Filed with the Securities and Exchange Commission on March 31, 2000
1933 Act Registration File No. 33-26915
1940 Act File No. 811-5762
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. |_|
------------
Post-Effective Amendment No. 49 |X|
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 50 |X|
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FIRSTAR STELLAR FUNDS
---------------------
(Exact Name of Registrant as Specified in Charter)
615 East Michigan Street, Milwaukee, Wisconsin 53202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 677-3863
Elaine E. Richards, Esquire
Firstar Mutual Funds Services, LLC
615 East Michigan Street, 2nd Floor
Milwaukee, Wisconsin 53202
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
__X__ on MARCH 31, 2000 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on ___________ pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on ___________ pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
_____ This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
MONEY MARKET FUNDS
PROSPECTUS
March 31, 2000
TREASURY FUND
TAX-FREE MONEY MARKET FUND
OHIO TAX-FREE MONEY MARKET 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.
TABLE OF CONTENTS
OVERVIEW.......................................................................3
TREASURY FUND..................................................................4
TAX-FREE MONEY MARKET FUND.....................................................6
OHIO TAX-FREE MONEY MARKET FUND................................................9
MANAGEMENT OF THE FUNDS.......................................................12
DISTRIBUTION OF SHARES........................................................12
DESCRIPTION OF CLASSES........................................................13
PRICE OF SHARES...............................................................14
PURCHASING SHARES.............................................................14
SELLING SHARES................................................................16
EXCHANGING SHARES.............................................................17
DISTRIBUTIONS AND TAXES.......................................................18
FINANCIAL HIGHLIGHTS..........................................................20
OVERVIEW
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GOAL OF THE MONEY MARKET FUNDS
The goal of the Firstar Stellar money market funds is
to provide current income while preserving capital.
The advantage of the TAX-FREE MONEY MARKET FUND is
that the interest income is exempt from federal
income tax. The benefit of the OHIO TAX-FREE MONEY
MARKET FUND is that the interest income is exempt
from both federal and Ohio state income tax.
STRATEGIES OF THE FUNDS
The TREASURY FUND invests exclusively in short-term
U.S. Treasury obligations. The TAX-FREE MONEY MARKET
FUND and the OHIO TAX-FREE MONEY MARKET FUND
primarily invest in short-term municipal securities.
Each of the funds strives to maintain a share price
of $1.00.
PRINCIPAL RISKS COMMON TO THESE FUNDS
The main risks of investing in the funds are:
|X| INTEREST RISKS: The rate of income will vary from
day to day depending on short-term interest
rates. It is possible that a major change in
interest rates could cause the value of your
investment to decline.
|X| CREDIT RISKS: The funds can also be affected by
changes in the credit quality rating or changes
in the issuer's financial condition. A default on
a security or a repurchase agreement held by one
of the funds could cause the value of your
investment to decline.
|X| Although the funds seek to preserve the value of
your investment at $1.00 per share, it is
possible to lose money by investing in the funds.
AN INVESTMENT IN THE FUNDS WHO MAY WANT TO INVEST
IS NOT A DEPOSIT OF FIRSTAR These funds may be appropriate for investors that:
BANK AND IS NOT INSURED OR |X| want to save money rather than "invest"
GUARANTEED BY THE FEDERAL |X| require stability of principal
DEPOSIT INSURANCE |X| prefer to receive income with relatively fewer
CORPORATION OR ANY risks
OTHER GOVERNMENT AGENCY. |X| are risk adverse
The Statement of Additional Information contains more
information about the funds and the types of
securities in which they may invest.
TREASURY FUND
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INVESTMENT OBJECTIVE
The TREASURY FUND seeks to achieve stability of principal and current income
consistent with stability of principal.
INVESTMENT POLICIES AND PORTFOLIO SECURITIES
The fund intends to achieve its investment goal by investing exclusively in
short-term U.S. Treasury obligations that have a maturity of 397 days or less
from the date of purchase. The fund may purchase repurchase agreements
collateralized by U.S. Treasury obligations. The fund intends to invest in the
agreements that provide for repurchase within 397 days from the date of
acquisition. The average maturity of these securities is 120 days or less. The
average maturity, however, of all the securities in the fund's portfolio will be
90 days or less on a dollar-weighted basis. Securities subject to repurchase
agreements are marked to market on a daily basis. U.S. Treasury obligations are
issued by the U.S. government and are fully guaranteed as to principal and
interest by the United States government. The fund may also retain assets in
cash and may purchase U.S. Treasury obligations on a when-issued or delayed
delivery basis.
INVESTMENT RISKS
The following risks are specific to this fund in addition to the risks mentioned
in the Overview section.
REPURCHASE AGREEMENTS
Arrangements in which banks, broker/dealers and other financial institutions
sell securities to the fund and agree to repurchase them at a certain time and
price within one year.
REPURCHASE AGREEMENT RISKS One of the risks of investing in repurchase
agreements is that the seller may not repurchase the securities from the fund,
which may result in the fund selling the security for less than the agreed upon
price. Another risk of repurchase agreements is that the seller may default or
file for bankruptcy. That could mean the fund might have to wait through lengthy
court actions before selling the securities.
WHEN ISSUED/DELAYED DELIVERY
Securities with payment and delivery scheduled for a future time.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTION RISKS One of the risks of investing
in when-issued or delayed delivery transactions is if the seller chooses not to
complete the transaction, the fund could miss an advantageous price or yield.
Another risk is that because settlement dates may be a month or more after
entering into the transactions, the market value of the securities may have
dropped from the agreed upon purchase price. However, the fund may cancel a
commitment to purchase securities prior to settlement if the fund's investment
adviser believes it is appropriate.
The fund may enter into transactions to sell its purchase commitments to third
parties at current market rates and simultaneously acquire other commitments to
purchase similar securities at later dates. The fund may realize short-term
profits or losses on the sale of these kinds of commitments.
PAST PERFORMANCE
The bar chart and table below illustrate the variability of the TREASURY FUND'S
returns. The bar chart indicates the risks of investing in the fund by showing
the changes in the fund's performance from year to year (on a calendar year
basis). The table shows the fund's average annual returns for one, five,
ten-years and since the fund's inception ended December 31, 1999. THE FUND'S
PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE.
Treasury Fund - C Shares
Calendar Year Returns as of 12/31
1990 7.64%
1991 5.49%
1992 3.26%
1993 2.54%
1994 3.51%
1995 5.26%
1996 4.77%
1997 4.86%
1998 4.61%
1999 4.06%
BEST QUARTER: Q3 1989 2.08%
WORST QUARTER: Q4 1993 0.62%
- -------------------------------- ------- -------- ---------- -----------
AVERAGE ANNUAL TOTAL RETURN 1 Year 5 Years 10 Years Since
THROUGH 12/31/99 inception
- -------------------------------- ------- -------- ---------- -----------
Treasury Fund C Shares1 4.06% 4.71% 4.59% 4.85%
Y Shares2 4.22% N/A N/A 4.62%
- -------------------------------- ------- -------- ---------- -----------
FOR UP-TO-DATE YIELD INFORMATION, PLEASE CALL 1-800-677-FUND.
1 C Shares commenced operations April 15, 1989.
2 Y Shares commenced operations March 25, 1997.
FUND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- ---------------------------------------------- -------- ---------
SHAREHOLDER FEES CLASS C CLASS Y
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- ---------------------------------------------- -------- ---------
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON None None
PURCHASES (as a percentage of offering price)
MAXIMUM DEFERRED SALES CHARGE (LOAD) None 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
- ---------------------------------------------- -------- ---------
- ---------------------------------------------- -------- ---------
ANNUAL FUND OPERATING EXPENSES CLASS C CLASS Y
(EXPENSES DEDUCTED FROM FUND ASSETS)
- ---------------------------------------------- -------- ---------
MANAGEMENT FEES 0.50% 0.50%
DISTRIBUTION AND SERVICE (12B-1) FEES1 0.25% None
OTHER EXPENSES2 0.43% 0.43%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.18% 0.93%
- ---------------------------------------------- -------- ---------
1 Y shares are not subject to a Rule 12b-1 Plan. C shares of the TREASURY FUND
can pay up to 0.25% of average daily net assets for 12b-1 fees. However, the
investment adviser has chosen to waive a portion of this fee so that the actual
amount imposed is 0.15% of average daily net assets. The adviser can reduce the
waiver at anytime.
2 "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 0.18% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at anytime.
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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS C $120 $375 $649 $1,432
CLASS Y $ 95 $296 $515 $1,143
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 13.
TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
The TAX-FREE MONEY MARKET FUND seeks to provide current income exempt from
federal regular income tax consistent with stability of principal.
WHAT IS FEDERAL REGULAR INCOME TAX?
Federal regular income tax refers to normal income tax that most U.S. taxpayers
compute and pay each year. It does not include the federal alternative minimum
tax.
INVESTMENT POLICIES AND PORTFOLIO SECURITIES
The fund intends to achieve its investment goal by investing its assets so that
at least 80% of its annual interest income is exempt from federal regular income
tax and not subject to the alternative minimum tax. The fund's portfolio
consists of municipal securities maturing in 397 days or less. The average
maturity, however, of all the securities in the fund's portfolio will be 90 days
or less on a dollar-weighted basis. The municipal securities in which the fund
invests are primarily debt obligations issued by or on behalf of states,
territories and possessions of the United States, and any political subdivision
or financing authority of any of these, the income from which is exempt from
federal regular income tax. 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 (e.g., the security's interest
rate is not as favorable as other securities' interest rates)? (3) Has the
adviser's outlook regarding the security's income changed? If the adviser can
answer each question positively, then the adviser will sell the securities.
EXAMPLES OF MUNICIPAL SECURITIES
|X| tax and revenue anticipation notes issued to finance working capital needs
in anticipation of receiving taxes or other revenues
|X| bond anticipation notes that are intended to be refinanced through a later
issuance of longer term bonds
|X| municipal commercial paper and other short-term notes
|X| variable rate demand notes
|X| municipal bonds and leases
|X| construction loan notes insured by the Federal Housing Association and
financed by the Federal or Government National Mortgage Associations
|X| participation interests in any of the above
PARTICIPATION INTERESTS The fund may purchase interests in municipal securities
from financial institutions such as commercial and investment banks, savings
associations and insurance companies. Financial institutions provide guarantees,
letters of credit or insurance to the fund on the underlying municipal
securities.
MUNICIPAL LEASES The fund may also invest in municipal leases, which are
obligations issued by state and local governments to finance the acquisition of
equipment and facilities. Municipal leases may take the form of a lease, an
installment purchase contract, a conditional sales contract or a participation
interest. Municipal leases may be considered illiquid.
VARIABLE RATE DEMAND NOTES The fund may invest in variable rate demand notes,
which are obligations with variable or floating interest rates. The notes
provide the fund with the right to tender the security for repurchase at its
stated principal amount plus accrued interest. These securities usually bear
interest at a rate that allow the securities to trade at par. Most variable rate
demand notes allow the fund to demand the repurchase of the security on not more
than 7 days notice. Other notes only permit the fund to tender the security at
the time of each interest rate adjustment or at other fixed intervals. The fund
treats variable rate demand notes as maturing on the later of the date of the
next interest adjustment or the date on which the fund may next tender the
security for repurchase.
TEMPORARY INVESTMENTS From time to time, the fund may invest in tax-exempt or
taxable short-term temporary investments when the fund's investment adviser
determines that market conditions call for a temporary defensive posture. During
such times, it is possible for the fund not to reach its investment objective.
Although the fund is permitted to make taxable, temporary investments, the
adviser currently has no intention to generate income subject to federal regular
income tax.
INVESTMENT RISKS
The following risks are specific to this fund in addition to the risks mentioned
in the Overview section.
MUNICIPAL SECURITIES RISKS One of the risks of investing in municipal securities
is that the yield produced by such securities depends on a variety of factors
including the general conditions of the short-term municipal note market and the
municipal bond market. Other factors include the size of the particular
offering, the maturity of the obligations and the rating of the issue. The
ability of the fund to achieve its investment objective also depends on the
ability of the issuers of the municipal securities to meet their obligations for
the payment of interest and principal when due.
CREDIT RISKS Another risk is that the fund may invest more than 25% of its total
assets in securities credit-enhanced by banks. Credit-enhanced securities are
investments backed by a guaranty, letter of credit or insurance. Any bankruptcy,
receivership, default or change in the credit quality of the party providing the
credit enhancement will adversely affect the quality and marketability of the
underlying security causing the fund to lose money.
TAX RISKS The fund may be more adversely impacted by changes in tax rates and
policies than other funds. Because interest income on municipal obligations is
normally not subject to regular federal income taxation, the attractiveness of
municipal obligations in relation to other investment alternatives is affected
by changes in federal income tax rates applicable to, or the continuing federal
income tax-exempt status of such interest income. Therefore, any proposed or
actual changes in such rates or exempt status can significantly affect the
demand for and supply, liquidity and marketability of municipal obligations,
which could in turn affect the fund's ability to acquire and dispose of
municipal obligations at desirable yield and price levels.
PAST PERFORMANCE
The bar chart and table below illustrate the variability of the TAX-FREE MONEY
MARKET FUND'S returns. The bar chart indicates the risks of investing in the
fund by showing the changes in the fund's performance from year to year (on a
calendar year basis). The table shows the fund's average annual returns for
one-year, five-years, and since the fund's inception ended December 31, 1999.
THE FUND'S PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE.
Tax-Free Money Market Fund - C Shares
Calendar Year Returns as of 12/31
1992 2.44%
1993 1.88%
1994 2.29%
1995 3.33%
1996 2.86%
1997 3.04%
1998 2.79%
1999 2.53%
BEST QUARTER: Q3 1991 1.01%
WORST QUARTER: Q1 1994 0.43%
- ------------------------------------ --------- ----------- ----------
AVERAGE ANNUAL TOTAL RETURN Since
THROUGH 12/31/99 1 Year 5 Years Inception
- ------------------------------------ --------- ----------- ----------
Tax-Free Money Market Fund
C Shares1 2.53% 2.91% 2.76%
- ------------------------------------ --------- ----------- ----------
FOR UP-TO-DATE YIELD INFORMATION, PLEASE CALL 1-800-677-FUND.
1 C Shares commenced operations March 15, 1991.
FUND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- ------------------------------------------------- --------------
SHAREHOLDER FEES CLASS C
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- ------------------------------------------------- --------------
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON None
PURCHASES (as a percentage of offering price)
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
(as a percentage of offering price)
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON None
REINVESTED DIVIDENDS
REDEMPTION FEE None
EXCHANGE FEE None
- ------------------------------------------------- --------------
- ------------------------------------------------- --------------
ANNUAL FUND OPERATING EXPENSES CLASS C
(EXPENSES DEDUCTED FROM FUND ASSETS)
- ------------------------------------------------- --------------
MANAGEMENT FEES1 0.55%
DISTRIBUTION AND SERVICE (12B-1) FEES2 0.25%
OTHER EXPENSES3 0.45%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.25%
- ------------------------------------------------- --------------
1 The fund's investment adviser voluntarily waives a portion of this fee each
year. The adviser can terminate this voluntary waiver at anytime. With the
current waiver, the management fee is 0.50% of average daily net assets.
2 Currently, C shares of the fund are not paying or accruing Rule 12b-1 fees.
The class can pay up to 0.25% of average daily net assets as a Rule 12b-1 fee to
the fund's distributor.
3 "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 0.20% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at anytime.
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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS C $127 $397 $686 $1,511
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 13.
OHIO TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
The OHIO TAX-FREE MONEY MARKET FUND seeks to provide current income exempt from
federal income tax and the personal income taxes imposed by the state of Ohio
and Ohio municipalities consistent with stability of principal.
