
comparable quality (as described in the prospectus) that can be used, in
whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along
with warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before
the bond's maturity. In the case of liquidation, convertible securities
are senior to equity securities and, therefore, have a claim to assets of
the corporation prior to the common stockholders. However, convertible
securities are generally subordinated to similar non-convertible
securities of the same company. The interest income and dividends from
convertible bonds and preferred stocks provide a stable stream of income
with generally higher yields than common stocks, but lower than
non-convertible securities of similar quality.
A fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in
which, in the adviser's opinion, the investment characteristics of the
underlying common shares will assist the fund in achieving their
investment objectives. Otherwise, the fund will hold or trade the
convertible securities. In selecting convertible securities for the fund,
the adviser evaluates the investment characteristics of the convertible
security as a fixed income instrument and the investment potential of the
underlying equity security for capital appreciation. In evaluating these
matters with respect to a particular convertible security, the adviser
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.
ZERO-COUPON SECURITIES
The fund may invest in zero-coupon securities. The fund may invest in zero
coupon bonds in order to receive the rate of return through the
appreciation of the bond. This application is extremely attractive in a
falling rate environment as the price of the bond rises rapidly in value
as opposed to regular coupon bonds. A zero coupon bond makes no periodic
interest payments and the entire obligation becomes due only upon
maturity. Zero-coupon convertible securities are debt securities, which
are issued at a discount to their face amount and do not entitle the
holder to any periodic payments of interest prior to maturity. Rather,
interest earned on zero-coupon convertible securities increases at a
stated yield until the security reaches its face amount at maturity.
Zero-coupon convertible securities are convertible into a specific number
of shares of the issuer's common stock. In addition, zero-coupon
convertible securities usually have put features that provide the holder
with the opportunity to sell the bonds back to the issuer at a stated
price before maturity.
Generally, the price of zero-coupon securities is more sensitive to
fluctuations in interest than are conventional bonds and convertible
securities. In addition, federal tax law requires the holder of a
zero-coupon security to recognize income from the security prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and to avoid liability of federal income taxes, the
fund will be required to distribute income accrued from zero-coupon
securities which they own, and may have to sell portfolio securities
(perhaps at disadvantageous times) in order to generate cash to satisfy
these distribution requirements.
Zero-coupon securities usually trade at a deep discount from their face or
par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities
which make current distributions of interest. As a result, the net asset
value of shares of the fund may fluctuate over a greater range than shares
of other mutual funds investing in securities making current distributions
of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by
the U.S. Treasury or other short-term debt obligations, and longer-term
bonds or notes and their unmatured interest coupons which have been
separated by their holder, typically a custodian bank or investment
brokerage firm. A number of securities firms and banks have stripped the
interest coupons from the underlying principal (the "corpus") of U.S.
Treasury securities and have resold them in custodial receipt programs
with a number of different names, including Treasury Income Growth
Receipts ("TIGRS") and Certificates of Accrual on Treasuries ("CATS"). The
underlying U.S. Treasury bonds and notes themselves are held in book-entry
form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer of
holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial
ownership of particular interest coupons and corpus payments on Treasury
securities through the Federal Reserve book-entry record-keeping system.
The Federal Reserve program as established by the Treasury Department is
known as "STRIPS" or "Separate Trading of Registered Interest and
Principal of Securities." Under the STRIPS program, a fund will be able to
have its beneficial ownership of U.S. Treasury zero-coupon securities
recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidence of ownership of the
underlying U.S. Treasury securities.
When the holder has stripped debt obligations of their unmatured interest
coupons, the stripped coupons are sold separately. The principal or corpus
is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold
in such bundled form. Purchasers of stripped obligations acquire, in
effect, discount obligations that are economically identical to the
zero-coupon securities issued directly by the obligor.
REAL ESTATE INVESTMENT TRUSTS
The fund may invest in equity or mortgage real estate investment trusts
(REITs) that together produce income. A real estate investment trust is a
managed portfolio of real estate investments. Regarding the fund's asset
allocation policy, real estate of domestic issuers will not be considered
domestic equity securities. REITs will be diversified by geographic
location and by sector (such as shopping malls, apartment building
complexes and health care facilities). An equity REIT holds equity
positions in real estate and provides its shareholders with income from
the leasing of its properties and capital gains from any sales of
properties. A mortgage REIT specializes in lending money to developers of
properties and passes any interest income earned to its shareholders.
Risks associated with real estate investments include the fact that equity
and mortgage real estate investment trusts are dependent upon management
skill and are not diversified, and are, therefore, subject to the risk of
financing single projects or unlimited number of projects. They are also
subject to heavy cash flow dependency, defaults by borrowers, and
self-liquidation. Additionally, equity real estate investment trusts may
be affected by any changes in the value of the underlying property owned
by the trusts, and mortgage real estate investment trusts may be affected
by the quality of any credit extended. The investment adviser seeks to
mitigate these risks by selecting real estate investment trusts
diversified by sector (shopping malls, apartment building complexes and
health care facilities) and geographic location.
OVER-THE-COUNTER OPTIONS
The fund may generally purchase over-the-counter options on portfolio
securities in negotiated transactions with the writers of the options when
options on the portfolio securities held by the fund is not traded on an
exchange. The fund purchases options only with investment dealers and
other financial institutions (such as commercial banks or savings
associations) deemed creditworthy by the investment adviser.
Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while over-the-counter options may
not.
REVERSE REPURCHASE AGREEMENTS
The fund may enter into reverse repurchase agreements. This transaction is
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 the fund will repurchase the portfolio instrument by
remitting the original consideration, plus interest at an agreed upon
rate.
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 at the trade date. These securities are marked
to market daily and are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, the
fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse
repurchase agreements, but only to the extent necessary to assure
completion of the reverse repurchase agreements. The use of reverse
repurchase agreements may enable the 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 the fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
LENDING OF PORTFOLIO SECURITIES
The fund may lend portfolio securities to one-third of the value of its
total assets, on a short- or long-term basis, to broker/dealers, banks or
other institutional borrowers of 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 the
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.
The 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. The fund will only enter into
loan arrangements with broker/dealers, banks or other institutions that
the investment adviser has determined are creditworthy under guidelines
established by the fund's Board of Trustees. The fund must also receive
collateral in the form of cash or U.S. government securities equal to at
least 100% of the securities loaned at all times.
MONEY MARKET SECURITIES
The fund may invest in U.S. dollar and foreign dollar short-term money market
instruments. The short-term money market instruments include:
o commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's, or F-1 or F-2 by Fitch. In the case where commercial
paper has received different ratings from different rating
services, such commercial paper is acceptable so long as at least
one rating is in the two highest categories of the nationally
recognized statistical rating organizations ("NRSROs") described above;
o instruments of domestic and foreign banks and savings associations
(such as certificates of deposit, demand and time deposits and
bankers' acceptances) if they have capital, surplus, and undivided
profits of over $100,000,000, or if BIF or SAIF insures the
principal amount of the instrument. These instruments may include
Eurodollar Certificates of Deposit, Yankee Certificates of Deposit, and
Eurodollar Time Deposits;
o obligations of the U.S. government or its agencies or instrumentalities;
o repurchase agreements; and
o other short-term instruments that are not rated but are determined
by the investment adviser to be of comparable quality to the other
obligations in which the funds may invest.
INVESTMENTS IN FOREIGN SECURITIES
The fund may invest in foreign securities. The types of international
securities in which the fund may invest include other investment companies
that invest primarily in international securities. The international
securities include equity securities of non-U.S. companies and corporate
and government fixed-income securities denominated in currencies other
than U.S. dollars. The international equity securities may be traded
domestically or abroad through various stock exchanges, American
Depositary Receipts or International Depositary Receipts (ADRs or IDRs).