EXAMPLES OF OHIO MUNICIPAL SECURITIES
|X| tax and revenue anticipation notes issued to finance working capital needs
in anticipation of receiving taxes or other revenues
|X| bond anticipation notes that are intended to be refinanced through a later
issuance of longer term bonds
|X| municipal commercial paper and other short-term notes
|X| variable rate demand notes
|X| municipal bonds and leases
|X| participation interests in any of the above
INVESTMENT POLICIES AND PORTFOLIO SECURITIES
The fund intends to achieve its investment goal by investing its assets so that
at least 80% of its annual interest income is exempt from federal income tax and
not subject to the alternative minimum tax and the personal income taxes imposed
by the state of Ohio and Ohio municipalities. In addition, the fund will invest
its assets so that under normal circumstances, at least 65% of the value of its
total assets will be invested in Ohio municipal securities exempt from federal
regular income tax and Ohio State income tax. The fund's portfolio consists of
municipal securities maturing in 397 days or less. The average maturity,
however, of all the securities in the fund's portfolio will be 90 days or less
on a dollar-weighted basis.
The municipal securities in which the fund invests are primarily debt
obligations issued by or on behalf of Ohio and its political subdivisions and
financing authorities and obligations of other states, territories and
possessions of the United States and any political subdivision or financing
authority of any of these. The income from such obligations must be exempt from
federal income tax (including alternative minimum tax) and the personal income
taxes imposed by the state of Ohio and other municipalities.
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 (e.g., the security's interest rate is not as favorable as other
securities' interest rates)? (3) Has the adviser's outlook regarding the
security's income changed? If the adviser can answer each question positively,
then the adviser will sell the securities.
PARTICIPATION INTERESTS The fund may purchase interests in municipal securities
from financial institutions such as commercial and investment banks, savings
associations and insurance companies. Financial institutions provide guarantees,
letters of credit or insurance to the fund on the underlying municipal
securities.
MUNICIPAL LEASES The fund may also invest in municipal leases, which are
obligations issued by state and local governments to finance the acquisition of
equipment and facilities. Municipal leases may take the form of a lease, an
installment purchase contract, a conditional sales contract or a participation
interest. Municipal leases may be considered illiquid.
VARIABLE RATE DEMAND NOTES The fund may invest in variable rate demand notes,
which are obligations with variable or floating interest rates. The notes
provide the fund with the right to tender the security for repurchase at its
stated principal amount plus accrued interest. These securities usually bear
interest at a rate that allow the securities to trade at par. Most variable rate
demand notes allow the fund to demand the repurchase of the security on not more
than 7 days' notice. Other notes only permit the fund to tender the security at
the time of each interest rate adjustment or at other fixed intervals. The fund
treats variable rate demand notes as maturing on the later of the date of the
next interest adjustment or the date on which the fund may next tender the
security for repurchase.
TEMPORARY INVESTMENTS From time to time, the fund may invest in tax-exempt or
taxable short-term temporary investments when the fund's investment adviser
determines that market conditions call for a temporary defensive posture. During
such times, it is possible for the fund not to reach its investment objective.
Although the fund is permitted to make taxable temporary investments, the
adviser currently has no intention to generate income subject to federal regular
income tax.
INVESTMENT RISKS
The following risks are specific to this fund in addition to the risks mentioned
in the Overview section.
MUNICIPAL SECURITIES RISKS One of the risks of investing in municipal securities
is that the yield produced by such securities depends on a variety of factors.
Factors affecting the yield include the general conditions of the short-term
municipal note market and the municipal bond market. Other factors are the size
of the particular offering, the maturity of the obligations and the rating of
the issue. The ability of the fund to achieve its investment objective also
depends on the ability of the issuers of the municipal securities to meet their
obligations for the payment of interest and principal when due.
CREDIT RISKS Another risk is that the fund may invest more than 25% of its total
assets in securities credit-enhanced by banks. Credit-enhanced securities are
investments backed by a guaranty, letter of credit or insurance. Any bankruptcy,
receivership, default or change in the credit quality of the party providing the
credit enhancement will adversely affect the quality and marketability of the
underlying security causing the fund to lose money.
TAX RISKS The fund may be more adversely impacted by changes in tax rates and
policies than other funds. Because interest income on municipal obligations is
normally not subject to regular federal income taxation, the attractiveness of
municipal obligations in relation to other investment alternatives is affected
by changes in federal income tax rates applicable to, or the continuing federal
income tax-exempt status of such interest income. Therefore, any proposed or
actual changes in such rates or exempt status can significantly affect the
demand for and supply, liquidity and marketability of municipal obligations,
which could in turn affect the fund's ability to acquire and dispose of
municipal obligations at desirable yield and price levels.
NON-DIVERSIFICATION RISKS Investing in the fund has added risks because the fund
is a non-diversified fund under the Investment Company Act of 1940, as amended.
Compared with other mutual funds, this fund may invest a greater percentage of
its assets in a more limited number of issues concentrated in one state, which
as a result, can increase the fund's volatility. The value of the fund's
securities can be impacted by economic or political developments affecting
certain securities.
OHIO STATE SPECIFIC RISKS Ohio's economy is largely composed of manufacturing
which is concentrated in the automobile sector and other durable goods. The
exposure to these industries, particularly the auto sector, leaves Ohio
vulnerable to an economic slowdown associated with business cycles. Furthermore,
population growth, as in many states around the Great Lakes, has been stagnant.
The fund's concentration in securities issued by Ohio and its political
subdivisions provides a greater level of risk than a fund whose assets are
diversified across numerous states and municipal issuers. The ability of Ohio or
its municipalities to meet their obligations will depend on:
(1) the availability of tax and other revenues;
(2) economic, political and demographic conditions within the state; and
(3) the underlying fiscal condition of the state, its counties and its
municipalities.
PAST PERFORMANCE
The bar chart and table below illustrate the variability of the OHIO TAX-FREE
MONEY MARKET FUND'S returns. The bar chart indicates the risks of investing in
the fund by showing the changes in the fund's performance from year to year (on
a calendar year basis). The table shows the fund's average annual returns for
one-year and since the fund's inception ended December 31, 1999. THE FUND'S PAST
PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE.
Ohio Tax-Free Money Market Fund - C Shares
Calendar Return as of 12/31
1998 2.85%
1999 2.69%
BEST QUARTER: Q2 1998 0.78%
WORST QUARTER: Q1 1998 0.63%
- --------------------------------------- --------- -----------
AVERAGE ANNUAL TOTAL RETURN Since
THROUGH 12/31/99 1 Year Inception
- --------------------------------------- --------- -----------
Ohio Tax-Free Money Market Fund
C Shares1 2.69% 2.77%
- --------------------------------------- --------- -----------
FOR UP-TO-DATE YIELD INFORMATION, PLEASE CALL 1-800-677-FUND.
1 C Shares commenced operations December 2, 1997.
FUND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- --------------------------------------------- ------------------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS C
- --------------------------------------------- ------------------
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON None
PURCHASES
(as a percentage of offering price)
MAXIMUM DEFERRED SALES CHARGE (LOAD) (as a None
percentage of offering price)
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON None
REINVESTED DIVIDENDS
REDEMPTION FEE None
EXCHANGE FEE None
- --------------------------------------------- ------------------
- --------------------------------------------- ------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES CLASS C
DEDUCTED FROM FUND ASSETS)
- --------------------------------------------- ------------------
MANAGEMENT FEES1 0.55%
DISTRIBUTION AND SERVICE (12B-1) FEES2 0.25%
OTHER EXPENSES3 0.50%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.30%
- --------------------------------------------- ------------------
1 The fund's investment adviser voluntarily waives a portion of this fee each
year. The adviser can terminate this voluntary waiver at anytime. With the
current waiver, the management fee is 0.35% of average daily net assets.
2 Currently, C shares of the fund are not paying or accruing Rule 12b-1 fees.
The class can pay up to 0.25% of average daily net assets as a Rule 12b-1 fee to
the distributor.
3 "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 0.25% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at anytime.
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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS C $132 $412 $713 $1,568
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 13.
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Firstar Investment Research & Management Company, LLC (FIRMCO), a wholly owned
subsidiary of Firstar Corporation, is the investment adviser for the funds.
Prior to April 1, 2000, the funds were managed by the Capital Management
Division of Firstar Bank, N.A., which is also a wholly owned subsidiary of
Firstar Corporation. As part of an internal restructuring of the investment
advisory function within Firstar Corporation, the investment management
resources of the Capital Management Division of Firstar Bank, N.A. have been
consolidated with those of FIRMCO. Management of the funds was not affected by
this consolidation. The investment decisions made by FIRMCO are subject to
direction of the funds' 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 funds and is
responsible for the purchase and sale of securities for the funds' portfolios.
The adviser receives an annual fee from each fund for its services as follows:
THE AMOUNTS SHOWN REPRESENT A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET
ASSETS.
BEFORE AFTER
WAIVERS WAIVERS
- ------------------------------------------- -------- ---------
Treasury Fund 0.50% 0.50%
Tax-Free Money Market Fund 0.55% 0.50%
Ohio Tax-Free Money Market Fund 0.55% 0.35%
- ------------------------------------------- -------- ---------
FIRMCO, located at the Firstar Center, 777 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, has provided investment advisory services since 1986. FIRMCO
currently has $35.3 billion in assets under management.
FUND ADMINISTRATION, FUND ACCOUNTING, DIVIDEND DISBURSEMENT AND CUSTODY SERVICES
Firstar Mutual Fund Services, LLC, an affiliate of the funds' investment
adviser, provides administrative, accounting and dividend disbursement services
to the Firstar Stellar Funds and is located in Milwaukee, Wisconsin. Firstar
Bank, N.A., serves as custodian for the funds.
DISTRIBUTION OF SHARES
- --------------------------------------------------------------------------------
DISTRIBUTOR
Edgewood Services, Inc. is the distributor for shares of the funds. Edgewood is
based in Pittsburgh, Pennsylvania and is the distributor for a number of
investment companies around the country.
RULE 12B-1 PLAN
The funds have adopted a Rule 12b-1 Plan under the Investment Company Act of
1940. Under the 12b-1 Plan, class C shares may pay up to an annual rate of 0.25%
of the average daily net asset value of shares to Edgewood. Edgewood uses this
fee to finance activities that promote the sale of the funds' 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.
Currently, the TAX-FREE MONEY MARKET FUND and the OHIO TAX-FREE MONEY MARKET
FUND are not paying or accruing Rule 12b-1 fees. 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 funds. 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
- --------------------------------------------------------------------------------
Firstar Stellar Funds offers four classes of shares - classes A, B, C and Y
shares. Class A and B shares are only offered with the bond and stock funds.
Please call 1-800-677-FUND to receive a copy of the bond or stock funds
prospectuses, which describe the A and B share classes. Class C shares are only
offered with the money market funds and are discussed below. Class Y shares are
offered with various funds.
CLASS C SHARES
Class C shares are regular retail shares and may be purchased by individuals or
IRAs. With class C shares, you pay no sales charge when you invest. In the case
of the TREASURY FUND, an annual Rule 12b-1 fee (as discussed previously) is
assessed against the shares of the class. All of the money market funds sell
class C shares.
CLASS Y SHARES
The Y class of shares is available only to Firstar Bank's trust or institutional
customers. With class Y shares, not only do you not pay any sales charges, you
also do not pay a Rule 12b-1 fee. Similar to the C shares, however, the Y shares
pay investment management fees and other fees. Currently, only the TREASURY FUND
sells class Y shares.
PRICE OF SHARES
- --------------------------------------------------------------------------------
WHAT SHARES COST
Shares of the funds are sold at their net asset value (NAV) next determined
after an order is received. The funds attempt to stabilize the net asset value
of their shares at $1.00 by valuing the portfolio securities using the amortized
cost method. The net asset value is calculated by subtracting the total
liabilities of each fund from the fund's total assets. The difference is divided
by the number of fund shares outstanding. There is no sales charge imposed by
any of the funds.
NAV =
ASSETS - LIABILITIES
--------------------
# outstanding shares
The funds will utilize the amortized cost method in valuing its portfolio
securities. This method involves valuing a security at its cost adjusted by a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. The
purpose of this method of calculation is to facilitate the maintenance of a
consistent net asset value per share for the fund of $1.00. However, there is no
assurance that the $1.00 net asset value per share will be maintained.
The net asset value for the TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE MONEY
MARKET FUND is determined as of 10:00 a.m. (Eastern time). The net asset value
for the TREASURY FUND is determined as of 2:00 p.m. (Eastern time).
PURCHASING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
To open an account, first determine if you are buying class C shares or class Y
shares (See "Description of Classes"). The minimum initial investment amounts
for each class of shares are as follows. Additional investments may be made in
any amount.
<TABLE>
<CAPTION>
- ------------------------------------------------------------ ---------------------------------------------------------
Class C Shares Class Y Shares
- ------------------------------------------------------------ ---------------------------------------------------------
<S> <C>
|X| $1,000 for individuals |X| $1,000 for trust or institutional customers of
Firstar Bank ($1,000 may be determined by
|X| $500 for Education IRA customers combining the amount in all mutual fund accounts
you maintain with Firstar Bank)
|X| $25 for Firstar Bank employees and members of
their immediate family, and persons contributing to
SIMPLE IRAs
- ------------------------------------------------------------ ---------------------------------------------------------
</TABLE>
TIMING OF PURCHASE 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 funds or by the
funds' authorized agent. Telephone orders and federal funds wire requests
received in good order by the funds before the following times, will be executed
on the same day. Requests received after the following times (including all
purchases by checks) will be executed the next business day.
DAILY DEADLINES FOR PURCHASE ORDERS
TREASURY FUND 2:00 p.m. (Eastern time)
TAX-FREE MONEY MARKET FUND 10:00 a.m. (Eastern time)
OHIO TAX-FREE MONEY MARKET FUND 10:00 a.m. (Eastern time)
When making a purchase request, make sure your request is in good order. "Good
order" means your purchase request includes:
|X| the NAME of the fund
|X| the DOLLAR amount of shares to be purchased
|X| purchase application or investment stub
|X| check payable to Firstar Stellar Funds
RECEIPT OF ORDERS
Shares may only be purchased on days the New York Stock Exchange and the Federal
Reserve wire system are 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.
<TABLE>
<CAPTION>
METHODS OF BUYING
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
<S> <C> <C>
|X| BY TELEPHONE Call Firstar Stellar Funds at 1-800-677-FUND to Call Firstar Stellar Funds at 1-800-677-FUND
(FIRSTAR BANK CUSTOMERS place the order. (Note: For security reasons, to place the order. (Note: For security
ONLY) requests by telephone will be recorded.) reasons, requests by telephone will be
recorded.)
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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 right.
Firstar Bank, N.A.
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 #)
The fund and its transfer agent are not
responsible for the consequences of delays
resulting from the banking or Federal Reserve
Wire system, or from incomplete wiring
instructions.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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 with initial period) will be taken automatically monthly
purchase application. or quarterly from your checking account.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| BY EXCHANGE Call 1-800-677-FUND to obtain exchange Call 1-800-677-FUND to obtain exchange
information. See "Exchanging Shares." information. See "Exchanging Shares."
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
</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 3011 615 E. Michigan Street, Third Floor
Milwaukee, Wisconsin 53201-3011 Milwaukee, Wisconsin 53202
NOTE: The funds do not consider the U.S. Postal Service or other independent
delivery services to be their 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 funds.
SELLING SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
METHODS OF SELLING
- ---------------------------------- -----------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ---------------------------------- -----------------------------------------------------------------------------------
<S> <C>
|X| BY TELEPHONE Call Firstar Stellar Funds at 1-800-677-FUND to sell shares.
(NOTE: For security reasons, requests by telephone will be recorded.)
- ---------------------------------- -----------------------------------------------------------------------------------
|X| 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, signatures 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.
- ---------------------------------- -----------------------------------------------------------------------------------
|X| 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.