The international fixed-income securities include ADRs, IDRs, and
government securities of other nations and must be rated Baa or better by
Moody's or BBB or better by S&P. If the securities are unrated, the
adviser must determine that they are of similar quality to the rated
securities before a fund may invest in them. The fund does not intend to
invest more than 10% of their respective assets in international
securities
INVESTMENT RISKS OF FOREIGN SECURITIES
Investments in foreign securities involve special risks that differ
from those associated with investments in domestic securities. The
risks associated with investments in foreign securities relate to
political and economic developments abroad, as well as those that
result from the differences between the regulation of domestic
securities and issuers and foreign securities and issuers. These risks
may include, but are not limited to, expropriation, confiscatory
taxation, currency fluctuations, withholding taxes on interest,
limitations on the use or transfer of fund assets, political or social
instability and adverse diplomatic developments. In addition, there are
restrictions on foreign investments in other jurisdictions and there
tends to be difficulty in obtaining judgments from abroad and effecting
repatriation of capital invested abroad. Delays could occur in
settlement of foreign transactions, which could adversely affect
shareholder equity. Moreover, individual foreign economies may differ
favorably or unfavorably from the domestic economy in such respects as
growth of gross national product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments
position.
Investing in foreign securities can carry higher returns and risks than
those associated with domestic investments. Foreign securities may be
denominated in foreign currencies. Therefore, the value in U.S. dollars
of a fund's assets and income may be affected by changes in exchange
rates and regulations. Although the funds value their assets daily in
U.S. dollars, they will not convert their holdings of foreign
currencies to U.S. dollars daily. When a fund converts its holdings to
another currency, it may incur currency conversion costs. Foreign
exchange dealers realize a profit on the difference between the prices
at which they buy and sell currencies.
Other differences between investing in foreign companies and the U.S. include:
o information is less publicly available
o there is a lack of uniform financial accounting standards applicable to
foreign companies
o market quotations are less readily available
o there are differences in government regulation and supervision of foreign
securities exchanges, brokers, listed companies and banks
o there is generally a lower foreign securities market volume a it is likely
that foreign securities may be less liquid or more volatile a there are
generally higher foreign brokerage commissions
o there may be difficulties in enforcing contractual obligations or obtaining
court judgments abroad because of differences in the legal systems
o the mail service between countries may be unreliable
o there are political or financial changes that adversely affect investments
in some countries.
INVESTMENT RISKS OF U.S. GOVERNMENT POLICIES REGARDING INVESTMENTS ABROAD
In the past, U.S. government policies have discouraged or restricted
certain investments abroad. Although the funds are unaware of any
current restrictions that would materially adversely affect their
ability to meet their investment objectives and policies, investors are
advised that these U.S. government policies could be reinstituted.
OPTIONS TRANSACTIONS
The fund may engage in options transactions. The fund may purchase and
sell options both to increase total returns and to hedge against the
effect of changes in the value of portfolio securities.
The fund may write (sell) covered call options and covered put options. By
writing a call option, a fund becomes obligated during the term of the
option to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, a fund becomes obligated during
the term of the option to purchase the securities underlying the option at
the exercise price if the option is exercised.
All options written by the fund must be "covered" options. This means
that, so long as a fund is obligated as the writer of a call option, it
will own the underlying securities subject to the option (or in the case
of call options on U.S. Treasury bills, substantially similar securities)
or have the right to obtain such securities without payment of further
consideration (or have segregated cash in the amount of an additional
consideration).
The fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of the put option, it
deposits and maintains with its custodian in a segregated account liquid
assets having a value equal to or greater than the exercise price of the
option.
The principal reason for writing call or put options is to manage price
volatility (or risk). In addition, the funds will attempt to obtain,
through a receipt of premiums, a greater current return than would be
realized on the underlying securities alone. The fund receives a premium
from writing a call or put option that it retains whether or not the
option is exercised. By writing a call option, a fund might lose the
potential for gain on the underlying security while the option is open,
and by writing a put option, the fund might become obligated to purchase
the underlying security for more than the current market price upon
exercise. A fund will write put options only on securities which the fund
wishes to have in its portfolio and where the fund has determined, as an
investment consideration, that it is willing to pay the exercise price of
the option.
Investments in put and call options may not exceed 5% of a fund's assets,
represented by the premium paid, and will only relate to specific
securities (or groups of specific securities) in which the fund may
invest. The fund may purchase put and call options for the purpose of
offsetting previously written put and call options of the same series. If
a fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the fund will not be able to sell the
underlying securities or dispose of assets held in a segregated account
until the options expire or are exercised. Put options may also be
purchased to protect against price movement in particular securities in
the fund's portfolio. 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. A fund will purchase
options only to the extent permitted by the policies of state securities
authorities in states where shares of the fund are qualified for offer and
sale.
FUTURES AND OPTIONS TRANSACTIONS
The fund may invest in futures and options transactions as a means of
reducing fluctuations in the fund's net asset value. The fund may attempt
to hedge all or a portion of their portfolios by buying and selling
futures contracts and options on futures contracts, and buying put and
call options on securities indices. The fund may also purchase put options
on portfolio securities to hedge a portion of their portfolio investments.
The fund will maintain positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed or have expired. An option position on futures contracts may be
closed out over-the-counter or on a nationally recognized exchange which
provides a secondary market for options of the same series.
FUTURES CONTRACTS
The fund may purchase and sell futures contracts to hedge against the
effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. Although some futures
contracts call for making or taking delivery of the underlying
securities, in most cases these obligations are closed out before the
settlement date. The closing of a contractual obligation is
accomplished by purchasing or selling an identical offsetting futures
contract. Other futures contracts by their terms call for cash
settlements.
A futures contract is a firm commitment by two parties: 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 securities ("going long") at a certain time in the future. For
example, in the fixed income securities market, prices move inversely
to interest rates. A rise in rates means a drop in price. Conversely, a
drop in rates means a rise in price. To hedge their holdings of fixed
income securities against a rise in market interest rates, a fund could
enter into contracts to deliver securities at a predetermined price
(i.e., "go short"). Going short protects the funds against the
possibility that the prices of their fixed income securities may
decline during the funds' anticipated holding period. A fund would "go
long" (agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates.
Stock index futures contracts are based on indices that reflect the
market value of common stock of the firms included in the indices. An
index futures contract is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to the
differences between the value of the index at the close of the last
trading day of the contract and the price at which the index contract
was originally written.
"MARGIN" IN FUTURES TRANSACTIONS
The fund may engage in margin in futures transactions. Unlike the
purchase or sale of a security, the fund does not pay or receive money
upon the purchase or sale of a futures contract. Rather, a fund is
required to deposit an amount of "initial margin" in cash, U.S.
government securities or highly liquid debt securities 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. Initial margin in futures transactions does
not involve the borrowing of funds by the 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 the 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 the
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 the fund but is instead settlement between the fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the fund will mark to
market its open futures position.
A fund is also required to deposit and maintain margins when it writes
call options on futures contracts. When a fund purchase futures
contracts, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contracts (less any related
margin deposits), will be deposited in a segregated account with the
fund's custodian (or the broker, if legally permitted). The cash is
segregated to provide collateral and to insure that the use of the
futures contracts is not leveraged.