- ---------------------------------- -----------------------------------------------------------------------------------
|X| SYSTEMATIC WITHDRAWAL 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.
- ---------------------------------- -----------------------------------------------------------------------------------
|X| SHAREHOLDER SERVICE Consult your account agreement for information on redeeming shares.
ORGANIZATION
- ---------------------------------- -----------------------------------------------------------------------------------
|X| BY EXCHANGE Call 1-800-677-FUND to obtain exchange information. See "Exchanging Shares."
- ---------------------------------- -----------------------------------------------------------------------------------
</TABLE>
WHEN REDEMPTION PROCEEDS ARE SENT TO YOU
Your shares may only be redeemed on days on which the funds compute their net
asset value. Your redemption requests cannot be processed on days the New York
Stock Exchange is closed or on federal holidays which restrict wire transfers.
When making a redemption request, make sure your request is in good order. "Good
order" means your letter of instruction includes:
|X| the NAME of the fund
|X| the NUMBER of shares or the DOLLAR amount of shares to be redeemed
|X| SIGNATURES of all registered shareholders exactly as the shares are
registered (guaranteed for IRAs)
|X| the ACCOUNT number
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).
Your shares will be redeemed at the net asset value next determined after
Firstar Stellar Funds receives your redemption request in good order. 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
You will need your signature guaranteed if:
|X| you are redeeming shares from an IRA account
|X| you request a redemption to be made payable to a person not on record with
the funds, or
|X| you request that a redemption be mailed to an address other than that on
record with the funds
You may obtain signature guarantees from most
trust companies, commercial banks or other eligible guarantor institutions. A
notary public cannot guarantee signatures.
EXCHANGING SHARES
- --------------------------------------------------------------------------------
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.
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 consequence 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.
The SAI contains more information on exchanges. You may also call 1-800-677-FUND
to learn more about exchanges, other Firstar Stellar Funds, or any other Firstar
family of funds.
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
The funds declare dividends on a daily basis and pay them to you on a monthly
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 that 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 are earned on the day shares of the fund are purchased. If you
are investing through a shareholder service organization, consult your account
agreement for dividend payment information. Dividends paid in cash or in
additional shares are treated the same for tax purposes.
CAPITAL GAINS
If any of the funds realize capital gains, you could earn more dividends.
Capital losses could result in a decrease in dividends for you. If a fund
realizes net long-term capital gains (not very common), the fund would
distribute them every 12 months.
TAX INFORMATION
The funds will pay no federal income tax because they expect to meet certain
Internal Revenue Code requirements. The funds will be treated as single,
separate entities for federal income tax purposes so that income (including
capital gains, if any) and losses realized by one fund will not be combined for
tax purposes with those realized by the other funds. Each of the funds expects
their distributions to consist primarily of ordinary income, but for the two
tax-free funds, the distributions will be tax-free for the most part. The funds
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.
An exchange is not a tax-free transaction. An exchange of shares pursuant to the
funds' 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.
ADDITIONAL TAX INFORMATION
TREASURY FUND
If you are a shareholder of the TREASURY FUND, unless you are exempt from having
to pay federal income taxes, you are required to pay federal income taxes on any
dividends and other distributions (including capital gain distributions) you
receive.
TAX-FREE MONEY MARKET FUND
INTEREST INCOME ON MUNICIPAL BONDS If you are a shareholder of the TAX-FREE
MONEY MARKET FUND, you are not required to pay regular federal income tax on any
dividends you receive from the fund that represent net interest income on
tax-exempt municipal bonds. However, you may have to pay federal alternative
minimum taxes on dividends representing net interest income earned on some
municipal bonds.
The alternative minimum tax (AMT) applies when it exceeds the regular federal
income tax for the taxable year. Alternative minimum taxable income is equal to
the regular taxable income of the taxpayer increased by certain "tax preference"
items not included in regular taxable income and reduced by only a portion of
the deductions allowed in the calculation of the regular tax. The Tax Reform Act
of 1986 treats interest on certain private activity bonds as a tax preference
item for both individuals and corporations. Unlike traditional governmental
purpose municipal bonds, which finance roads, schools, libraries, prisons and
other public facilities, private activity bonds provide benefits to private
parties.
The fund is permitted to purchase all types of municipal bonds, including
private activity bonds. As a result, if the fund purchased any private activity
bonds, a portion of the fund's dividends may be treated as a tax preference
item. The fund's investment adviser, however, currently has no intention to
purchase these types of bonds.
If you are an individual shareholder, your AMT could amount to 28% of your
alternative minimum taxable income. If you are a corporate shareholder, all
dividends of the fund which represent interest on municipal bonds may be subject
to the 20% corporate AMT because the dividends are included in your corporate
"adjusted current earnings."
Corporate alternative minimum taxable income includes 75% of the excess pre-tax
adjusted current earnings over its alternative minimum taxable income as a tax
preference item. Adjusted current earnings are based on the corporation's
earnings and profits. Earnings and profits generally include the full amount of
any fund dividend. However, alternative minimum taxable income does not include
the portion of the fund's dividends attributable to municipal bonds that are not
private activity bonds. As a result, the difference will be included in the
calculation of the corporation's AMT.
INTEREST INCOME ON TEMPORARY INVESTMENTS If the fund invests in certain
temporary investments, you may have to pay regular federal income tax on the
dividends you receive. This is because dividends representing net interest
income earned on some temporary investments and any realized net short-term
gains are taxed as ordinary income. Examples of these temporary investments
include:
|X| obligations issued by or on behalf of municipal or corporate issuers having
the same quality and maturity characteristics as municipal securities
purchased by the fund;
|X| instruments issued by banks or other depository institutions which have
capital, surplus and undivided profits in excess of $100,000,000 at the time
of investment;
|X| repurchase agreements; and
|X| prime commercial paper rated A-1 by S&P's Ratings Group, Prime-1 by Moody's
or Fitch or other short-term credit instruments.
OHIO TAX-FREE MONEY MARKET FUND
If you are a shareholder of the OHIO TAX-FREE MONEY MARKET FUND, you may still
have to pay taxes on income earned in states other than Ohio. You should consult
your tax adviser regarding your investment under state and local laws.
INTEREST INCOME ON MUNICIPAL BONDS As a shareholder of the fund, you are not
required to pay federal regular income tax on any dividends you receive from the
fund that represent net interest interest on tax-exempt municipal bonds.
However, you may have to pay federal alternative minimum taxes on dividends
representing net interest income earned on some municipal bonds. You should read
the previous discussion on alternative minimum taxable income.
For both corporate and individual shareholders, under Ohio laws, distributions
made by the fund will not be subject to Ohio income taxes to the extent that the
distributions qualify as exempt interest dividends under the Internal Revenue
Code. Also, the distributions must represent:
1. interest on obligations of Ohio or its subdivisions which is exempt from
regular federal income tax; or
2. interest or dividends from obligations issued by the U.S. and its territories
or possessions or by any authority, commission or instrumentality of the U.S.
which is exempt from state income tax under federal laws.
However, if the fund invests in types of obligations that do not fall in the
above categories, you will have to pay Ohio income taxes on the distributions
you receive.
For corporate shareholders, distributions made by the fund will not be subject
to Ohio corporate franchise tax to the extent that the distributions qualify as
exempt interest dividends under the Internal Revenue Code and represent:
1. interest on obligations of Ohio or its subdivisions which is exempt from
regular federal income tax; or
2. net interest income from obligations issued by the U.S. and its territories
or possessions or by any authority, commission or instrumentality of the U.S.
which is exempt from state income tax under federal laws.
Exempt-interest dividends that represent interest from obligations issued by
Ohio or its political subdivisions will be exempt from any Ohio municipal income
tax (even if the municipality is permitted under Ohio laws to levy a tax on
intangible income).
INTEREST INCOME ON TEMPORARY INVESTMENTS If the fund invests in certain
temporary investments, you may have to pay regular federal income tax on the
dividends you receive. This is because dividends representing net interest
income earned on some temporary investments and any realized net short-term
gains are taxed as ordinary income. Examples of these temporary investments
include:
|X| obligations issued by or on behalf of municipal or corporate issuers;
|X| obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
|X| instruments issued by a U.S. bank or other depository institutions which
have capital, surplus and undivided profits in excess of $100,000,000 at the
time of investment; and
|X| repurchase agreements.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables set forth below are intended to help you
understand the funds' financial performance for the past 5 years or for the
funds' period of operations, as the case may be. Most of the information
reflects financial results with respect to a single fund share. The total
returns in the tables represent the rates that an investor would have earned (or
lost) on an investment in a fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Arthur Andersen LLP, whose
report, along with the funds' financial statements, are included in the funds'
annual report, which is available upon request.
<TABLE>
<CAPTION>
TREASURY FUND
(Class C Shares1) Period ended November 30,
- ---------------------------------------------- ------------- ------------ ----------- ----------- -----------
1999 1998 1997 1996 1995
- ---------------------------------------------- ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------- ------------- ------------ ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.04 0.05 0.05 0.05 0.05
Net gains or losses on securities (both - - - - -
realized and unrealized)
Total from investment operations 0.04 0.05 0.05 0.05 0.05
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.04) (0.05) (0.05) (0.05) (0.05)
Distributions (from capital gains) - - - - -
Total distributions (0.04) (0.05) (0.05) (0.05) (0.05)
- ---------------------------------------------- ------------- ------------ ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------- ------------- ------------ ----------- ----------- -----------
TOTAL RETURN2 4.02% 4.69% 4.85% 4.80% 5.23%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $1,049,641 $542,430 $469,400 $829,259 $654,963
(000's omitted)
Gross ratio of expenses to average net 1.08% 1.08% 0.93% 0.90% 0.91%
assets3
Net ratio of expenses to average net 0.92% 0.88% 0.73% 0.70% 0.71%
assets4
Gross ratio of net income to average net 3.82% 4.38% 4.53% 4.49% 4.94%
assets3
Net ratio of net income to average net 3.98% 4.58% 4.73% 4.69% 5.14%
assets4
</TABLE>
1 The C class of the Treasury Fund has been operating since April 15, 1989.
2 Based on net asset value.
3 Before waivers.
4 After waivers.
<TABLE>
<CAPTION>
TREASURY FUND
(Class Y Shares1) Period ended November 30,
1999 1998 1997
- ---------------------------------------------- -------------- ------------- -----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00
- ---------------------------------------------- -------------- ------------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.04 0.05 0.03
Net gains or losses on securities (both -- -- --
realized and unrealized)
Total from investment operations 0.04 0.05 0.03
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.04) (0.05) (0.03)
Distributions (from capital gains) -- -- --
Total distributions (0.04) (0.05) (0.03)
- ---------------------------------------------- -------------- ------------- -----------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00
- ---------------------------------------------- -------------- ------------- -----------
TOTAL RETURN2 4.18% 4.84% 3.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $1,766,246 $1,123,144 $659,296
(000's omitted)
Gross ratio of expenses to average net 0.93% 0.93% 0.92%3
assets4
Net ratio of expenses to average net 0.77% 0.73% 0.72%3
assets5
Gross ratio of net income to average net 3.97% 4.53% 4.67%3
assets4
Net ratio of net income to average net 4.13% 4.73% 4.87%3
assets5
</TABLE>
1 The Y class of the Treasury Fund has been operating since March 25, 1997.
2 Based on net asset value.
3 Annualized.
4 Before waivers.
5 After waivers.
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET FUND
(Class C Shares1) Period ended November 30,
1999 1998 1997 1996 1995
- ---------------------------------------------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------- ------------ ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.02 0.03 0.03 0.03 0.03
Net gains or losses on securities (both -- -- -- -- --
realized and unrealized)
Total from investment operations 0.02 0.03 0.03 0.03 0.03
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.02) (0.03) (0.03) (0.03) (0.03)
Distributions (from capital gains) -- -- -- -- --
Total distributions (0.02) (0.03) (0.03) (0.03) (0.03)
- ---------------------------------------------- ------------ ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------- ------------ ----------- ----------- ----------- -----------
TOTAL RETURN2 2.50% 2.83% 3.02% 2.91% 3.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $155,595 $134,556 $126,348 $153,256 $167,356
(000's omitted)
Gross ratio of expenses to average net 1.02% 1.05% 0.99% 1.01% 1.01%
assets3
Net ratio of expenses to average net 0.76% 0.75% 0.69% 0.70% 0.66%
assets4
Gross ratio of net income to average net 2.20% 2.49% 2.66% 2.56% 2.91%
assets3
Net ratio of net income to average net 2.46% 2.79% 2.96% 2.87% 3.26%
assets4
</TABLE>
1 The Tax-Free Money Market Fund has been operating since March 15, 1991.
2 Based on net asset value.
3 Before waivers.
4 After waivers.
OHIO TAX-FREE MONEY MARKET FUND
(Class C Shares1) Period ended November 30,
1999 1998
- ---------------------------------------------- ----------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00
- ---------------------------------------------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.03 0.03
Net gains or losses on securities (both -- --
realized and unrealized)
Total from investment operations 0.03 0.03
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.03) (0.03)
Distributions (from capital gains) -- --
Total distributions (0.03) (0.03)
- ---------------------------------------------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00
- ---------------------------------------------- ----------- -----------
TOTAL RETURN2 2.67% 2.85%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $64,475 $57,614
(000's omitted)
Gross ratio of expenses to average net 1.09% 1.29%3
assets4
Net ratio of expenses to average net 0.58% 0.69%3
assets5
Gross ratio of net income to average net 2.13% 2.21%3
assets4
Net ratio of net income to average net 2.64% 2.81%3
assets5
1 The Ohio Tax-Free Money Market Fund has been operating since December 2, 1997.
2 Based on net asset value.
3 Annualized
4 Before waivers.
5 After waivers.
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 annual and semi-annual reports
provide the funds' most recent
financial statements and portfolio
listings. The annual report contains a
discussion of the market conditions and
investment strategies that affected the
funds' performances during the last
fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
(SAI) DATED MARCH 31, 2000
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
funds' policies and management.
TO RECEIVE ANY OF THESE DOCUMENTS OR
PROSPECTUSES ON THE FIRSTAR STELLAR
FUNDS:
BY TELEPHONE
1-800-677-FUND
BY MAIL:
Firstar Stellar Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
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
1-202-942-8090 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
or by sending an electronic request to
the SEC at the following e-mail
address: [email protected].
Investment Company Act File # 811-05762
BOND FUNDS
PROSPECTUS
March 31, 2000
STRATEGIC INCOME FUND
U.S. GOVERNMENT INCOME FUND
INSURED TAX-FREE BOND 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.
TABLE OF CONTENTS
OVERVIEW.......................................................................3
STRATEGIC INCOME FUND..........................................................4
U.S. GOVERNMENT INCOME FUND....................................................7
INSURED TAX-FREE BOND FUND....................................................10
MANAGEMENT OF THE FUNDS.......................................................13
DISTRIBUTION OF SHARES........................................................14
DESCRIPTION OF CLASSES........................................................14
PRICE OF SHARES...............................................................16
PURCHASING SHARES.............................................................17
SELLING SHARES................................................................19
EXCHANGING SHARES.............................................................20
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES...............................21
FINANCIAL HIGHLIGHTS..........................................................22
OVERVIEW
- --------------------------------------------------------------------------------
GOAL AND STRATEGIES OF THE BOND FUNDS
The general goal of the Firstar Stellar bond funds is
to provide you with current income by investing in
fixed-income securities. The STRATEGIC INCOME FUND
attempts to generate high current income by investing
in short to long-term, investment grade U.S.
government fixed-income securities, corporate
fixed-income securities, structured fixed-income
securities, international bonds, real estate
investment trusts, domestic equity securities and
money market securities. The U.S. GOVERNMENT INCOME
FUND provides current income and capital appreciation
by investing primarily in short to long-term,
investment grade securities issued or guaranteed by
the U.S. government, its agencies or
instrumentalities. The INSURED TAX-FREE BOND FUND
invests in intermediate to long-term, investment
grade insured municipal securities so that most of
its annual interest income is exempt from federal
income tax.