PUT OPTIONS ON FUTURES CONTRACTS
The fund may purchase listed put options on futures contracts to
protect portfolio securities against decreases in value resulting from
market factors, such as an anticipated increase in interest rates or
decrease in stock prices. 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, the
fund will normally close out its options by selling an identical
option. If the hedge is successful, the proceeds received by the fund
upon the sale of the second option will be large enough to offset both
the premium paid by the fund for the original option plus the decrease
in value of the hedged securities.
Alternatively, a fund may exercise its put options to close out the
position. To do so, it would simultaneously enter into futures
contracts of the type underlying the options (for a price less than the
strike price of the option) and exercise the options. The fund would
then deliver the futures contract in return for payment of the strike
price. If the 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.
CALL OPTIONS ON FUTURES CONTRACTS
In addition to purchasing put options on futures, the fund may write
listed call options on futures contracts to hedge their portfolios.
When a fund writes call options on futures contracts, 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
options if the options are exercised. As market interest rates rise,
causing the prices of futures to go down, the fund's obligation under a
call option on a future (to sell a futures contract) costs less to
fulfill, causing the value of the fund's call option position to
increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so the fund keeps the premium received for the option. This
premium can substantially offset the drop in value of the fund's
fixed-income or indexed portfolio that is occurring as interest rates
rise.
Prior to the expiration of a call written by a fund, or exercise of it
by the buyer, the 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 the fund for the initial option.
The net premium income of the fund will then substantially offset the
decrease in value of the hedged securities.
A fund will not maintain open positions in futures contracts it has
sold or call options it has written if, in the aggregate, the value of
the open positions (marked to market) exceeds the current market value
of their securities portfolio, plus or minus the unrealized gain or
loss on those open positions, adjusted for the correlation of
volatility between the hedged securities and the futures contracts. If
this limitation is exceeded at any time, the fund will take prompt
action to close out a sufficient number of open contracts to bring its
open futures and options positions within this limitation.
CALL OPTIONS ON STOCK INDEX FUTURES CONTRACTS
In addition to writing call options on futures contracts, the fund may
write listed and over-the-counter call options on stock index futures
contracts (including cash-settled stock index options) to hedge their
portfolio against a decrease in stock prices. 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 stock prices fall, causing the prices of
futures to go down, a fund's obligation under a call option on a future
(to sell a futures contract) costs less to fulfill, causing the value
of the fund's call option position to increase.
STOCK INDEX OPTIONS
The fund may write (sell) and 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 value of the stocks listed in the index.
When a fund writes options, an amount equal to the net premium received
by the fund is included in the liability section of the fund's
Statement of Assets and Liabilities as a deferred credit. The amount of
the deferred credit will be subsequently marked to market to reflect
the current market value of the options written. The current market
value of a traded option is the last sale price or, in the absence of a
sale, the mean between the closing bid and asked price. If an option
expires on its stipulated expiration date or if the fund enters into a
closing purchase transaction, the fund will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the premium received
when the option was sold), and the deferred credit related to such
option will be eliminated.
The purchase of a put option would entitle a fund, in exchange for the
premium paid, to sell the underlying securities at a specified price
during the option period. The purchase of such puts is designed merely
to offset or hedge against a decline in the market value of an index. A
fund would ordinarily recognize a gain if the value of the index
decreased below the exercise price sufficiently to cover the premium
and would recognize a loss if the value of the index remained at or
above the exercise price.
The effectiveness of writing or purchasing stock index options will
depend upon the extent to which price movements in the fund's 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 a fund will
realize a gain or loss from the purchase of the option on an index
generally depends upon movements in the level of stock prices in the
stock market. In the case of certain indices, gain or loss depends upon
movement of stock prices in an industry or market segment rather than
movements in the price of a particular stock. Accordingly, successful
use by a fund of options on stock indices will be subject to the
ability of the adviser to predict correctly movements in the directions
of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the
prices of individual stocks.
RISKS
When investing in futures and options, you could lose more money than
you invested. When a fund uses futures and options on futures as
hedging devices, there is a risk that the prices of the securities
subject to the futures contracts may not correlate perfectly with the
prices of the securities in the fund's portfolio. This may cause the
futures contract and any related options to react differently to market
changes than the portfolio securities. In addition, the adviser could
be incorrect in its expectations about the direction or extent of
market factors such as interest rate movements. In these events, a fund
may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the adviser
will consider liquidity before entering into these transactions, there
is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at
any particular time. A fund's ability to establish and close out
futures and options positions depends on this secondary market. The
inability to close these positions could have an adverse effect on the
fund's ability to hedge its portfolio.
To minimize risks, a fund may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of
margin deposits on the fund's existing futures positions and premiums
paid for related options would exceed 5% of the market value of the
fund's total assets after taking into account the unrealized profits
and losses on those contracts it has entered into. In the case of an
option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing such 5%.
When a fund purchases futures contracts, an amount of cash and cash
equivalents, equal to the underlying commodity value of the futures
contracts (less any related margin deposits), will be deposited in a
segregated account with the fund's custodian (or the broker, if legally
permitted). The cash is segregated to provide collateral and to insure
that the use of the futures contracts is not leveraged. When a fund
sells futures contracts, they will either own or have the right to
receive the underlying future or security, or will make deposits to
collateralize the position as discussed above.
MORTGAGE-BACKED SECURITIES
The fund may invest in mortgage-backed securities. Mortgage-backed
securities are securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans on
real property. There are currently three basic types of mortgage-backed
securities:
1. Those issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities, such as Government National
Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC");
2. Those issued by private issuers that represent an interest in or
are collateralized by mortgage-backed securities issued or
guaranteed by the U.S. government or one of its agencies or
instrumentalities; and
3. Those issued by private issuers that represent an interest in or
are collateralized by whole loans or mortgage-backed securities
without a government guarantee but usually having some form of
private credit enhancement.
Mortgage-backed securities generally pay back principal and interest over
the life of the security. At the time a fund reinvests the payments and
any unscheduled prepayments of principal received, the fund may receive a
rate of interest which is actually lower than the rate of interest paid on
these securities ("prepayments risks"). Mortgage-backed securities are
subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans
may be prepaid without penalty or premium. Prepayment risk on
mortgage-backed securities tends to increase during periods of declining
mortgage interest rates because many borrowers refinance their mortgages
to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
The fund may invest in ARMS. ARMS are actively traded, mortgage-backed
securities representing interests in adjustable rather than fixed interest
rate mortgages. The fund invests in ARMS issued by GNMA, FNMA, and FHLMC.
The underlying mortgages which collateralize ARMS issued by GNMA are fully
guaranteed by the Federal Housing Administration or Veterans
Administration, while those collateralizing ARMS issued by FHLMC or FNMA
are typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, holders of the ARMS, would receive
monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments
and any unscheduled prepayments of principal that it receives, the holder
may receive a rate of interest which is actually lower than the rate of
interest paid on the existing ARMS. As a consequence, ARMS may be a less
effective means of "locking in" long-term interest rates than other types
of U.S. government securities.
Not unlike other U.S. government securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the
market value of ARMS generally declines when interest rates rise and
generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to the
extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs")
The fund may invest in CMOs. CMOs are debt obligations collateralized by
mortgage loans or mortgage-backed securities. Typically, CMOs are
collateralized by GNMA, FNMA or FHLMC certificates, but may be
collateralized by whole loans or private mortgage-backed securities.
The fund will invest only in CMOs rated AAA by a nationally recognized
rating organization (NRSRO) and which may be:
(a) collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an
agency or instrumentality of the U.S. government;
(b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or
(c) privately issued securities in which the proceeds of the issuance
are invested in mortgage securities and payment of the principal
and interest are supported by the credit of an agency or
instrumentality of the U.S. government.