PRINCIPAL RISKS COMMON TO THESE FUNDS The main risks
of investing in the funds are:
|X| MARKET RISKS: The funds' investments are subject
to bond market risk which means that the value of
the funds' investments may go up or down. The
market value of fixed-income securities is
significantly affected by changes in interest
rates. Generally, when interest rates decline,
the market value rises and when interest rates
increase, the market value of fixed-income
securities declines. If the value of the funds'
investments go down, you may lose money.
|X| MATURITY RISKS: The longer a bond's maturity, the
greater the risk and the higher its yield.
Conversely, the shorter a bond's maturity, the
lower the risk and the lower its yield.
|X| BOND SELECTION RISKS: The funds' investments are
subject to the risks inherent in individual bond
selections. The bonds selected by the investment
adviser may decline in value or not increase in
value when the bond market in general is rising.
|X| CREDIT RISKS: Individual issues of fixed-income
securities may also be subject to the credit risk
of the issuer. This means that the underlying
company may experience unanticipated financial
problems causing it to be unable to meet its
payment obligations.
AN INVESTMENT IN THE FUNDS WHO MAY WANT TO INVEST
IS NOT A DEPOSIT OF FIRSTAR These funds may be appropriate for investors that:
BANK AND IS NOT INSURED OR |X| wish to invest for the long term
GUARANTEED BY THE FEDERAL |X| want to earn income on investments considered
DEPOSIT INSURANCE more stable than stocks
CORPORATION OR ANY OTHER |X| are looking for a fixed-income component to
GOVERNMENT AGENCY. complete their portfolio
|X| have long-term goals such as planning for
retirement
These funds may not be appropriate for investors
that:
|X| have short-term financial goals
The Statement of Additional Information contains
more information about the funds and the types of
securities in which they may invest.
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
The STRATEGIC INCOME FUND'S investment objective is to generate high current
income.
THE FUND'S INVESTMENT CATEGORIES:
1. U.S. government & corporate fixed-income securities
2. International securities
3. Real estate investment trusts
4. Domestic equity securities
5. Money market securities
6. Mortgage and asset-backed securities
INVESTMENT POLICIES AND PORTFOLIO SECURITIES
The fund attempts to achieve its investment goal by investing its assets in a
core group of securities as shown in the box to the right. The investment
adviser's strategy is to spread the investment portfolio over several securities
categories to reduce the impact of any drastic market movements affecting one
category. With that in mind, the fund invests approximately 40% of its assets in
short to long-term, investment grade U.S. government and corporate fixed-income
securities (category 1). The fund invests between 0% to 20% of its assets in
each of the other categories (categories 2 through 6). Overall, the fund will
have at least 65% of its assets invested in securities that produce income.
To aid in selecting securities, the adviser will use the following techniques:
|X| fundamental and quantitative analysis to select equity securities,
which includes examining price/earnings ratios, historical and
projected earnings growth rates, historical sales growth rates,
historical return on equity, market capitalization, and average daily
trading volume;
|X| use of ratings assigned by nationally recognized statistical rating
organizations (when needed);
|X| credit research;
|X| review of issuers' historical performance;
|X| examination of issuers' dividend growth record;
|X| consideration of market trends; and
|X| hedging through the use of options and futures.
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 (e.g. deterioration of the credit quality or worthiness of the
issuer)? (3) Has the adviser's outlook changed (e.g. the company's market sector
experiences negative changes)?
DOMESTIC FIXED-INCOME SECURITIES As noted above, the fund will invest in
domestic corporate debt obligations, obligations of the United States, and
notes, bonds and discount notes of U.S. government agencies or
instrumentalities. The adviser selects bonds based on their potential interest
rates and yield in relation to other bonds of similar quality and maturity. The
fund will only invest in bonds which are rated Baa or higher by Moody's or rated
BBB or higher by S&P or Fitch. If the securities are unrated, the adviser must
consider them to be of similar quality to the rated securities before the fund
may invest in them.
U.S. GOVERNMENT SECURITIES The fund may invest in securities issued and/or
guaranteed as to the payment of principal and interest by the U.S. government or
its agencies or instrumentalities. U.S. government securities include direct
obligations of the U.S. Treasury (such as U.S. Treasury bills, notes and bonds)
and obligations issued or guaranteed by U.S government agencies or
instrumentalities.
INTERNATIONAL SECURITIES The fund may invest in international securities
(including other investment companies that invest primarily in international
securities). The international securities include equity securities of non-U.S.
companies and corporate and government fixed-income securities denominated in
currencies other than U.S. dollars. These securities may be traded domestically
or abroad through various stock exchanges, American Depositary Receipts or
International Depositary Receipts (ADRs or IDRs). The international fixed-income
and corporate securities include ADRs, IDRs, and government securities of other
nations and must be rated Baa or better by Moody's or BBB or better by S&P. If
the securities are unrated, the adviser must determine that they are of similar
quality to the rated securities before the fund may invest in them.
A REIT (REAL ESTATE INVESTMENT TRUST) IS A MANAGED PORTFOLIO OF REAL ESTATE
INVESTMENTS.
REAL ESTATE INVESTMENT TRUSTS The fund may invest in equity or mortgage REITs
that produce income. REITs will be diversified by geographic location and by
sector (such as shopping malls, apartment building complexes and health care
facilities). An equity REIT holds equity positions in real estate and provides
its shareholders with income from the leasing of its properties and capital
gains from any sales of properties. A mortgage REIT specializes in lending money
to developers of properties and passes interest income to its shareholders.
DOMESTIC EQUITY SECURITIES The fund's domestic equity securities consist of high
dividend paying common and preferred stocks of U.S. companies listed on the New
York or American Stock Exchanges or traded in the over-the-counter market. The
companies must have a history of stable earnings and/or growing dividends. The
fund may also invest in warrants and securities convertible into common stocks
of these U.S. companies.
MONEY MARKET INSTRUMENTS The fund may invest in U.S. and foreign short-term
money market instruments, including commercial paper rated A-1 or A-2 by S&P,
Prime-1 or Prime-2 by Moody's or F-1 or F-2 by Fitch, bank instruments,
obligations of the U.S. government, its agencies or instrumentalities,
repurchase agreements, and other unrated short-term instruments that the adviser
believes to be of comparable quality to the other obligations in which the fund
may invest.
MORTGAGE AND ASSET-BACKED SECURITIES The fund may invest in mortgage-backed
securities, adjustable rate mortgage securities, collateralized mortgage
obligations and asset-backed securities.
INVESTMENT RISKS
The following risks are specific to this fund in addition to the risks mentioned
in the Overview section.
STOCK MARKET RISKS One of the risks of investing in equity securities is stock
market risk. The portion of the fund's portfolio invested in equity securities
may experience sudden, unpredictable declines in value, as well as periods of
poor performance. Because stock values go up and down, the value of your fund's
shares may go up and down. Therefore, when you sell your investment, you may
receive more or less money than you originally invested.
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.
FOREIGN SECURITIES RISKS The fund can invest in foreign securities, which can
carry higher returns, but involve more risks than those associated with domestic
investments. Additional risks include currency fluctuations, political and
economic instability, differences in financial reporting standards and less
stringent regulation of securities markets.
HIGH TURNOVER RISKS The fund purchases and sells securities to capture dividends
on particular securities. The fund will purchase a security close to its
ex-dividend date, thereby entitling the fund to receive the anticipated
dividend. The fund will then sell the security after the ex-dividend date. This
practice could result in the fund experiencing an annual turnover rate of up to
250%. High portfolio turnover rates lead to increased costs, could cause you to
pay higher taxes and could negatively affect the performance of the fund.
REAL ESTATE INVESTMENT TRUSTS RISKS Some of the risks of equity and mortgage
REITs are that they depend on management skills and are not diversified. As a
result, REITs are subject to the risk of financing either single projects or any
number of projects. REITs depend on heavy cash flow and may be subject to
defaults by borrowers and self-liquidation. Additionally, equity REITs may be
affected by any changes in the value of the underlying property owned by the
trusts. Mortgage REITs may be affected by the quality of any credit extended.
The adviser tries to minimize these risks by selecting REITs diversified by
sector (i.e. shopping malls, apartment building complexes, health care
facilities) and geographic location. The fund will generally be subject to risks
associated with direct ownership of real estate, such as decreases in real
estate values or fluctuations in rental income caused by a variety of factors,
including increases in interest rates, increases in property taxes and other
operating costs, casualty or condemnation losses, possible environmental
liabilities and changes in supply and demand for properties.
MORTGAGE AND ASSET-BACKED SECURITIES RISKS The main risk of mortgage and
asset-backed securities is that the borrower will prepay some or all of the
principal owed to the issuer. If that happens, the fund may have to replace the
security by investing the proceeds in a lower yielding security. This could
reduce the fund's share price and its income distributions.
OPTIONS RISKS The fund may use options 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 a fund or if
the strategy does not correlate well with the fund's investments. The use of
options may produce a loss for the fund, even when used only for hedging
purposes and you could lose more money than you invested because of the fund's
use of options.
PAST PERFORMANCE
The bar chart and table below illustrate the variability of the STRATEGIC INCOME
FUND'S returns. The bar chart indicates the risks of investing in the fund by
showing the changes in the fund's performance from year to year (on a calendar
year basis). The table shows how the fund's average annual returns for one-year,
five-years, and since inception ended December 31, 1999 compare with broad
measures of market performance. THE FUND'S PAST PERFORMANCE DOES NOT PREDICT
FUTURE PERFORMANCE.
Strategic Income Fund - B Shares
Calendar Year Returns as of 12/31
1995 13.24%
1996 5.29%
1997 9.49%
1998 -3.19%
1999 -5.80%
Sales charges are not reflected in the bar chart. If these amounts were
reflected, returns would be less than those shown.
BEST QUARTER: Q2 1997 4.59%
WORST QUARTER: Q3 1999 -2.72%
- ------------------------------------- --------- ------------ -----------
AVERAGE ANNUAL TOTAL RETURN 1 Year 5 Years Since
THROUGH 12/31/99 Inception1
- ------------------------------------- --------- ------------ -----------
Strategic Income Fund A Shares N/A N/A N/A
B Shares -10.19% 3.40% 3.78%
Lehman Brothers
Government/Corporate Total Index2 -2.15% 7.60% 7.66%
- ------------------------------------- --------- ------------ -----------
THE AVERAGE ANNUAL TOTAL RETURNS ABOVE REFLECT THE SALES CHARGES. FOR UPDATED
YIELD INFORMATION, PLEASE CALL 1-800-677-FUND.
1 B Shares commenced operations on December 12, 1994. A shares commenced
operations on March 31, 2000. The index shows returns since the inception of the
B shares on December 12, 1994.
2 Lehman Brothers Government/Corporate Total Index is an unmanaged index
composed of bonds which have maturities of at least one year and are rated
investment grade or higher by Moody's, S&P or Fitch, in that order.
FUND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- -------------------------------------- -------- --------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR CLASS A CLASS B
INVESTMENT)
- -------------------------------------- -------- --------
MAXIMUM SALES CHARGE (LOAD) IMPOSED
ON PURCHASES (as a percentage of
offering price) 4.00% None
MAXIMUM DEFERRED SALES CHARGE (LOAD)
(as a percentage of offering price)1 None 5.00%
MAXIMUM SALES CHARGE (LOAD) IMPOSED
ON REINVESTED DIVIDENDS None None
REDEMPTION FEE None None
EXCHANGE FEE None None
- -------------------------------------- -------- --------
- -------------------------------------- -------- --------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS) CLASS A CLASS B
- -------------------------------------- -------- --------
MANAGEMENT FEES 0.95% 0.95%
DISTRIBUTION AND SERVICE (12B-1) 0.25% 0.25%
FEES2
OTHER EXPENSES3 0.50% 0.50%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.70% 1.70%
- -------------------------------------- -------- --------
1 The contingent deferred sales charge for the B shares is 5.00% in the first
year, declining to 1.00% in the sixth year. Thereafter class B shares convert to
class A shares, which do not bear a contingent deferred sales charge. See
"Description of Classes."
2 Class A and B shares are subject to a Rule 12b-1 fee of 0.25% of average daily
net assets. Currently, the adviser is waiving this fee and neither class A or B
shares of the fund are paying or accruing Rule 12b-1 fees. This waiver may be
modified or terminated at anytime.
3 "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 0.25% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at anytime.
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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $566 $914 $1,286 $2,328
CLASS B $673 $836 $1,123 $2,009
- ------------- -------- --------- ---------- -----------
If you did not redeem your shares, you would pay the following expenses:
- ------------- -------- --------- ---------- -----------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $566 $914 $1,286 $2,328
CLASS B $173 $536 $ 923 $2,009
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 14.
U.S. GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
The U.S. GOVERNMENT INCOME FUND'S goal is to provide current income. The fund's
second objective is to achieve capital appreciation.
INVESTMENT STRATEGY EXAMPLE:
The adviser may sell 2-year and buy 10-year maturity notes. If interest rates
fall, prices for the 10-year note will rise more than the 2-year note. Thus,
capital gains are enhanced as well as the fund's total return.
INVESTMENT POLICIES AND PORTFOLIO SECURITIES
To achieve its objectives, the fund invests at least 65% of the value of its
total assets in securities issued or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities which produce
income. The fund attempts to achieve its secondary objective by increasing or
decreasing the portfolio's average maturity depending on forecasted interest
rates. By varying portfolio maturity lengths in relation to the interest rate
forecasts, the adviser seeks to improve the fund's total return. See the
investment strategy example to the right.
U.S. GOVERNMENT OBLIGATIONS The government securities in which the fund
invests include direct obligations of the U.S. Treasury (such as U.S. Treasury
bills, notes and bonds) and obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed by:
|X| the full faith and credit of the U.S. Treasury
|X| the issuer's right to borrow from the U.S. Treasury
|X| the discretionary authority of the U.S. government to purchase certain
obligations of its agencies or instrumentalities; or
|X| the credit of the agency or instrumentality issuing the obligation.
The fund also considers collateralized mortgage obligations issued by U.S.
government agencies or instrumentalities to be U.S. government securities.
Up to 35% of the value of the fund's assets may be invested in:
|X| time and savings deposits |X| asset-backed securities
|X| mortgage-backed securities |X| commercial paper
|X| investment grade corporate |X| debt securities of
debt obligations foreign issues
DOMESTIC DEBT SECURITIES A small percentage of the fund's assets may be invested
in short to long-term, investment grade domestic issues of corporate debt
obligations. The corporate debt obligations may have floating or fixed interest
rates. At the time the fund purchases the obligation, the securities will be
rated in one of the four highest categories by a nationally recognized
statistical rating organization (i.e., S&P or Fitch).
U.S. MONEY MARKET INSTRUMENTS The fund may invest in U.S. money market
instruments (including commercial paper). The instruments must mature within 270
days and must be 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. Other types of money market instruments in which the fund may
invest are time and savings deposits (including certificates of deposit) in
commercial or savings banks. The banks must be insured by the Bank Insurance
Fund or the Savings Association Insurance Fund, both of which are administered
by the FDIC. Foreign branches of FDIC insured banks and banker's acceptances
might issue the deposits.
FOREIGN DEBT SECURITIES The fund may invest in debt securities of foreign
governments, agencies or supranational institutions. The fund will invest in
investment quality debt securities issued by foreign corporations. The
securities will be rated in one of the four highest rating categories by a
nationally recognized statistical rating organization. If the securities are
unrated, the adviser must deem them to be of similar quality to the rated
securities before the fund may invest in them.
MORTGAGE AND ASSET-BACKED SECURITIES A small portion of the fund's assets may be
invested in mortgage-backed securities including adjustable rate mortgage
securities, collateralized mortgage obligations and asset-backed securities.
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 (e.g. the security's interest rate is not a favorable as other
securities' interest rates)? (3) Has the adviser's outlook changed (e.g. the
company's market sector experiences negative changes)?
INVESTMENT RISKS
The following risks are specific to this fund in addition to the risks mentioned
in the Overview section.
FOREIGN SECURITIES RISKS The fund can invest in foreign securities, which can
carry higher returns, but involve more risks than those associated with domestic
investments. Additional risks include currency fluctuations, political and
economic instability, differences in financial reporting standards and less
stringent regulation of securities markets.
MORTGAGE AND ASSET-BACKED SECURITIES RISKS The main risk of mortgage and
asset-backed securities is that the borrower will prepay some or all of the
principal owed to the issuer. If that happens, the fund may have to replace the
security by investing the proceeds in a lower yielding security. This could
reduce the fund's share price and its income distributions.
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.
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 a fund or if the strategy does not correlate well
with the fund's investments. The use of futures and options on futures may
produce a loss for the fund, even when used only for hedging purposes and you
could lose more money than you invested because of the fund's use of options.
PAST PERFORMANCE
The bar chart and table below illustrate the variability of the U.S. GOVERNMENT
INCOME FUND'S returns. The bar chart indicates the risks of investing in the
fund by showing the changes in the fund's performance from year to year (on a
calendar year basis). The table shows how the fund's average annual returns for
one-year, five-years, and since the fund's inception ended December 31, 1999
compare with broad measures of market performance. THE FUND'S PAST PERFORMANCE
DOES NOT PREDICT FUTURE PERFORMANCE.
U.S. Government Income Fund - A Shares
Calendar Year Returns as of 12/31
1994 -3.27%
1995 15.74%
1996 1.73%
1997 9.00%
1998 7.97%
1999 -3.16%
Sales charges are not reflected on the bar chart. If these amounts were
reflected, returns would be less than those shown.
BEST QUARTER: Q2 1995 4.87%
WORST QUARTER: Q1 1996 -2.84%
- ------------------------------------- --------- -------- -----------
AVERAGE ANNUAL TOTAL RETURN Since
THROUGH 12/31/99 1 Year 5 Years inception1
- ------------------------------------- --------- -------- -----------
U.S. Government Income Fund
A Shares -6.57% 5.29% 4.44%
B Shares -7.77% N/A -0.18%
Lehman Brothers
Government/Corporate Total Index2 -2.15% 7.60% 6.43%
Lipper U.S. Government Fund Avg.3 -3.02% 6.51% 4.94%
- ------------------------------------- --------- -------- -----------
THE AVERAGE ANNUAL TOTAL RETURNS ABOVE REFLECTS THE SALES CHARGES. FOR UPDATED
YIELD INFORMATION PLEASE CALL 1-800-677-FUND.
1 A Shares commenced operations on January 5, 1993. B Shares commenced
operations on April 27, 1998. The indices show returns since the inception of
the A Shares on January 5, 1993.
2 Lehman Brothers Government/Corporate Total Index is an unmanaged index
composed of bonds which have maturities of at least one year and are rated
investment grade or higher by Moody's, S&P or Fitch, in that order.
3 The Lipper U.S. Government Fund Average shows the performance of a category of
mutual funds with similar goals to the fund.
FUND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- -------------------------------------- --------- --------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR CLASS A CLASS B
INVESTMENT)
- -------------------------------------- --------- --------
MAXIMUM SALES CHARGE (LOAD) IMPOSED
ON PURCHASES (as a percentage of
offering price) 4.00% None
MAXIMUM DEFERRED SALES CHARGE (LOAD)
(as a percentage of offering price)1 None 5.00%
MAXIMUM SALES CHARGE (LOAD) IMPOSED
ON REINVESTED DIVIDENDS None None
REDEMPTION FEE None None
EXCHANGE FEE None None
- -------------------------------------- --------- --------
- -------------------------------------- --------- --------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS) CLASS A CLASS B
- -------------------------------------- --------- --------
MANAGEMENT FEES 0.60% 0.60%
DISTRIBUTION AND SERVICE (12B-1) 0.25% 0.25%
FEES2
OTHER EXPENSES3 0.48% 0.48%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.33% 1.33%
- -------------------------------------- --------- --------
1 The contingent deferred sales charge for the B shares is 5.00% in the first
year, declining to 1.00% in the sixth year. Thereafter class B shares convert to
class A shares, which do not bear a contingent deferred sales change. See
"Description of Classes."
2 Class A and B shares are subject to a Rule 12b-1 fee of 0.25% of average daily
net assets. Currently, the adviser is waiving this fee and neither class A or B
shares of the fund are paying or accruing Rule 12b-1 fees. This waiver may be
modified or terminated at anytime.
3 "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 0.23% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at anytime.
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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $530 $805 $1,100 $1,937
CLASS B $635 $721 $ 929 $1,601
- ------------- -------- --------- ---------- -----------
If you did not redeem your shares, you would pay the following expenses:
- ------------- -------- --------- ---------- -----------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $530 $805 $1,100 $1,937
CLASS B $135 $421 $ 729 $1,601
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 14.
INSURED TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
The INSURED TAX-FREE BOND FUND seeks to provide current income exempt from
federal income tax by primarily purchasing insured municipal bonds.
INVESTMENT POLICIES AND PORTFOLIO SECURITIES
Under normal circumstances, the fund invests its assets so that at least 80% of
its annual interest income is exempt from federal income tax and not subject to
the alternative minimum tax. Usually, at least 65% of the value of the fund's
assets are invested in intermediate to long-term, investment grade municipal
securities that are insured as to timely payment. All tax-exempt interest income
earned by the fund will remain tax-free when it is distributed to you.
EXAMPLES OF MUNICIPAL SECURITIES
|X| tax and revenue anticipation notes issued to finance working capital needs
in anticipation of receiving taxes or other revenues
|X| bond anticipation notes that are intended to be refinanced through a later
issuance of longer term bonds
|X| municipal commercial paper and other short-term notes
|X| variable rate demand notes
|X| municipal bonds and leases
|X| construction loan notes insured by the Federal Housing Administration and
financed by the Federal or Government National Mortgage Associations
|X| participation interests in any of the above
Municipal securities are debt obligations issued by or on behalf of the states,
territories and other possessions of the United States that have income exempt
from federal income tax. If you are subject to alternative minimum tax (AMT),
you may be required to pay AMT if the fund invests in securities subject to AMT.
However, no more than 20% of the fund's income will be subject to AMT.
Municipal securities are generally issued to finance public works, such as:
|X| airports |X| bridges |X| hospitals
|X| highways |X| housing |X| schools
|X| mass transportation |X| water |X| streets
projects and sewer
works
Municipal securities are also issued to:
|X| repay outstanding obligations
|X| raise funds for general operating expenses
|X| make loans to other public institutions and facilities
The fund's investment adviser looks for certain qualities when investing in
municipal securities. These include:
1. rated investment grade, or in other words, rated within the four highest
rating categories by a nationally recognized statistical rating organization
(NRSRO) such as Aaa, Aa, A or Baa by Moody's Investors Service, Inc. or AAA, AA,
A, or BBB by Standard and Poor's, Fitch IBCA, Inc. or Duff & Phelps Credit
Rating Co.;
2. insured by a municipal bond insurance company which is in the top rating
category by an NRSRO;
3. guaranteed at the time of purchase by the U.S. government as to the payment
of principal and interest;
4. fully collateralized by an escrow of U.S. government securities; or
5. determined to be of comparable quality to the above rating categories by the
fund's adviser if the security is unrated.
The municipal securities purchased by the fund are covered by insurance which
guarantees the timely payment of principal at maturity and interest on the
securities. These insured municipal securities are either: (1) covered by an
insurance policy applicable to a particular security, or (2) insured under
master insurance policies issued by municipal bond insurers, which may be
purchased by the fund.
The fund will require or obtain municipal bond insurance when it purchases
municipal securities that are not up to the fund's quality standards. The fund
may also require or obtain municipal bond insurance for specific municipal
securities held or purchased if the insurance would benefit the fund by
improving the portfolio quality, for example.
PARTICIPATION INTERESTS The fund may purchase interests in municipal securities
from financial institutions such as commercial and investment banks, savings
associations and insurance companies. The fund invests in these sorts of
participation interests in order to obtain credit enhancement or demand features
that would not be available by directly owning the underlying municipal
securities. Credit enhanced securities are investments backed by a guaranty,
letter of credit, or insurance. They ensure that participation interests are of
high quality.
VARIABLE RATE MUNICIPAL SECURITIES The fund may invest in variable rate
municipal securities (i.e., securities that have variable or floating interest
rates). These securities provide the fund with the right to tender the
securities for repurchase at the stated principal amount plus accrued interest.
These securities usually bear interest at a rate that allow the securities to
trade at par. Most variable rate municipal securities allow the fund to demand
the repurchase of the security on not more than 7 days' notice. Other variable
rate municipal securities do not have this demand feature or the demand feature
is longer than 7 days. Those securities may be considered illiquid. The adviser
will use the above quality standards to buy variable rate municipal securities.
MUNICIPAL LEASES The fund may also invest in municipal leases (i.e., obligations
issued by state and local governments to finance the acquisition of equipment
and facilities). Municipal leases may take the form of a lease, an installment
purchase contract, a conditional sales contract, or a participation interest.
Municipal leases may be considered illiquid.
INDUSTRIAL DEVELOPMENT BONDS The fund also invests in industrial development
bonds, another type of municipal security, issued by or on behalf of public
authorities. IDBs are used to provide financing aid to acquire sites or
construct and equip facilities for privately or publicly owned corporations. The
fund may invest more than 25% of its assets in various IDBs as long as they are
not from the same facility or similar types of facilities or projects.
TEMPORARY INVESTMENTS The fund may invest up to 100% of its assets in tax-exempt
or taxable short-term temporary investments to respond to adverse market,
economic, political or other conditions. These temporary investments include
tax-exempt variable and floating rate demand notes, temporary municipal
securities, U.S. obligations, etc. Although the fund is permitted to make
taxable, temporary investments, the adviser currently does not intend to
generate income subject to federal regular income tax. There are no applicable
rating requirements to temporary investments with the exception of temporary
municipal securities. These securities are subject to the same rating
requirements as all other municipal securities in which the fund invests.
However, for other temporary investments, the adviser will have to determine
whether the securities are of comparable quality to the rated securities before
investing. To the extent the fund invests in such temporary investments, the
fund may not achieve its investment objective.
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 (e.g. deterioration of the credit quality or worthiness of the
issuer)? (3) Has the adviser's outlook changed (e.g. the company's market sector
experiences negative changes)?
INVESTMENT RISKS
The following risks are specific to this fund in addition to the risks mentioned
in the Overview section.
MUNICIPAL SECURITIES RISKS The yield of municipal securities depends on a
variety of factors. The investment adviser must consider the general conditions
of the money market and the taxable and municipal securities markets. The
adviser must also weigh the size of the particular offering, the maturity of the
obligations and the rating of the issue. The ability of the fund to achieve its
investment objective also depends on the ability of the issuers of the municipal
securities and demand features, or the credit enhancers of either to continue to
meet their obligations for the payment of interest and principal when due.
Further, any adverse economic conditions or developments affecting the states or
municipalities could negatively impact the fund's portfolio.
TAX RISKS The fund may be more adversely impacted by changes in tax rates and
policies than other funds. Because interest income on municipal obligations is
normally not subject to regular federal income taxation, the attractiveness of
municipal obligations in relation to other investment alternatives is affected
by changes in federal income tax rates applicable to, or the continuing federal
income tax-exempt status of, such interest income. Therefore, any proposed or
actual changes in such rates or exempt status can significantly affect the
demand for and supply, liquidity and marketability of municipal obligations,
which could in turn affect the fund's ability to acquire and dispose of
municipal obligations at desirable yield and price levels.
CONCENTRATION RISKS The fund may invest more than 25% of its assets in
industrial development bonds. The fund does not invest that amount in the same
facility or project. However, if the adviser chooses to concentrate those
investments in the same industry or state, the shares of the fund are likely to
fluctuate in value more than those of a fund investing in a broader range of
securities.
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 a fund or if the strategy does not correlate well
with the fund's investments. The use of futures and options on futures may
produce a loss for the fund, even when used only for hedging purposes and you
could lose more money than you invested because of the fund's use of options.
PAST PERFORMANCE
The bar chart and table below illustrate the variability of the INSURED TAX-FREE
BOND FUND'S returns. The bar chart indicates the risks of investing in the fund
by showing the changes in the fund's performance from year to year (on a
calendar year basis). The table shows how the fund's average annual returns for
one-year and since inception ended December 31, 1999 compare with those of a
broad measure of market performance. THE FUND'S PAST PERFORMANCE DOES NOT
PREDICT FUTURE PERFORMANCE.
Insured Tax-Free Bond Fund - A Shares
Calendar Year Returns as of 12/31
1997 8.29%
1998 5.81%
1999 -1.85%
Sales charges are not reflected on the bar chart. If these amounts were
reflected, returns would be less than those shown.
BEST QUARTER: Q3 1998 3.35%
WORST QUARTER: Q2 1999 -1.99%
- ---------------------------------------- ---------- ----------
AVERAGE ANNUAL TOTAL RETURN Since
THROUGH 12/31/99 1 Year Inception1
- ---------------------------------------- ---------- ----------
Insured Tax-Free Bond Fund A Shares -6.24% 2.51%
B Shares N/A N/A
Lehman Brothers Ten Year Insured Bond
Index2 -1.35% 4.73%
Lipper Insured Municipal Debt Fund
Average3 -1.28% 4.29%
- ---------------------------------------- ---------- ----------
THE AVERAGE ANNUAL TOTAL RETURNS ABOVE REFLECT THE SALES CHARGES. FOR UPDATED
YIELD INFORMATION PLEASE CALL 1-800-677-FUND.
1 A Shares commenced operations on December 30, 1996. B Shares commenced
operations on March 31, 2000. The indices show returns since the inception of
the A shares on December 30, 1996.
2 The Lehman Brothers Ten Year Insured Bond Index is an unmanaged index that
reflects the total performance of the insured bond sector. Securities in the
Index must have maturaties between 8 and 12 years.
3 The Lipper Insured Municipal Debt Fund Average shows the performance of a
category of mutual funds with similar goals to the fund.
FUND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- --------------------------------------- --------- ---------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR CLASS A CLASS B
INVESTMENT)
- --------------------------------------- --------- ---------
MAXIMUM SALES CHARGE (LOAD) IMPOSED 4.00% None
ON PURCHASES (as a percentage of
offering price)
MAXIMUM DEFERRED SALES CHARGE (LOAD)1 None 5.00%
(as a percentage of offering price)
MAXIMUM SALES CHARGE (LOAD) IMPOSED None None
ON REINVESTED DIVIDENDS
REDEMPTION FEE None None
EXCHANGE FEE None None
- --------------------------------------- --------- ---------
- --------------------------------------- --------- ---------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS) CLASS A CLASS B
- --------------------------------------- --------- ---------
MANAGEMENT FEES2 0.75% 0.75%
DISTRIBUTION AND SERVICE (12B-1) FEES3 0.25% 0.75%
OTHER EXPENSES4 0.47% 0.47%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.47% 1.97%
- --------------------------------------- --------- ---------
1 The contingent deferred sales charge for the B shares is 5.00% in the first
year, declining to 1.00% in the sixth year. Thereafter class B shares convert to
class A shares, which do not bear a contingent deferred sales change. See
"Description of Classes."