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs--most of the CMOs in which the fund invests use the
same basic structure:
(a) Several classes of securities are issued against a pool of
mortgage collateral. The most common structure contains four
classes of securities. The first three (A, B, and C bonds) pay
interest at their stated rates beginning with the issue date. The
final class (Z bond) typically receives any excess income from
the underlying investments after payments are made to the other
classes and receives no principal or interest payments until the
shorter maturity classes have been retired. The Z bond class then
receives all remaining principal and interest payments.
(b) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(c) The classes of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity class (or A
bond). When those securities are completely retired, all
principal payments are then directed to the
next-shortest-maturity security (or B bond). This process
continues until all of the classes have been paid off.
Because the cash flow is distributed sequentially instead of pro-rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns.
ASSET-BACKED SECURITIES
The fund may invest in asset-backed securities. Asset-backed securities
have structural characteristics similar to mortgage-backed securities but
have underlying assets that generally are not mortgage loans or interests
in mortgage loans. The fund may invest in asset-backed securities rated
AAA by an NRSRO including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and
credit card receivables, equipment leases, manufactured housing (mobile
home) leases or home equity loans. These securities may be in the form of
pass-through instruments or asset-backed bonds. The securities are issued
by non-governmental entities and carry no direct or indirect government
guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time a fund reinvests
the payments and any unscheduled prepayments of principal received, the
fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Mortgage-backed
and asset-backed securities are subject to higher prepayment risks than
most other types of debt instruments with prepayment risks because the
underlying mortgage loans or the collateral supporting asset-backed
securities may be prepaid without penalty or premium. Prepayment risks on
mortgage-backed securities tend to increase during periods of declining
mortgage interest rates because many borrowers refinance their mortgages
to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally
are less likely to experience substantial prepayments than are
mortgage-backed securities, certain of the factors that affect the rate of
prepayments on mortgage-backed securities also affect the rate of
prepayments on asset-backed securities.
While mortgage-backed securities generally entail less risk of a decline
during periods of rapidly rising interest rates, mortgage-backed
securities may also have less potential for capital appreciation than
other similar investments (e.g., investments with comparable maturities)
because as interest rates decline, the likelihood increases that mortgages
will be prepaid. Furthermore, if mortgage-backed securities are purchased
at a premium, mortgage foreclosures and unscheduled principal payments may
result in some loss of a holder's principal investment to the extent of
the premium paid. Conversely, if mortgage-backed securities are purchased
at a discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many
of which give such debtors the right to set off certain amounts owed on
the credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by motor vehicle installment purchase
obligations permit the servicer of such receivables to retain possession
of the underlying obligations. If the servicer sells these obligations to
another party, there is a risk that the purchaser would acquire an
interest superior to that of the holders of the related asset-backed
securities. Further, if a vehicle is registered in one state and is then
re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle
in certain cases. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
THE FUND'S INVESTMENT LIMITATIONS
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The following is a list of the fund's investment limitations, which cannot be
changed without the approval of a majority of a fund's outstanding voting
securities. As used in this SAI, "a majority of a fund's outstanding voting
securities" means the lesser of (1) 67% of the shares of common stock of the
Fund represented at a meeting at which more than 50% of the outstanding shares
are present, or (2) more than 50% of the outstanding shares of common stock of
the fund.
1. SELLING SHORT. The fund will not sell any securities short.
2. BUYING ON MARGIN. The fund will not purchase any securities on margin, but it
may obtain such short-term credits as may be necessary for clearance of
purchases and sales of portfolio securities. The deposit or payment by the 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.
3. ISSUING SENIOR SECURITIES. The fund will not issue senior securities, except
that the fund may borrow money directly or through reverse repurchase agreements
in amounts up to one-third of the value of its total assets, including the
amount borrowed. The fund will issue senior securities to the extent that the
fund may enter into futures contracts.
4. BORROWING MONEY. Except as described in the prospectus, the fund will not
borrow money or engage in reverse repurchase agreements for investment leverage.
However, the fund may borrow money up to one-third of its value of its total
assets as a temporary, extraordinary, or emergency measure or to facilitate
management of the fund by enabling the fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. Interest paid on borrowed funds will serve to reduce the fund's
income. The fund will not purchase any securities while borrowings and reverse
repurchase agreements in excess of 5% of its total assets are outstanding.
During the period any reverse repurchase agreements are outstanding, the fund
will restrict the purchase of portfolio securities to money market instruments
maturing on or before the expiration date of the reverse repurchase agreements,
but only to the extent necessary to assure completion of the reverse repurchase
agreements.
5. PLEDGING ASSETS. The fund will not mortgage, pledge, or hypothecate any
assets except to secure permitted borrowings. In those cases, they may mortgage,
pledge, or hypothecate assets having a market value not exceeding 10% of the
value of total assets at the time of the pledge.
The following will not be deemed to be pledges of the fund's assets:
(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.
Margin deposits for the purchase and sale of futures contracts and related
options are not deemed to be a pledge.
6. CONCENTRATION OF INVESTMENTS. The fund will not invest 25% or more of the
value of its respective total assets in any one industry, except in the science
and technology areas as set forth under the "Investment Objective and Policies"
in the Prospectus, provided also that there shall be no limitation on the fund
to purchase obligations issued or guaranteed by the United States Government,
its agencies or instrumentalities. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the issuing entity and a security is backed
only by the assets and revenues of the entity, the entity would be deemed to be
the sole issuer of the security. Similarly, in the case of an industrial revenue
bond, if that bond is backed only by the assets and revenues of the
non-governmental issuer, then such non-governmental issuer would be deemed to be
the sole issuer. If, however, in either case, the creating government guarantees
a security, such a guarantee would be considered a separate security and would
be treated as an issue of such government.
7. UNDERWRITING. The fund will not underwrite any issue of securities, except as
it may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
8. INVESTING IN REAL ESTATE. The fund will not purchase or sell real estate,
including limited partnership interests. However, it may invest in the
securities of companies whose business involves the purchase or sale of real
estate or in securities that are secured by real estate or interests in real
estate.
9. INVESTING IN COMMODITIES. The fund will not purchase or sell commodities,
commodity contracts, or commodity futures contracts. However the fund may engage
in transactions involving futures contracts or options on futures contracts.
10. LENDING CASH OR SECURITIES. The fund will not lend any of their respective
assets, except portfolio securities up to one-third of the value of its total
assets. This shall not prevent the fund from purchasing or holding U.S.
government obligations, money market instruments, variable rate demand notes,
bonds, debentures, notes, certificates of indebtedness, or other debt
securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the fund's investment objectives, policies, and
limitations or the Trust's Declaration of Trust.
The Trustees may change the following investment limitations without shareholder
approval. Shareholders will be notified before any material change in these
limitations becomes effective.
1. INVESTING IN ILLIQUID AND RESTRICTED SECURITIES. The fund will not invest
more than 15% of the value of its net assets in illiquid securities, including
repurchase agreements providing for settlement in more than seven days after
notice, non-negotiable fixed time deposits with maturities over seven days,
over-the-counter options and certain restricted securities not determined by the
Trustees to be liquid.
2. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES.
The fund will limit its investment in other investment companies to:
o no more than 3% of the total outstanding voting stock of any investment
company,
o no more than 5% of its total assets in any one investment company,
o no more than 10% of its total assets in investment companies in general.
The fund will purchase securities of investment companies only in
open-market transactions involving customary broker's commissions. The
adviser will waive its investment advisory fee on assets invested in
securities of open-end investment companies.