2 The amount shown indicates the maximum fee the investment adviser can charge.
The investment adviser voluntarily waives a portion of the investment management
fee each year. The adviser can modify or terminate this voluntary waiver at
anytime. Currently with the waiver, the effective management fee is 0.55% of
average daily net assets.
3 Class A shares are subject to a Rule 12b-1 fee of up to 0.25% of average daily
net assets. Class B shares are subject to a Rule 12b-1 fee of up to 0.75% of
average daily net assets. Currently, the adviser is waiving these fees and
neither class A or B shares of the fund are paying or accruing Rule 12b-1 fees.
This waiver may be modified or terminated at anytime.
4 "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 0.22% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at anytime.
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 gains 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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $544 $846 $1,171 $2,087
CLASS B $700 $918 $1,262 $2,296
- ------------- -------- --------- ---------- -----------
If you did not redeem your shares, you would pay the following expenses:
- ------------- -------- --------- ---------- -----------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $544 $846 $1,171 $2,087
CLASS B $200 $618 $1,062 $2,296
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 14.
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Firstar Investment Research & Management Company, LLC (FIRMCO), a wholly owned
subsidiary of Firstar Corporation, is the investment adviser for the funds.
Prior to April 1, 2000, the funds were managed by the Capital Management
Division of Firstar Bank, N.A., which is also a wholly owned subsidiary of
Firstar Corporation. As part of an internal restructuring of the investment
advisory function within Firstar Corporation, the investment management
resources of the Capital Management Division of Firstar Bank, N.A. have been
consolidated with those of FIRMCO. Management of the funds was not affected by
this consolidation. The investment decisions made by FIRMCO are subject to
direction of the funds' 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 funds and is
responsible for the purchase and sale of securities for the funds' portfolios.
The adviser receives an annual fee from each fund for its services as follows:
THE AMOUNTS SHOWN REPRESENT A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET
ASSETS.
BEFORE AFTER
WAIVERS WAIVERS
- ----------------------------------------- --------- --------
Strategic Income Fund 0.95% 0.95%
U.S. Government Income Fund 0.60% 0.60%
Insured Tax-Free Bond Fund 0.75% 0.55%
- ----------------------------------------- --------- --------
FIRMCO, located at the Firstar Center, 777 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, has provided investment advisory services since 1986. FIRMCO
currently has $35.3 billion in assets under management.
PORTFOLIO MANAGERS
KIRK F. MENTZER, a Vice-President and Director of Fixed Income Research for the
Capital Management Division of Firstar Bank since 1992, has been employed by
Firstar Bank in various capacities since 1989. Mr. Mentzer has managed the U.S.
GOVERNMENT INCOME FUND since its inception in January 1993. He has also managed
the domestic and structured fixed-income components of STRATEGIC INCOME FUND
since its inception in December 1994 and the cash equivalent components of the
Firstar Stellar Funds since June 1998. Mr. Mentzer earned a Bachelor of Business
Administration degree in Finance from the University of Cincinnati and a Masters
degree in Finance from Xavier University.
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 domestic equity component of the STRATEGIC
INCOME FUND since March 1999. Mr. Keller earned a Bachelor of Business
Administration Degree in Finance and Accounting from the University of
Cincinnati. He also earned his Masters in Finance from Xavier University.
PETER MERZIAN manages the INSURED TAX-FREE BOND FUND. Mr. Merzian joined
Firstar in 1993 and has 12 years of investment management experience. During
the past five years, Mr. Merzian has been has been a senior associate with
Mississippi Valley Advisors, Inc. where he was the lead portfolio manager for
three tax-exempt bond funds. He has managed the fund since February 14, 2000.
FUND ADMINISTRATION, FUND ACCOUNTING, DIVIDEND DISBURSEMENT, AND CUSTODY
SERVICES
Firstar Mutual Fund Services, LLC, an affiliate of the funds' investment
adviser, provides administrative, accounting and dividend disbursement services
to the Firstar Stellar Funds and is located in Milwaukee, Wisconsin. Firstar
Bank, N.A., serves as custodian for the funds.
DISTRIBUTION OF SHARES
- --------------------------------------------------------------------------------
DISTRIBUTOR
Edgewood Services, Inc. is the distributor for shares of the funds. Edgewood is
based in Pittsburgh, Pennsylvania and is the distributor for a number of
investment companies around the country.
RULE 12B-1 PLAN
The funds have adopted a Rule 12b-1 Plan under the Investment Company Act of
1940. Under the Rule 12b-1 Plan, class A and B shares may pay up to an annual
rate of 0.25% of the average daily net asset value of shares to Edgewood (some
class B shares may pay up to 0.75% of average daily net assets). Edgewood uses
this fee to finance activities that promote the sale of the funds' 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 funds. 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
- --------------------------------------------------------------------------------
Firstar Stellar Funds offers four classes of shares - class A, B, C and Y
shares. Class C shares are only offered with the money market fund and discussed
in the money market prospectus. Class Y shares are offered with certain stock
and money market funds and are discussed in those prospectuses. To receive a
copy of the money market or stock funds prospectus, please call 1-800-677-FUND.
CLASS A SHARES
Class A shares are regular retail shares and may be purchased by individuals or
IRAs. With class A shares, you will pay a sales charge when you invest unless
you qualify for a waiver of the sales charge. Certain class A shares also impose
a Rule 12b-1 fee (as discussed previously) which is assessed against the shares
of the fund. WHAT SHARES COST - CLASS A SHARES If you purchase class A shares of
the funds, you will pay the net asset value next determined after your order is
received PLUS a sales charge (shown in percentages below) depending on the
amount of your investment. The sales charge is calculated as follows:
- ------------------ ------------------ ------------------- ------------------
SALES CHARGE AS SALES CHARGE AS A DEALERS
AMOUNT OF A % OF OFFERING % OF NET ASSET REALLOWANCE AS A
TRANSACTION PRICE VALUE % OF OFFERING PRICE
- ------------------ ------------------ ------------------- ------------------
LESS THAN $50,000
4.00% 4.17% 3.75%
- ------------------ ------------------ ------------------- ------------------
$50,000 TO
$100,000 3.50% 3.63% 3.25%
- ------------------ ------------------ ------------------- ------------------
$100,000 TO
$249,999 3.00% 3.09% 2.75%
- ------------------ ------------------ ------------------- ------------------
$250,000 TO
$499,999 2.50% 2.56% 2.25%
- ------------------ ------------------ ------------------- ------------------
$500,000 TO
$999,999 2.00% 2.04% 1.75%
- ------------------ ------------------ ------------------- ------------------
$1,000,000 AND
ABOVE 0.50% 0.50% 0.40%
- ------------------ ------------------ ------------------- ------------------
NOTE: Sales charges are not imposed on shares purchased with reinvested
dividends.
WAIVERS - CLASS A SHARES
The following persons will not have to pay a sales charge on class A shares:
|X| Employees and retired employees of Firstar Bank or its affiliates,
and members of the families (including parents, grandparents, siblings,
spouses, children, and in-laws) of such employees or retired employees;
|X| Firstar trust customers of Firstar Corporation and its subsidiaries; and
|X| non-trust customers of financial advisers
REDUCING YOUR SALES CHARGE - CLASS A SHARES
You can reduce the sales charge on purchases of class A shares by:
|X| purchasing larger quantities of shares or putting a number of purchases
together to obtain the quantity discounts indicated above;
|X| signing a letter of intent that you intend to purchase more than $100,000
worth of shares over the next 13 months;
|X| using the reinvestment privilege which allows you to redeem shares and then
immediately reinvest them without a sales charge within 60 days; and
|X| combining concurrent purchases of class A shares from different funds.
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 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.
WHAT SHARES COST - CLASS B SHARES
- ------------------------------ -------------------------------
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
- ------------------------------ -------------------------------
1 OR LESS 5.0%
1 - 2 4.0%
2 - 3 3.0%
3 - 4 3.0%
4 - 5 2.0%
5 - 6 1.0%
MORE THAN 6 None
- ------------------------------ -------------------------------
If you purchase class B shares of any of the funds, 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 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:
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
A redemption made under the Systematic Withdrawal Plan (see "Selling Shares")
will not be assessed CDSC as long as it does not amount to more than 10% of your
initial balance. CDSC is also not charged on:
|X| shares purchased by reinvesting your dividends or distributions of short or
long-term capital gains
|X| shares held for more than six full years after purchase
|X| redemptions made following death or disability (as defined by the IRS)
|X| 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
|X| redemptions made in shareholder accounts that do not have the required
minimum balance
WAIVERS - CLASS B SHARES
The following persons will not have to pay the CDSC on class B shares:
|X| Employees and retired employees of Firstar Bank or its affiliates, and
members of the families (including parents, grandparents, siblings, spouses,
children, and in-laws) of such employees or retired employees;
|X| Firstar trust customers of Firstar Corporation and its subsidiaries; and
|X| non-trust customers of financial advisers
PRICE OF 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 each 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, which currently includes
the following holidays:
New Year's Day Good Friday Labor Day
Martin Luther King, Jr.'s Day Memorial Day Thanksgiving Day
Presidents' Day Independence Day Christmas Day
NAV =
ASSETS - LIABILITIES
--------------------
# outstanding shares
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the funds' portfolio securities are determined as
follows:
1. FOR EQUITY SECURITIES: according to the last sale price on a national
securities exchange, if applicable.
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
funds' 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
funds value 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.
PURCHASING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
To open an account, first determine if you are buying class A or B shares (see
"Description of Classes"). The minimum initial investment amounts for each fund
are as follows. Additional investments may be made in any amount.
- ------------------------------------------------------------
Class A and B Shares
- ------------------------------------------------------------
|X| $1,000 for individuals
|X| $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)
|X| $500 for Education IRA customers
|X| $25 for Firstar Bank employees and members of
their immediate family, and persons contributing to
SIMPLE IRAs
- ------------------------------------------------------------
TIMING OF REQUESTS
The price per share will be the next asset value next computed after the time
your request is received in good order and accepted by the funds or the funds'
authorized agent. All requests received in good order by the funds 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.
When making a purchase request, make sure your request is in good order. "Good
order" means your purchase request includes:
|X| the NAME of the fund
|X| the DOLLAR amount of shares to be purchased
|X| purchase application or investment stub
|X| check payable to Firstar Stellar Funds
RECEIPT OF ORDERS
Shares may only be purchased on days the New York Stock Exchange and the Federal
Reserve wire system are 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.
<TABLE>
<CAPTION>
METHODS OF BUYING
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
<S> <C> <C>
|X| BY TELEPHONE Call Firstar Stellar Funds at 1-800-677-FUND to Call Firstar Stellar Funds at 1-800-677-FUND
(FIRSTAR BANK CUSTOMERS place the order. (Note: For security reasons, to place the order. (Note: For security
ONLY) requests by telephone will be recorded.) reasons, requests by telephone will be
recorded.)
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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 right.
Firstar Bank, N.A.
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 #)
The fund and its transfer agent are not
responsible for the consequences of delays
resulting from the banking or Federal Reserve
Wire system, or from incomplete wiring
instructions.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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 with initial period) will be taken automatically monthly
purchase application. or quarterly from your checking account.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| BY EXCHANGE Call 1-800-677-FUND to obtain exchange Call 1-800-677-FUND to obtain exchange
information. See "Exchanging Shares." information. See "Exchanging Shares."
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
</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 3011 615 E. Michigan Street, Third Floor
Milwaukee, Wisconsin 53201-3011 Milwaukee, Wisconsin 53202
NOTE: The funds do not consider the U.S. Postal Service or other independent
delivery services to be their 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 funds.
SELLING SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
METHODS OF SELLING
- ---------------------------------- -----------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ---------------------------------- -----------------------------------------------------------------------------------
<S> <C>
|X| BY TELEPHONE Call Firstar Stellar Funds at 1-800-677-FUND to sell shares.
(NOTE: For security reasons, requests by telephone will be recorded.)
- ---------------------------------- -----------------------------------------------------------------------------------
|X| 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, signatures 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.
- ---------------------------------- -----------------------------------------------------------------------------------
|X| 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.
- ---------------------------------- -----------------------------------------------------------------------------------
|X| SYSTEMATIC WITHDRAWAL 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.
- ---------------------------------- -----------------------------------------------------------------------------------
|X| SHAREHOLDER SERVICE Consult your account agreement for information on redeeming shares.
ORGANIZATION
- ---------------------------------- -----------------------------------------------------------------------------------
|X| BY EXCHANGE Call 1-800-677-FUND to obtain exchange information. See "Exchanging Shares."
- ---------------------------------- -----------------------------------------------------------------------------------
</TABLE>
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). 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
You will need your signature guaranteed if:
|X| you are redeeming shares from an IRA account
|X| you request a redemption to be made payable to a person not on record with
the funds, or
|X| you request that a redemption be mailed to an address other than that on
record with the funds
You may obtain signature guarantees from most
trust companies, commercial banks or other eligible guarantor institutions. A
notary public cannot guarantee signatures.
EXCHANGING SHARES
- --------------------------------------------------------------------------------
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.
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 consequence 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.
REINSTATEMENT PRIVILEGE
If you sell shares of a Firstar Stellar Fund or any Firstar family of funds, you
may reinvest some or all of the proceeds in class A shares of any Firstar
Stellar Fund within 60 days without a sales charge, as long as you notify the
transfer agent or your shareholder service organization at the time 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, other Firstar Stellar Funds, or any other Firstar
family of funds.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND CAPITAL GAINS
The INSURED TAX-FREE BOND FUND declares and pays dividends on a monthly basis.
The U.S. GOVERNMENT INCOME FUND and the STRATEGIC INCOME FUND declare dividends
on a daily basis, but pay dividends on a monthly 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 any of the funds realize capital gains, they will be distributed once every
12 months.
TAX INFORMATION
The funds will pay no federal income tax because they expect to meet certain
Internal Revenue Code requirements. The funds will be treated as single,
separate entities for federal income tax purposes so that income (including
capital gain, if any) and losses realized by one fund will not be combined for
tax purposes with those realized by the other funds.
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 funds and distributions of
net realized short-term capital gains are taxable as ordinary income.
Distributions paid by a fund from net realized long-term capital gains are
taxable as long-term capital gain. The capital gain holding period and the
applicable tax rate is determined by the length of time a fund has held the
security and not the length of time that you have held shares in the fund. The
funds expect that, because of their investment objectives, distributions will
consist primarily of long- and short-term capital gains. Each 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
funds' 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.
The funds 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.
ADDITIONAL TAX INFORMATION -- INSURED TAX-FREE BOND FUND
If you are a shareholder of the INSURED TAX-FREE BOND FUND, you are not required
to pay federal regular income tax on any dividends you receive from the fund
that represent net interest on tax-exempt municipal bonds. However, shareholders
of the fund may be required to pay federal alternative minimum taxes on
dividends representing net interest earned on some municipal bonds.
The alternative minimum tax (AMT) applies when it exceeds the regular tax for
the taxable year. AMT is equal to the regular taxable income of the taxpayer
increased by certain "tax preference" items not included in regular taxable
income and reduced by only a portion of the deductions allowed in the
calculation of the regular tax. The Tax Reform Act of 1986 treats interest on
certain private activity bonds as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds that
finance roads, schools, libraries, prisons and other public facilities, private
activity bonds provide benefits to private parties.
The fund is permitted to purchase all types of municipal bonds, including
private activity bonds. As a result, if the fund purchases any private activity
bonds, a portion of the fund's dividends may be treated as a tax preference
item.
Dividends of the fund representing net income earned on some temporary
investments and any net realized short-term gains are taxed as ordinary income.
Dividends are treated the same for tax purposes whether they are received in
cash or as additional shares. Distributions paid by a 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 a
fund has held the security and not the length of time that you have held shares
in the fund.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables set forth below are intended to help you
understand the funds' financial performance for the past 5 years or for the
funds' period of operations, as the case may be. Most of the information
reflects financial results with respect to a single fund share. The total
returns in the tables represent the rates that an investor would have earned (or
lost) on an investment in a fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Arthur Andersen LLP, whose
report, along with the funds' financial statements, are included in the funds'
annual report, which is available upon request.
<TABLE>
<CAPTION>
STRATEGIC INCOME FUND
(Class B Shares1) Period ended November 30,
1999 1998 1997 1996 1995
- ---------------------------------------------- ------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.62 $10.67 $10.50 $10.53 $10.00
- ---------------------------------------------- ------------ ------------ ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.64 0.72 0.73 0.73 0.69
Net gains or losses on securities (both (1.10) (0.94) 0.18 (0.04) 0.55
realized and unrealized)
Total from investment operations (0.46) (0.22) 0.91 0.69 1.24
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.63) (0.73) (0.74) (0.72) (0.67)
Distributions in excess of net investment (0.01) -- -- -- --
income
Distributions (from capital gains) -- (0.10) -- -- (0.04)
Distributions in excess of net realized -- -- -- -- (0.00)7
gain on investments and options2
Total distributions (0.64) (0.83) (0.74) (0.72) (0.71)
- ---------------------------------------------- ------------ ------------ ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $8.52 $9.62 $10.67 $10.50 $10.53
- ---------------------------------------------- ------------ ------------ ---------- ---------- ----------
TOTAL RETURN3 (4.99)% (2.16)% 9.02% 6.99% 12.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $160,605 $202,354 $179,413 $110,775 $47,513
(000's omitted)
Gross ratio of expenses to average net 1.44% 1.46% 1.46% 1.56% 1.77%4
assets5
Net ratio of expenses to average net 1.28% 1.26% 1.26% 1.36% 1.47%4
assets6
Gross ratio of net income to average net 6.79% 6.99% 6.93% 7.06% 7.11%4
assets5
Net ratio of net income to average net 6.95% 7.19% 7.13% 7.26% 7.41%4
assets6
Portfolio turnover rate 73% 146% 142% 201% 258%
</TABLE>
1 The date of initial public investment for class B shares was December 12,
1994.
2 Distributions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles. These
distributions did not represent a return of capital for federal income tax
purposes.
3 Based on net asset value, which does not reflect the contingent deferred sales
charge, if applicable.
4 Annualized.
5 Before waivers.
6 After waivers.
7 Less than one cent per share.
<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
(Class A Shares1) Period ended November 30,
1999 1998 1997 1996 1995
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.18 $9.87 $9.83 $9.98 $9.24
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.52 0.56 0.57 0.57 0.60
Net gains or losses on securities (both (0.76) 0.30 0.04 (0.15) 0.74
realized and unrealized)
Total from investment operations (0.24) 0.86 0.61 0.42 1.34
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.52) (0.55) (0.57) (0.57) (0.60)
Distributions (from capital gains) -- -- -- -- --
Total distributions (0.52) (0.55) (0.57) (0.57) (0.60)
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
NET ASSET VALUE, END OF PERIOD $9.42 $10.18 $9.87 $9.83 $9.98
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
TOTAL RETURN2 (2.34)% 9.00% 6.46% 4.46% 14.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $162,523 $148,773 $137,445 $138,874 $109,666
Gross ratio of expenses to average net assets3 1.09% 1.11% 1.09% 1.12% 1.12%
Net ratio of expenses to average net assets4 0.93% 0.91% 0.89% 0.92% 0.92%
Gross ratio of net income to average net 5.22% 5.31% 5.68% 5.68% 6.03%
assets3
Net ratio of net income to average net assets4 5.38% 5.51% 5.88% 5.88% 6.23%
Portfolio turnover rate 122% 88% 140% 158% 236%
</TABLE>
1 The date of initial public investment for class A shares was January 5, 1993.
For the period from November 30, 1992 (start of business) to January 4, 1993,
all income was distributed to Federated Services Corp., the administrator at
the time.
2 Based on net asset value, which does not reflect the sales charge, if
applicable.
3 Before waivers.
4 After waivers.
U.S. GOVERNMENT INCOME FUND
(Class B Shares1) Period ended November 30,
1999 1998
- ---------------------------------------------- ----------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $10.18 $9.89
- ---------------------------------------------- ----------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.52 0.36
Net gains or losses on securities (both (0.76) 0.29
realized and unrealized)
Total from investment operations (0.24) 0.65
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.52) (0.36)
Distributions (from capital gains) -- --
Total distributions (0.52) (0.36)
- ---------------------------------------------- ----------- --------
NET ASSET VALUE, END OF PERIOD $9.42 $10.18
- ---------------------------------------------- ----------- --------
TOTAL RETURN2 (2.36)% 6.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $1,030 $305
(000's omitted)
Gross ratio of expenses to average net 1.09% 1.11%3
assets4
Net ratio of expenses to average net 0.93% 0.91%3
assets5
Gross ratio of net income to average net 5.22% 5.31%3
assets4
Net ratio of net income to average net 5.38% 5.51%3
assets5
Portfolio turnover rate 122% 88%
1 The date of initial public investment for class B shares was April 27, 1998.
2 Based on net asset value, which does not reflect the contingent deferred sales
charge, if applicable.
3 Annualized.
4 Before waivers.
5 After waivers.
INSURED TAX-FREE BOND FUND
(Class A Shares1) Period ended November 30,
1999 1998 1997
- ---------------------------------------------- ----------- ----------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $10.49 $10.25 $10.00
- ---------------------------------------------- ----------- ----------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.44 0.46 0.44
Net gains or losses on securities (both (0.55) 0.26 0.24
realized and unrealized)
Total from investment operations (0.11) 0.72 0.68
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.45) (0.46) (0.43)
Distributions (from capital gains) (0.01) (0.02) --
Total distributions (0.46) (0.48) (0.43)
- ---------------------------------------------- ----------- ----------- ---------
NET ASSET VALUE, END OF PERIOD $9.92 $10.49 $10.25
- ---------------------------------------------- ----------- ----------- ---------
TOTAL RETURN2 (1.13)% 7.20% 6.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $160,256 $152,231 $128,591
Gross ratio of expenses to average net 1.23% 1.24% 1.24%3
assets4
Net ratio of expenses to average net 0.86% 0.79% 0.79%3
assets5
Gross ratio of net income to average net 3.90% 3.98% 4.21%3
assets4
Net ratio of net income to average net 4.27% 4.43% 4.66%3
assets5
Portfolio turnover rate 15% 14% 15%
1 The date of initial public investment for class A shares was December 30,
1996.
2 Based on net asset value, which does not reflect the sales charge, if
applicable.
3 Annualized.
4 Before waivers.
5 After waivers.
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 annual and semi-annual reports
provide the funds' most recent
financial statements and portfolio
listings. The annual report contains a
discussion of the market conditions and
investment strategies that affected the
funds' performances during the last
fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
(SAI) DATED MARCH 31, 2000
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
funds' policies and management.
TO RECEIVE ANY OF THESE DOCUMENTS OR
PROSPECTUSES ON THE FIRSTAR STELLAR
FUNDS:
BY TELEPHONE
1-800-677-FUND
BY MAIL:
Firstar Stellar Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
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
1-202-942-8090 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
or by sending an electronic request to
the SEC at the following e-mail
address: [email protected].
Investment Company Act File # 811-05762
STOCK FUNDS
PROSPECTUS
March 31, 2000
GROWTH EQUITY FUND
RELATIVE VALUE FUND
SCIENCE & TECHNOLOGY FUND
STELLAR FUND
CAPITAL APPRECIATION FUND
INTERNATIONAL EQUITY 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.
TABLE OF CONTENTS
OVERVIEW.......................................................................3
GROWTH EQUITY FUND.............................................................4
RELATIVE VALUE FUND............................................................7
SCIENCE & TECHNOLOGY FUND......................................................9
STELLAR FUND..................................................................12
CAPITAL APPRECIATION FUND.....................................................15
INTERNATIONAL EQUITY FUND.....................................................18
MANAGEMENT OF THE FUNDS.......................................................22
DISTRIBUTION OF SHARES........................................................23
DESCRIPTION OF CLASSES........................................................24
PRICE OF SHARES...............................................................26
PURCHASING SHARES.............................................................27
SELLING SHARES................................................................29
EXCHANGING SHARES.............................................................30
DISTRIBUTIONS AND TAXES.......................................................31
FINANCIAL HIGHLIGHTS..........................................................32
OVERVIEW
- --------------------------------------------------------------------------------
GOAL AND STRATEGIES OF THE STOCK FUNDS
The general goal of the Firstar Stellar stock funds
is to maximize your capital appreciation by investing
in equity securities. The GROWTH EQUITY FUND focuses
its investments in growth-oriented equity securities
of U.S. companies. The RELATIVE VALUE FUND focuses on
capital appreciation from equities of U.S. companies
that the adviser considers to have value
characteristics. The SCIENCE & TECHNOLOGY FUND
attempts to maximize growth and capital appreciation
by investing in equity securities of companies in the
science and technology industries. The STELLAR FUND
provides investors with the opportunity to gain
income and appreciation from both equity and
fixed-income investments. The CAPITAL APPRECIATION
FUND invests in equity securities of small to
medium-sized U.S. companies. The INTERNATIONAL EQUITY
FUND seeks investment opportunities by investing in
mutual funds that invest in non-U.S. companies.
PRINCIPAL RISKS COMMON TO THESE FUNDS The main risks
of investing in the funds are:
|X| 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 funds are likely to
decline in value. Therefore, you may lose money
if the value of the funds decline.
|X| 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.
|X| BOND RISKS: To the extent the funds invest in
bonds, they will be exposed to the risks of bond
investing. A bond's market value is affected
significantly by changes in interest rates.
Generally, when interest rates rise, the bond's
market value declines and when interest rates
decline, its market value rises. Also, the
longer a bond's maturity, the greater the risk
and the higher its yield. Conversely, the
shorter a bond's maturity, the lower the risk and
the lower its yield. A bond's value can also be
affected by changes in the bond's credit quality
rating or its issuer's financial condition.
Because bond values fluctuate, the fund's share
price fluctuates. So, when you sell your
investment, you may receive more or less money
than you originally invested.
|X| 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.
AN INVESTMENT IN THE FUNDS WHO MAY WANT TO INVEST
IS NOT A DEPOSIT OF FIRSTAR These funds may be appropriate for investors that:
BANK AND IS NOT INSURED OR |X| wish to invest for the long term
GUARANTEED BY THE FEDERAL |X| want to diversify their portfolios
DEPOSIT INSURANCE |X| want to allocate some portion of their
CORPORATION OR ANY OTHER long-term investments to aggressive equity
GOVERNMENT AGENCY. investing
|X| are willing to accept a high degree of
volatility and risk in exchange for the
opportunity to realize greater financial gains
in the future
These funds may not be appropriate for investors
that:
|X| are investing for short terms
|X| are risk adverse
The Statement of Additional Information contains
more information about the funds and the types of
securities in which they may invest.
GROWTH EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
The GROWTH EQUITY FUND'S investment objective is to maximize capital
appreciation.
INVESTMENT POLICIES AND PORTFOLIO SECURITIES
The fund attempts to achieve its investment goal by investing at least 65% of
the value of its total assets in growth-oriented domestic equity securities.
"Growth-oriented" securities are securities of U.S. companies that have market
capitalization of $1.5 billion or more and, based on traditional research
techniques, the fund's investment adviser believes have earnings growth
potential superior to the S&P 500. The fund will maximize the amount of capital
appreciation that it can within the constraints of its investment policies and
restrictions.
WHAT ARE "GROWTH-ORIENTED" SECURITIES?
Securities of U.S. companies with market capitalization of $1.5 billion or
greater that show superior growth in earnings and revenues.
The adviser selects securities and attempts to maintain an acceptable level of
risk largely through the use of automated quantitative measurement techniques.
The adviser considers the following factors when using this research technique:
|X| price/earnings ratios,
|X| historical and projected earnings growth rates,
|X| historical sales growth rates,
|X| historical return on equity,
|X| market capitalization,
|X| average daily trading volume, and
|X| credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The investment adviser uses the quantitative model together with economic
forecasts and assessment 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 (e.g. decreased growth/earnings, new competition, or lessened
financial or managerial stability of the company)? (3) Has the adviser's
outlook changed (e.g. anticipated changes in the company's market place do not
result)?
The fund's domestic equity securities usually consist of U.S. common and
preferred stocks and warrants of companies with market capitalization of $1.5
billion or greater. The stocks are listed on the New York or American Stock
Exchanges or traded in the over-the-counter market.
To a limited degree, the fund may also invest in:
|X| domestic debt securities rated Baa or higher by Moody's or rated BBB or
higher by S&P or Fitch (i.e., notes, zero coupon bonds and convertible
securities of U.S. companies)
|X| U.S. government securities (i.e., direct obligations of the U.S. Treasury)
|X| real estate investment trusts
|X| investment grade structured fixed-income securities (i.e.,
mortgage-backed securities, adjustable rate mortgage securities,
collateralized mortgage obligations and asset-backed securities)
|X| international securities (including other investment companies, American
Depositary Receipts and International Depositary Receipts)
|X| options and futures
|X| money market instruments
TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other
conditions, the fund may invest up to 100% of its assets in U.S. and foreign
short-term money market instruments. The fund may invest up to 35% of its assets
in these securities to maintain liquidity. Some of the short-term money market
instruments include:
|X| commercial paper
|X| certificates of deposit, demand and time deposits and bankers' acceptances
|X| U.S. government securities
|X| repurchase agreements
To the extent the fund engages in this temporary, defensive strategy, the fund
may not achieve its investment objective.
INVESTMENT RISKS
The following risks are specific to this fund in addition to the risks mentioned
in the Overview section.
SMALL- AND MEDIUM-SIZE COMPANIES RISKS The fund may invest in the stocks of
small- to medium-size 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.
REAL ESTATE INVESTMENT TRUSTS RISKS Some of the risks of equity and mortgage
real estate investment trusts (REITs) are that they depend on management skills
and are not diversified. As a result, REITs are subject to the risk of financing
either single projects or any number of projects. REITs depend on heavy cash
flow and may be subject to defaults by borrowers and self-liquidation.
Additionally, equity REITs may be affected by any changes in the value of the
underlying property owned by the trusts. Mortgage REITs may be affected by the
quality of any credit extended. The adviser tries to minimize these risks by
selecting REITs diversified by sector (I.E., shopping malls, apartment building
complexes, health care facilities) and geographic location.
MORTGAGE AND ASSET-BACKED SECURITIES RISKS The main risk of mortgage and
asset-backed securities is that the borrower will prepay some or all of the
principal owed to the issuer. If that happens, the fund may have to replace the
security by investing the proceeds in a lower yielding security. This could
reduce the fund's share price and its income distributions.
FOREIGN SECURITIES RISKS The fund can invest in foreign securities, which can
carry higher returns, but involve more risks than those associated with domestic
investments. Additional risks include currency fluctuations, political and
economic instability, differences in financial reporting standards and less
stringent regulation of securities markets.
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 a fund or if the strategy does not correlate well
with the fund's investments. The use of futures and options on futures may
produce a loss for the fund, even when used only for hedging purposes and you
could lose more money than you invested because of the fund's use of options.
PAST PERFORMANCE
The bar chart and table below illustrate the variability of the GROWTH EQUITY
FUND'S returns. The bar chart indicates the risks of investing in the fund by
showing the changes in the fund's performance from year to year (on a calendar
year basis). The table shows how the fund's average annual returns for one-year,
five-years, and since inception ended December 31, 1999 compare with broad
measures of market performance. THE FUND'S PAST PERFORMANCE DOES NOT PREDICT
FUTURE PERFORMANCE.
Growth Equity Fund - B Shares
Calendar Year Returns as of 12/31
1995 27.37%
1996 23.35%
1997 25.28%
1998 28.05%
1999 25.42%
Sales charges are not reflected in the bar chart. If these amounts were
reflected, returns would be less than those shown.