These limitations are not applicable if the securities are acquired in a
merger, consolidation, reorganization or acquisition of assets. It should
be noted that investment companies may incur certain expenses that may be
duplicative of certain fees incurred by the fund.
3. PURCHASING SECURITIES TO EXERCISE CONTROL. The fund will not purchase
securities of a company for the purpose of exercising control or management.
4. WRITING COVERED CALL OPTIONS. The fund will not write call options on
securities unless the securities are held in the specific fund's portfolio or
unless the fund is entitled to them in deliverable form without further payment
or after segregating cash in the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The fund does not expect to borrow money or pledge securities in excess of 5% of
the value of its total assets in the coming fiscal year.
For purposes of its policies and limitations, the fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."
As a matter of operating policy, which may be changed without shareholder
approval, the fund will limit the margin deposits on futures contract and
options entered into by a fund to 5% of its net assets.
Temporary Investments
- --------------------------------------------------------------------------------
From time to time, the fund may invest in temporary investments. For
temporary defensive purposes (up to 100% of total assets) and to maintain
liquidity (up to 35% of total assets), the fund may invest in U.S. and
foreign short-term money market instruments including:
o commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's, or F-1 or F-2 by Fitch. In the case where commercial paper
has received different ratings from different rating services, such
commercial paper is acceptable so long as at least one rating is in
the two highest categories of the NRSROs described above;
o instruments of domestic and foreign banks and savings associations
(such as certificates of deposit, demand and time deposits and
bankers' acceptances) if they have capital, surplus, and undivided
profits of over $100,000,000, or if BIF or SAIF insures the principal
amount of the instrument. These instruments may include Eurodollar
Certificates of Deposit, Yankee Certificates of Deposit, and
Eurodollar Time Deposits;
o obligations of the U.S. government or its agencies or instrumentalities;
o repurchase agreements; and
o other short-term instruments that are not rated but are determined by
the adviser to be of comparable quality to the other obligations in
which the fund may invest.
Management of the Fund
- --------------------------------------------------------------------------------
The Trust is managed by a Board of Trustees. The Trust's Board of Trustees
consists of six individuals, all of whom are not "interested persons" of the
Trust as that term is defined in the 1940 Act. The Trustees are fiduciaries for
the fund's shareholders and are governed by the laws of the State of
Massachusetts in this regard. They establish policies for the operation of the
Trust and appoint the officers who conduct the daily business of the Trust.
Officers and Trustees are listed below with their addresses, ages, present
positions with the Trust and principal occupations.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Name and Address Age Position and Office Principal Occupation
with the Trust during the Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Thomas L. Conlan, Jr.(1)<F5> 61 Trustee Retired; President and Chief Executive
c/o Firstar Corporation Officer, Student Loan Funding Resources,
425 Walnut Street Inc., 1998 to 1999; President and Chief
Cincinnati, Ohio 45202 Executive Officer, Student Loan Funding
Corporation, 1981 to June 1998; President
and Chief Executive Officer, Student Loan
Funding Corporation, Inc., 1991 to June
1998.
- ------------------------------------------------------------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D. 69 Trustee Chancellor (January 1996 to present),
c/o Firstar Corporation Professor and President, 1971 to 1995,
425 Walnut Street Hebrew Union College-Jewish Institute of
Cincinnati, Ohio 45202 Religion.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert J. Hill, D.O. 40 Trustee Physician, Ohio Valley Orthopaedic and
c/o Firstar Corporation Sports Medicine Institute, Inc. and
425 Walnut Street Wellington Orthopaedics, 1994 to present;
Cincinnati, Ohio 45202 Fellow Physician, Cleveland Clinic
Foundation, 1993 to 1994.
- ------------------------------------------------------------------------------------------------------------------------------------
Dawn M. Hornback 36 Trustee Founder, President and Chief Executive
c/o Firstar Corporation Officer of Observatory Group, Inc., August
425 Walnut Street 1990 to present. Observatory Group, Inc.
Cincinnati, Ohio 45202 is a marketing communications firm
specializing in the commercial, medical
and educational fields.
- ------------------------------------------------------------------------------------------------------------------------------------
Lawrence M. Turner 52 Trustee Vice President and Treasurer, Kroger
c/o Firstar Corporation Company, 1986 to present. The Kroger Co.
425 Walnut Street operates supermarkets and convenience
Cincinnati, Ohio 45202 stores and processes food.
- ------------------------------------------------------------------------------------------------------------------------------------
William H. Zimmer, III 46 Trustee Executive Vice President & Chief Financial
c/o Firstar Corporation Officer, Advanced Communications Group,
425 Walnut Street Inc., December 1998 to present; Corporate
Cincinnati, Ohio 45202 Vice President, Cincinnati Bell, Inc.,
1997 to 1998 Treasurer, Cincinnati Bell, Inc.,
1991 to present; Secretary, Cincinnati Bell, Inc.
1988 to 1997; Assistant Treasurer, Cincinnati Bell,
Inc., 1988 to 1991.
- ------------------------------------------------------------------------------------------------------------------------------------
Daniel B. Benhase 40 President Executive Vice President, Firstar
Firstar Corporation Corporation since 1987.
425 Walnut Street
Cincinnati, OH 45202
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph C. Neuberger 37 Vice President Vice President, Firstar Mutual Fund
Firstar Mutual Fund Services, LLC, 1994 to present.
Services, LLC
615 E. Michigan Street
Milwaukee, WI 53202
- ------------------------------------------------------------------------------------------------------------------------------------
Michael T. Karbouski 34 Treasurer Trust Officer, Firstar Mutual Fund
Firstar Mutual Fund Services, LLC, 1990 to present.
Services, LLC
615 E. Michigan Street
Milwaukee, WI 53202
- ------------------------------------------------------------------------------------------------------------------------------------
Elaine E. Richards 31 Secretary Trust Officer, Firstar Mutual Fund
Firstar Mutual Fund Services, LLC, June 1998 to present;
Services, LLC Associate Attorney, Reinhart, Boerner, Van
615 E. Michigan Street Deuren, Norris & Rieselbach, s.c.,
Milwaukee, WI 53202 Milwaukee, Wisconsin, 1995 to 1998.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)<F5> Before Mr. Conlan retired as President and Chief Executive Officer from
the Student Loan Funding Corporation, the Trustees considered him to be an an
"interested person," as defined in the 1940 Act, of the Trust by virtue of his
business relationship with the fund's investment adviser, and certain of its
affiliates. The Student Loan Funding Corporation and SLFC, Inc., of which Mr.
Conlan was President and Chief Executive Officer, purchases student loans from
various financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. Mr. Conlan is no longer considered an "interested person" because of
his recent retirement from Student Loan Funding Corporation and SLFC, Inc.
COMPENSATION
For their service as Trustees, the independent Trustees receive a $3,000 annual
retainer fee and $2,375 per meeting attended, as well as reimbursement for
expenses incurred in connection with attendance at such meetings. The interested
Trustees of the Trust receive no compensation for their service as Trustees. The
table below details the amount of compensation received by the Trustees from the
Trust for the past fiscal year. Presently, none of the executive officers
receive compensation from the Trust. The aggregate compensation is provided for
the Trust, which is comprised of twelve portfolios.
<TABLE>
Total Compensation
Aggregate Pension or Retirement Estimated Annual from Trust and Fund
Compensation Benefits Accrued As Benefits Upon Complex Paid to
Name and Position From Trust**<F7> Part of Trust Expenses Retirement Trustees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas L. Conlan, Jr.*<F6> None None None None
Trustee
Dr. Alfred Gottschalk $11,000 None None $11,000
Trustee
Dr. Robert J. Hill $11,500 None None $11,500
Trustee
Dawn M. Hornback $11,000 None None $11,000
Trustee
Lawrence M. Turner $11,000 None None $11,000
Trustee
William H. Zimmer, III $11,500 None None $11,500
Trustee
</TABLE>
*<F6>This trustee did not receive compensation from the Trust during the last
fiscal year becuase he was considered an "interested person" of the Trust by
virtue of his business relationship. See footnote (1) to previous table.
**<F7>A portion of these fees were paid by the Market Capitalization Fund a
former Firstar Stellar Fund that was recently dissolved.
SALES LOADS
Unless a trustee falls into one of the following categories, there are currently
no discounts available to Trustees on sales charges applied to shares of the
Fund. The following persons will not have to pay a sales charge on class A or
class B shares: o Employees and retired employees of Firstar Bank (or Star
Bank), or their affiliates and members of their families (including
parents, grandparents, siblings, spouses, children, and in-laws) of such
employees or retired employees; o FirstarTrust customers of Firstar Corporation
and its subsidiaries; and o non-trust customers of financial advisers.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------
CONTROL PERSON AND PRINCIPAL HOLDERS
As of August 3, 1999, no one is deemed to be a control person or a principal
holder of the fund. A principal holder is a person that beneficially owns 5% or
more of the fund's outstanding equity securities. A control person is a person
that owns over 25% of the voting shares of the fund.
MANAGEMENT OWNERSHIP
As of August 3, 1999, the officers and Trustees of the Trust do not own any
outstanding shares of the fund.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Trust's investment adviser is Firstar Bank, N.A. located at 425 Walnut
Street, Cincinnati, Ohio 45202 ("Firstar Bank"). Firstar Bank is a wholly-owned
subsidiary of Firstar Corporation whose principal business is commercial
banking. On November 20, 1998, StarBanc Corporation merged with Firstar
Corporation. The new entity retained the "Firstar" name and Firstar Corporation
is now the parent company of the adviser. The adviser was known as Star Bank,
N.A. prior to the merger.
The merger has produced no significant changes to the management of the adviser.
Together, the two banks have become the 21st largest bank in the United States
and have blended an expertise of trust administration and investments together
with extensive knowledge in the mutual fund industry.
Firstar Bank's assets under management, including mutual funds, have a market
value in excess of $ 12 billion. As part of its regular banking operations,
Firstar Bank may make loans to public companies. As a result, it may be possible
for the fund to hold or acquire securities of companies that are also lending
clients of Firstar Bank. The lending relationship will not be a factor in the
selection of securities. Because of internal controls maintained by Firstar Bank
to restrict the flow of non-public information, Trust investments are typically
made without any knowledge of Firstar Bank's or its affiliates' lending
relationships with an issuer.
Firstar Bank shall not be liable to the Trust, the fund, or any shareholder of
the fund 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.
Firstar Corporation is also the parent company to Firstar Investment Management
and Research Company, LLC ("FIRMCO"), a registered investment adviser. FIRMCO
serves as the investment adviser to the Firstar Funds, a separate family of fund
using the "Firstar" name.
ADVISORY FEES
For its advisory services, Firstar Bank receives an annual investment advisory
fee from the fund as described in the prospectus.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
The adviser is responsible for making decisions to buy and sell securities for
the fund and for placing the fund's securities. The adviser is also responsible
for negotiating the commissions to be paid on such transactions and allocating
portfolio transactions. The adviser seeks to obtain the best execution at the
best security price available with respect to each transaction. The best price
to a fund means the best net price without regard to the mix between purchase or
sale price and commission if any. While the adviser seeks reasonably competitive
commission rates, the fund does not necessarily pay the lowest available
commission. Brokerage will not be allocated based on the sale of the Fund's
shares.
Section 28(e) of the Securities Exchange Act of 1934, as amended permits an
investment adviser under certain circumstances, to cause an account to pay a
broker or dealer who supplies brokerage and research services a commission for
effecting a transaction in excess of the amount of commission another broker or
dealer would have charged for effecting the transaction. Brokerage and research
services include:
(a) furnishing advice as to the value of securities, the availability of
investing, purchasing or selling securities and the availability of
securities or purchasers or sellers of securities;
(b) furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accruals; and
(c) effecting securities transactions and performing functions incidental
thereto (such as clearance, settlement and custody).
In selecting brokers or dealers, the adviser considers investment and market
information and other research, such as economic, securities and performance
measurement research provided by such brokers or dealers and the quality and
reliability of brokerage services, including execution capability, performance
and financial responsibility. Accordingly, the commissions charged by any such
broker or dealer may be greater than the amount another firm might charge if the
adviser determines in good faith that the amount of such commissions is
reasonable in relation to the value of the research information and brokerage
services provided by such broker or dealers to the fund. The adviser believes
that the research information received in this manner provides the fund with
benefits by supplementing the research otherwise available to the fund. Such
higher commissions will not be paid by the fund unless:
(a) the adviser determines in good faith that the amount is reasonable in
relation to the services in terms of the particular transaction or in terms
of the adviser's overall responsibilities with respect to the accounts,
including the fund as to which it exercises investment discretion;
(b) such payment is made in compliance with the provisions of Section 28(e) and
to other applicable state and federal laws; and
(c) in the opinion of the adviser, the total commissions paid by the fund will
be reasonable in relation to the benefits to the fund over the long term.
Although investment decisions for the fund are made independently from those of
the other accounts managed by the adviser, investments of the type the fund may
make may also be made by those other accounts. When the fund and one or more
other accounts managed by the adviser 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 adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the fund or the size of the position obtained or disposed of by the fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the fund.
DISTRIBUTOR
- --------------------------------------------------------------------------------
Edgewood Services, Inc., 1001 Liberty Avenue, Pittsburgh, Pennsylvania
15222-3779, is the distributor for the shares of the fund. Edgewood is the
distributor for a number of investment companies around the country. The
distributor will use its best efforts to distribute the fund's shares, which
shares are offered for sale by the fund continuously.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Firstar Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, a subsidiary of Firstar Bank, N.A., ("Firstar"), provides
administrative personnel and services to the fund. Firstar provides services
such as legal compliance and accounting services. Firstar provides these
services at an annual rate of 0.11% of the average daily net assets of the fund.
Edgewood Services, Inc. serves as sub-administrator to the fund. For its
services, Edgewood is paid a fee by the fund's administrator and is not paid by
the fund.
FUND ACCOUNTING AND DIVIDEND PAYING AGENT SERVICES
- --------------------------------------------------------------------------------
Firstar provides fund accounting personnel and services to the fund pursuant to
a Fund Accounting Service Agreement. Under the Fund Accounting Servicing
Agreement, Firstar provides portfolio accounting services, expense accrual and
payment services, fund valuation and financial reporting services, tax
accounting services and compliance control services. Firstar receives a fund
accounting fee, for the fund, which is billed on a monthly basis. Firstar acts
as the fund's dividend paying agent.
CUSTODIAN
- --------------------------------------------------------------------------------
Firstar Bank, N.A., 425 Walnut Street, Cincinnati, OH 45202, is custodian for
the cash and securities of the fund. Under the Custodian Agreement, Firstar Bank
holds the Fund's portfolio securities in safekeeping and keeps all necessary
records and documents relating to its duties. The custodian receives an annual
fee equal to 0.025% of each fund's average daily net assets.
DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
As noted in the fund's prospectus, the Trust on behalf of the fund has adopted a
Rule 12b-1 Plan, as amended and restated, pursuant to Rule 12b-1 promulgated by
the SEC pursuant to the 1940 Act (the "Plan"). The Plan was adopted to
facilitate the sale of a sufficient number of shares to allow the Fund to
achieve economic viability. The Plan is a compensation type of Plan that
provides the Trust the ability to use assets of the fund to pay securities
dealers, financial institutions and other industry professionals ("shareholder
service organizations") to finance any activity that is principally intended to
result in the sale of the fund' shares subject to the Plan. Such activities may
include:
o the advertising and marketing of shares of the fund;
o preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and
o implementing and operating the Plan.
The distributor may pay fees to brokers and others for such services. Edgewood
Services, Inc., became the distributor for the Trust as of April 1, 1999.
In compensation for the services provided pursuant to this Plan, Edgewood
Services, Inc. will be paid a monthly fee computed at the annual rate of up to
0.75% of the average aggregate net asset value of shares of the fund held during
the month. The Plan provides that the only shares of the fund subject to the
accrual and payment of Rule 12b-1 fees are the fund in which there is Y class of
shares. Although Class Y shares are not subject to Rule 12b-1 fees, Classes A, B
or C shares within the particular fund are subject to the fees. Class C of the
Treasury Fund is paying Rule 12b-1 fees because a Y class of shares exists in
the fund.
The Trust's Board of Trustees, including all of the independent Trustees as
defined in the 1940 Act, has approved the Plan. The Board of Trustees has
determined that a consistent cash flow resulting from the sale of new shares is
necessary and appropriate to meet redemptions and to take advantage of buying
opportunities without having to make unwarranted liquidations of portfolio
securities. The Board of Trustees believes, therefore, that it will benefit the
fund to have monies available for the direct distribution activities of the
distributor in promoting the sale of the fund's shares. Furthermore, having
money available will avoid any uncertainties as to whether other payments by the
fund constitute distribution expenses on behalf of the fund. The Plan must be
renewed annually by the Board of Trustees, including a majority of the
independent Trustees who have no direct or indirect financial interest in the
operation of the Plan, cast in person at a meeting called for that purpose. It
is also required that the independent Trustees select and nominate other
independent Trustees.
The Plan and any related agreement may not be amended to materially increase the
amounts to be spent for distribution expenses without approval by a majority of
the fund's outstanding shares. All material amendments to the Plan or any
related agreements must be approved by a vote of the independent Trustees, cast
in person at a meeting called for the purpose of voting on any such amendment.
The distributor is required to report in writing to the Board of Trustees, at
least quarterly, on the amounts and purpose of any payment made under the Plan.
The distributor is also required to furnish the Board of Trustees with such
other information as may reasonably be requested in order to enable the Trustees
to make an informed determination of whether the Plan should be continued.
With the exception of Firstar Bank, in its capacity as the Fund's investment
adviser, and Edgewood Services Inc., in its capacity as distributor of the
fund's shares, no "interested person" of the fund, as defined in the 1940 Act,
and no trustee of the fund who is not an "interested person" has or had a direct
or indirect financial interest in the Plan or any related argument.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the fund are described in the prospectus. Dividend income
is recorded on the ex-dividend date, except that certain dividends from foreign
securities where the ex-dividend date may have passed, are recorded as soon as
the fund is informed of the ex-dividend date.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the fund's portfolio securities are determined as
follows:
1. For equity securities: according to the last quoted sale price of
the day on a national securities exchange or on the NASDAQ
National Market System.
2. In the absence of recorded sales for listed equity securities:
according to the mean between the last closing bid and asked prices.
3. For unlisted equity securities: latest bid prices.
4. For bonds and other fixed-income securities: as determined by an independent
pricing service.
5. For short-term obligations: according to the mean between bid and
asked prices as furnished by an independent pricing service.
6. For short-term obligations with remaining maturities of 60 days or less at
the time of purchase: at amortized cost.
7. For all other securities: at fair value as determined in good faith by the
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.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times that vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
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 underlying fund's board of directors, although the actual
calculation may be done by others.
PURCHASE, EXCHANGE AND PRICING OF SHARES
- --------------------------------------------------------------------------------
Except in initial circumstances as described in the prospectus, shares of the
fund are sold at their net asset value plus a sales charge, on days the New York
Stock Exchange and the Federal Reserve wire system are open for business. The
procedure for purchasing shares of the fund is explained in the prospectus.
CLASS C AND CLASS Y SHARES
Class C and Class Y shares are sold at their net asset value and do not have
sales charges or contingent deferred sales charges. See the prospectus for more
information. (Class C shares are offered with other Firstar Stellar Funds.)
EXCHANGE PRIVILEGE
Shareholders may exchange shares within the Firstar Stellar Funds. Prior to any
exchange, shareholders should read a copy of the current prospectus of the fund
into which they wish to exchange. To participate in the exchange privilege,
shareholders must exchange shares having a net asset value of at least $1,000.
If you established your account through a Shareholder Service Organization, you
may be able to exchange a lower amount, but you should consult your account
agreement for procedures. Exercising the exchange privilege is treated as a sale
for federal income tax purposes and you may realize short or long-term capital
gains or losses on the exchange.
Shareholders may exchange shares by telephone or in writing as follows:
Telephone
- ---------
You may exchange shares by telephone only if the shareholders registered on your
account are the same shareholders registered on the account into which you are
exchanging. Exchange requests must be recieved before 3:30 p.m. (Eastern time)
to be processed that day.
In Writing
- ----------
You may send your exchange request in writing. Please provide the fund name and
account number for each of the funds involved in the exchange and make sure the
letter of instruction is signed by all shareholders on the account.
Each class of shares may be exchanged as follows:
o Holders of Class C or Y shares of any of the Firstar Stellar Funds may
exchange such shares for Class C or Y shares of any other Firstar Stellar
Funds at net asset value.
o Holders of Class B shares of any Firstar Stellar Funds may exchange such
shares for Class B or C shares of any other Firstar Stellar Funds at net
asset value.
o Holders of Class A shares of any Firstar Stellar Funds may exchange such
shares for Class A or C shares of any other Firstar Stellar Funds at net
asset value plus the difference (if any) between the sales charge already
paid on the shares of the fund which are being exchanged out of, and any
sales charge imposed by the fund which is being exchanged into. In all
cases, shareholders will be required to pay a sales charge only once.
Shares are exchanged at their net asset values. However, additional fees may
apply to class A and B shares as noted in the table below.
A to A Exchange
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When you exchange Class A shares of a fund for Class A shares of another fund,
you will have to pay the difference between the fund's sales charge you already
paid and the sales charge of the fund into which you are entering.
A to C Exchange
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When you exchange Class A shares of a fund for Class C shares of another fund,
the Class A shares retain their charge to be exercised in further exchanges.
If you later re-exchange the C shares that you obtained from the A-C exchange,
you would exchange at the NAV plus the difference between the sales charge
initially paid and the sales charge of the fund into which you are entering.
B to B Exchange / B to C Exchange
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When you exchange Class B shares of a fund for class B or C shares of another
fund, no sales charges are assesed at the time of the exchange. However, if
you redeem shares within 5 years of the original purchase, a CDSC will be
imposed according to the original purchase date.
NOTE: Firstar Stellar Funds may modify or terminate the exchange privilege at
any time. Investors may have difficulty making exchanges by telephone through
brokers or banks during times of drastic market changes. If you cannot contact
your broker or bank, by telephone, you should send your request in writing via
overnight mail.
EXCHANGING SECURITIES FOR FUND SHARES
The fund may accept securities in exchange for shares. The fund will allow such
exchanges only upon the prior approval of the particular fund and a
determination by the fund and the Adviser that the securities to be exchanged
are acceptable.
Any securities exchanged must meet the investment objective and policies of the
fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the fund will be valued in the same manner as the fund
values its assets. The basis of the exchange will depend upon the net asset
value of shares of the fund on the day the securities are valued. One share of
the 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, or other
rights attached to the securities become the property of the fund, along with
the securities.
SHAREHOLDER SERVICES PLAN
Shareholder service organizations are non-affiliated banks and broker/dealers
that provide certain support and distribution services to their customers who
are the beneficial owners of the fund's shares. Generally, the services provided
include assisting customers in processing purchase, exchange and redemption
requests, although the services vary according to the specific agreement.
Shareholder service organizations are record owners of the shares of the fund
and are responsible for promptly transmitting orders. The organizations may
charge their customers for services relating to their investment in the fund. If
you are a customer of a shareholder service organization, carefully read your
account agreement together with the fund's prospectus with regard to services
provided, fees charged and any restrictions imposed.
Firstar Bank has a shareholder services plan that permits the payment of fees to
Firstar Bank and, indirectly, to financial institutions to cause services to be
provided to shareholders by a representative who has knowledge of the
shareholder's particular circumstances and goals. These activities and services
may include, but are not limited to, providing: office space, equipment,
telephone facilities, and various clerical, supervisory, computer and other
personnel as necessary or beneficial to:
o establish and maintain shareholder accounts and records;
o process purchase and redemption transactions and automatic investments of
client account cash balances;
o answer routine client inquiries; and
o assist clients in changing dividend options, account designations and
addresses.
CONVERSION TO FEDERAL FUND
It is the fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal fund or be converted into federal fund. Firstar Bank acts as the
shareholder's agent in depositing checks and converting them to federal fund.
REDEEMING SHARES
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REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be made
in readily marketable securities to the extent that such securities are
available. If the state's policy changes, the fund reserve the right to redeem
in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the 1940 Act under
which the fund is obligated to redeem shares for any one shareholder in cash
only up to the lesser of $250,000 or 1% of the class' net asset value during any
90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs in the disposition of such securities.
REDEMPTION IN WRITING
To redeem shares, shareholders may send a written request to:
Firstar Stellar Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
The written letter of instructions must include:
o the shareholder(s)' name,
o the fund name,
o the account number,
o the share or dollar amount to be redeemed, and
o signatures by all shareholders on the account.
The proceeds will be wired to the bank account of record or sent to the address
of record within seven calendar days.
If shareholders request redemption proceeds be sent to an address other than
that on record with the fund or proceeds made payable other than to the
shareholder(s) of record, the written request must have signatures guaranteed
by:
o a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the FDIC;
o a member of the New York, Boston, American, Midwest, or Pacific Stock
Exchange;
o a savings bank or savings association whose deposits are insured by the
SAIF, which is administered by the FDIC; or
o any other "eligible guarantor institution" as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Trust and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Trust may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Trust and its transfer agent reserve the right
to amend these standards at any time without notice.
TAX STATUS
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THE TRUST'S TAX STATUS
The Trust will pay no federal income tax because it expects 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, the fund must, among
other requirements:
o derive at least 90% of their gross income from dividends, interest and gains
from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
In the event the Trust fails to qualify as a "regulated investment company," it
will be treated as a regular corporation for federal income tax purposes.
Accordingly, the Trust would be subject to federal income taxes and any
distributions made by the fund would be taxable and non-deductible by the Trust.
This would increase the cost of investing in the fund for shareholders and would
make it more economical for shareholders to invest directly in securities held
by the fund instead of investing indirectly in such securities through the fund.
CAPITAL GAINS
Shareholders will pay federal tax at long-term capital gain rates on long-term
capital gains distributed to them regardless of how long they have held fund
shares.
Distribution 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 the shares.
CALCULATION OF PERFORMANCE DATA
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The fund's performance or return may be shown in the form of various performance
figures. The fund's performance figures are based upon historical results and
are not necessarily representative of future performance. Factors affecting the
fund's performance include general market conditions, generating expenses, the
imposition of sales charges and investment management.
YIELD
Yield is computed in accordance with a standardized method prescribed by rules
of the Securities and Exchange Commission. Under that method, the current yield
quotation for a fund is based on a one-month or 30-day period. The yield is
computed by dividing the net investment income per share earned during the
30-day or one month period by the maximum offering-price per share on the last
day of the period, according to the following formula:
YIELD = 2[(a-b + 1)6 - 1]
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c-d
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share 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 each class of
shares because of certain adjustments required by the Securities and Exchange
Commission 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 each class of shares, the performance will be
reduced for those shareholders paying those fees.
AVERAGE ANNUAL TOTAL RETURNS
The average annual total return is computed by finding the average annual
compounded rates of return over the periods that would equate the initial amount
invested to the redeemable value according to the following formula:
P(1+T)n = ERV
Where P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the stated periods at the end of the stated periods.
Performance for a specific period is calculated by first taking an investment
(assumed to be $1,000) ("initial investment") in a fund's shares on the first
day of the period and computing the "ending value" of that investment at the end
of the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The calculation
assumes that all income and capital gains dividends paid by a fund have been
reinvested at the net asset value of the fund on the reinvestment date during
the period. Total return may also be shown as the increased dollar value of the
hypothetical investment over the period.
Cumulative total return represents the simple change in value of an investment
over a stated period and may be quoted as a percentage or as a dollar amount.
Total returns may be broken down into their components of income and capital
(including capital gains and changes in share price) in order to illustrate the
relationship between their factor and their contributions to total return.
PERFORMANCE COMPARISONS
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The performance of the fund's shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the fund's expenses; and
o various other factors.
The performance of the fund's shares fluctuates on a daily basis largely because
net earnings and the maximum offering price per share fluctuate daily. Both net
earnings and offering price per share are factors in the computation of yield
and total return.
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 that the fund uses in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all income dividends and capital gains distributions,
if any. From time to time, the appropriate fund will quote its Lipper
ranking in the "growth" category in advertising and sale literature.
o STANDARD & POOR'S 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 the
total returns of funds whose portfolios are invested primarily in common
stocks. In addition, the Standard & Poor's indices assume reinvestments 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 Standard & Poor's figures. This index could be used to
compare the performances of the fund.
o 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.
Advertisements and other sales literature for shares may quote total returns
that are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in share classes
based on reinvestment of dividends over a specified period of time.
Advertisements may quote performance information that does not reflect the
effect of the contingent deferred sales charge.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, share classes can
compare their performance, or performance for the types of securities in which
they invest to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Funds' portfolio managers and their views and analysis on how
such developments could affect the funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute.
INDEPENDENT PUBLIC ACCOUNTANTS
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Arthur Andersen LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin, 53202,
serves as the independent public accountants for the fund. Their services
include examination of the fund's financial statements and the performance of
other related audit and tax services.
FINANCIAL STATEMENTS
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There are no financial statements for the fund at this time.
APPENDIX
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Standard & Poor's ("S&P") Corporate 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.
BB, B, CCC, CC-Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
CI-The rating "CI" is reversed for income bonds on which no interest is being
paid.
D-Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. CORPORATE 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 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 may be other elements present that
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 near 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.
Ba-Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B-Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa-Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds which are "Ca" represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C-Bonds which are rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC. BOND 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 credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered strong, but
may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB-Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B-Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC-Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC-Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C-Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D-Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