BEST QUARTER: Q4 1998 23.49%
WORST QUARTER: Q3 1998 -10.87%
- ------------------------------------ ---------- ------------ -----------
AVERAGE ANNUAL TOTAL RETURN Since
THROUGH 12/31/99 1 Year 5 Years Inception1
- ------------------------------------ ---------- ------------ -----------
Growth Equity Fund A Shares N/A N/A N/A
B Shares 20.42% 25.80% 26.41%
Y Shares 25.84% N/A 25.09%
S&P 500 Index2 21.05% 28.54% 28.58%
- ------------------------------------ ---------- ------------ -----------
THE AVERAGE ANNUAL TOTAL RETURNS ABOVE REFLECT THE SALES CHARGES.
1 A Shares commenced operations on March 31, 2000. B Shares commenced operations
on December 12, 1994. Y Shares commenced operations on August 18, 1997. The
indices show returns since the inception of the B Shares on December 12, 1994.
2 The S&P 500 Index is an unmanaged index of 500 domestic stocks created by
Standard & Poor's Corporation. The Index is heavily weighted toward stocks with
large market capitalization and represents approximately two-thirds of the total
market value of all domestic common stocks.
FUND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- ---------------------------------- -------- -------- ---------
SHAREHOLDER FEES (FEES PAID
DIRECTLY FROM YOUR INVESTMENT) CLASS A CLASS B CLASS Y
- ---------------------------------- -------- -------- ---------
MAXIMUM SALES CHARGE (LOAD)
IMPOSED ON PURCHASES (as a
percentage of offering price) 5.50% None None
MAXIMUM DEFERRED SALES CHARGE
(LOAD) (as a percentage of
offering price)1 None 5.00% None
MAXIMUM SALES CHARGE (LOAD)
IMPOSED ON REINVESTED DIVIDENDS None None None
REDEMPTION FEE None None None
EXCHANGE FEE None None None
- ---------------------------------- -------- -------- ---------
- ---------------------------------- --------- -------- --------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND CLASS A CLASS B CLASS Y
ASSETS)
- ---------------------------------- --------- -------- --------
MANAGEMENT FEES 0.75% 0.75% 0.75%
DISTRIBUTION AND SERVICE (12B-1)
FEES 0.25% 0.25% None
OTHER EXPENSES2 0.48% 0.48% 0.48%
TOTAL ANNUAL FUND OPERATING
EXPENSES 1.48% 1.48% 1.23%
- ---------------------------------- --------- -------- --------
1 The contingent deferred sales charge for the B shares is 5.00% in the first
year, declining to 1.00% in the sixth year. Thereafter class B shares convert to
class A shares, which do not bear a contingent deferred sales change. See
"Description of Classes."
2 "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 0.23% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at anytime.
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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $692 $992 $1,313 $2,221
CLASS B $651 $768 $1,008 $1,768
CLASS Y $125 $390 $ 676 $1,489
- ------------- -------- --------- ---------- -----------
If you did not redeem your shares, you would pay the following expenses:
- ------------- -------- --------- ---------- -----------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $692 $992 $1,313 $2,221
CLASS B $151 $468 $ 808 $1,768
CLASS Y $125 $390 $ 676 $1,489
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 24.
RELATIVE VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
The RELATIVE VALUE FUND'S goal is to obtain the highest total return from a
combination of income and capital appreciation.
INVESTMENT POLICIES AND PORTFOLIO SECURITIES
To achieve its objective, the fund invests primarily in common stocks. The
stocks in which the fund may invest include stocks that the fund's investment
adviser believes represent the best values within each industry sector. In the
adviser's opinion, stocks with the best values present characteristics
consistent with low volatility, above average yields, and are under valued
relative to the stocks comprising the Standard & Poor's 500 Composite Stock
Price Index. Under normal circumstances, the fund will invest at least 70% of
its assets in common stocks, which to a limited extent may include stocks of
foreign issuers. To obtain income, the fund may invest a significant portion of
its assets in investment grade fixed-income securities such as domestic issues
of corporate debt obligations with short and intermediate terms. In this manner,
the fund will attempt to obtain the highest total return that it can within the
constraints of its investment policies and restrictions.
The investment adviser uses traditional research techniques when choosing which
stocks to invest in. The adviser selects securities and attempts to maintain an
acceptable level of risk largely through the use of automated quantitative
measurement techniques. The adviser considers the following "value"
characteristics when using this research technique:
|X| price/earnings ratios,
|X| dividend yield,
|X| book value,
|X| assets to liabilities ratio,
|X| management ownership,
|X| average daily trading volume, and
|X| credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The investment adviser uses the quantitative model together with economic
forecasts and assessment of the risk and volatility of the company's industry.
The adviser assesses the earnings and dividend growth prospects of the various
companies' stock and then considers the risk and volatility of the company's
industry. The adviser typically invests in common stocks of companies that are
in the top 25% of their industries with regard to revenues. The adviser also
considers other factors such as product position or market share.
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 (e.g. decreased growth/earnings, new competition, lessened
financial or managerial stability of the company, or the security's interest
rate is not a favorable as other securitie's interest rates)? (3) Has the
adviser's outlook changed (e.g. anticipated changes in the company's market
place do not result)?
TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other
conditions, the fund may invest up to 100% of its assets in short-term temporary
investments. Some of the short-term money market instruments include:
|X| commercial paper
|X| certificates of deposit, demand and time deposits and bankers' acceptances
|X| U.S. government securities
|X| repurchase agreements
To the extent that the fund engages in this temporary, defensive strategy, the
fund may not achieve its investment objective.
INVESTMENT RISKS
The following risks are specific to this fund in addition to the risks mentioned
in the Overview section.
VALUE STYLE INVESTING RISKS Different types of equity securities tend to shift
in and out of favor depending on market and economic conditions, and the
performance resulting from the Fund's "value" investment style may sometimes be
lower than that of other types of equity funds, such as those focusing more
exclusively on growth in earnings.
FOREIGN SECURITIES RISKS The fund can invest in foreign securities, which can
carry higher returns, but involve more risks than those associated with domestic
investments. Additional risks include currency fluctuations, political and
economic instability, differences in financial reporting standards and less
stringent regulation of securities markets.
PAST PERFORMANCE
The bar chart and table below illustrate the variability of the RELATIVE VALUE
FUND'S returns. The bar chart indicates the risks of investing in the fund by
showing the changes in the fund's performance from year to year (on a calendar
year basis). The table shows how the fund's average annual returns for one-year,
five-years, and since the fund's inception ended December 31, 1999 compare with
broad measures of market performance. THE FUND'S PAST PERFORMANCE DOES NOT
PREDICT FUTURE PERFORMANCE.
Relative Value Fund - A Shares
Calendar Year Returns as of 12/31
1992 11.19%
1993 13.73%
1994 -2.63%
1995 35.69%
1996 26.45%
1997 32.20%
1998 18.25%
1999 6.96%
Sales charges are not reflected on the bar chart. If these amounts were
reflected, returns would be less than those shown.
BEST QUARTER: Q4 1998 21.33%
WORST QUARTER: Q3 1998 -12.29%
- ----------------------------------- --------- -------- -----------
AVERAGE ANNUAL TOTAL RETURN 1 Year 5 Year Since
THROUGH 12/31/99 Inception1
- ----------------------------------- --------- -------- -----------
Relative Value Fund A Shares 2.16% 22.33% 15.48%
B Shares 1.63% N/A 4.98%
Y Shares 7.42% N/A 13.91%
S&P 500 Index2 21.05% 28.54% 19.44%
Lipper Growth & Income Average3 11.23% 22.56% 16.09%
- ----------------------------------- --------- -------- -----------
THE AVERAGE ANNUAL TOTAL RETURNS ABOVE REFLECT THE SALES CHARGES.
1 A Shares commenced operations on June 5, 1991. B Shares commenced operations
on March 31, 1998. Y Shares commenced operations on August 18, 1997. The indices
show returns since the inception of the A shares on June 5, 1991.
2 The S&P 500 Index is an unmanaged index of 500 domestic stocks created by
Standard & Poor's Corporation. The Index is heavily weighted toward stocks with
large market capitalization and represents approximately two-thirds of the total
market value of all domestic common stocks.
3 The Lipper Growth & Income Average shows the performance of a category of
mutual funds with similar goals to the RELATIVE VALUE FUND.
FUND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- -------------------------------------- ------- ------- -------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR CLASS A CLASS B CLASS Y
INVESTMENT)
- -------------------------------------- ------- ------- -------
MAXIMUM SALES CHARGE (LOAD) IMPOSED
ON PURCHASES (as a percentage of
offering price) 5.50% None None
MAXIMUM DEFERRED SALES CHARGE (LOAD)
(as a percentage of offering price)1 None 5.00% None
MAXIMUM SALES CHARGE (LOAD) IMPOSED
ON REINVESTED DIVIDENDS None None None
REDEMPTION FEE None None None
EXCHANGE FEE None None None
- -------------------------------------- ------- ------- -------
- -------------------------------------- ------- ------- -------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS) CLASS A CLASS B CLASS Y
- -------------------------------------- ------- ------- -------
MANAGEMENT FEES 0.75% 0.75% 0.75%
DISTRIBUTION AND SERVICE (12B-1) FEES 0.25% 0.25% None
OTHER EXPENSES2 0.46% 0.46% 0.46%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.46% 1.46% 1.21%
- -------------------------------------- ------- ------- -------
1 The contingent deferred sales charge for the B shares is 5.00% in the first
year, declining to 1.00% in the sixth year. Thereafter class B shares convert to
class A shares, which do not bear a contingent deferred sales charge. See
"Description of Classes."
2 "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 0.21% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at anytime.
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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $690 $986 $1,304 $2,200
CLASS B $649 $762 $ 997 $1,746
CLASS Y $123 $384 $ 665 $1,466
- ------------- -------- --------- ---------- -----------
If you did not redeem your shares, you would pay the following expenses:
- ------------- -------- --------- ---------- -----------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $690 $986 $1,304 $2,200
CLASS B $149 $462 $ 797 $1,746
CLASS Y $123 $384 $ 665 $1,466
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 24.
SCIENCE & TECHNOLOGY FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
The investment objective of the SCIENCE & TECHNOLOGY FUND is to maximize growth
and capital appreciation by investing in equity securities of companies in the
science and technology industry.
INVESTMENT POLICIES AND PORTFOLIO SECURITIES
The fund seeks to achieve its investment objective by investing primarily in
equity securities of companies in the science and/or technology sectors. Under
normal market conditions, the fund will invest at least 65% of the value of its
total assets in common stock, preferred stocks and warrants of companies of any
size principally engaged in science and technology business activities. The fund
considers science and technology sectors to include companies whose primary
business is to provide goods or services in the fields of science (I.E., medical
and health) or technology (I.E., computers and communications). Such companies
include those that:
|X| make or sell products used in health care;
|X| make or sell medical equipment and devices and related technologies;
|X| make or sell software or information-based services and consulting,
communications and related services;
|X| design, manufacture or sell electronic components and systems;
|X| research, design, develop, manufacture or distribute products, processes or
services that relate to hardware technology within the computer industry;
|X| develop, produce or distribute products or services in the computer,
semi-conductor, electronics, communications, health care and biotechnology
sectors; and
|X| engage in the development, manufacturing or sale of communications services
or communications equipment.
The adviser believes that because of rapid advances in technology and science,
an investment in companies with business operations in these areas will offer
substantial opportunities for long-term capital appreciation. It is important to
note that prices of common stocks of even the best managed, most profitable
corporations are subject to market risk, which means their stock prices can
decline.
The adviser's overall stock selection for the fund is not based on the
capitalization or size of the company but rather on an assessment of the
company's fundamental prospects. The fund may invest in small, medium or large
size companies. The adviser will select securities while attempting to maintain
an acceptable level of risk largely through the use of automated quantitative
measurement techniques. The adviser will consider the following factors when
using this research technique:
|X| price/earnings ratios,
|X| historical and projected earnings growth rates,
|X| historical sales growth rates,
|X| historical return on equity,
|X| market capitalization,
|X| average daily trading volume, and
|X| 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.
To a limited degree, the fund may invest in foreign securities as well as
options and futures for hedging purposes. 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 (e.g. decreased
growth/earnings, new competition, or lessened financial or managerial stability
of the company)? (3) Has the adviser's outlook changed (e.g. anticipated changes
in the company's market place do not result)?
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:
|X| commercial paper
|X| certificates of deposit, demand and time deposits and bankers' acceptance
|X| U.S. government securities
|X| 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
The following risks are specific to this fund in addition to the risks mentioned
in the overview section.
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.
IPO RISKS The fund may invest in public offerings (IPOs). IPOs may have a
magnified performance impact on a fund with small asset base. The impact of IPOs
on the fund's performance will decrease as the fund's asset size increases.
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 and you
could lose more money than you invested because of the fund's use of options.
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.
PAST PERFORMANCE
Because the fund has been in existence for less than one year, there is no bar
chart or annual return table to show the fund's performance at this time.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- -------------------------------------- ------- ------- ------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR CLASS A CLASS B CLASS Y
INVESTMENT)
- -------------------------------------- ------- ------- ------
MAXIMUM SALES CHARGE (LOAD) IMPOSED
ON PURCHASES (as a percentage of
offering price) 5.50% None None
MAXIMUM DEFERRED SALES CHARGE (LOAD)
(as a percentage of offering price)1 None 5.00% None
MAXIMUM SALES CHARGE (LOAD) IMPOSED
ON REINVESTED DIVIDENDS None None None
REDEMPTION FEE None None None
EXCHANGE FEE None None None
- -------------------------------------- ------- ------- ------
- -------------------------------------- ------- ------- ------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS) CLASS A CLASS B CLASS Y
- -------------------------------------- ------- ------- ------
MANAGEMENT FEES 0.90% 0.90% 0.90%
DISTRIBUTION AND SERVICE (12B-1) FEES 0.25% 0.75% None
OTHER EXPENSES2 0.50% 0.50% 0.50%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.65% 2.15% 1.40%
- -------------------------------------- ------- ------- ------
1 The contingent deferred sales charge for the B shares is 5.00% in the first
year, declining to 1.00% in the sixth year. Thereafter class B shares convert to
class A shares, which do not bear a contingent deferred sales charge. See
"Description of Classes."
2 "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 0.25% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at anytime.
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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $709 $1,042 $1,398 $2,397
CLASS B $718 $ 973 $1,354 $2,483
CLASS Y $143 $ 443 $ 766 $1,680
- ------------- -------- --------- ---------- -----------
If you did not redeem your shares, you would pay the following expenses:
- ------------- -------- --------- ---------- -----------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $709 $1,042 $1,398 $2,397
CLASS B $218 $ 673 $1,154 $2,483
CLASS Y $143 $ 443 $ 766 $1,680
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 24.
STELLAR FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
The STELLAR FUND seeks to maximize total return derived from a combination of
dividend income and capital appreciation. INVESTMENT POLICIES AND PORTFOLIO
SECURITIES The fund invests approximately 20% of net assets in each of the first
four categories listed below. The remaining 20% is invested in precious metal
securities or short-term securities or both. The fund's investment adviser
believes that by spreading the investment portfolio over several categories, the
fund can reduce the impact of drastic market movements that might affect any one
securities type. The fund will invest no more than 25% and no less than 15% in
any one category.
THE FUND INVESTS IN THESE CATEGORIES OF SECURITIES:
1. domestic equity securities
2. domestic fixed-income securities (including mortgage and asset-backed
securities)
3. international securities (equity and fixed income)
4. real estate securities (REITs)
5. precious metal securities and short-term securities
Within each category, the investment adviser attempts to reduce risk even
further by conducting careful investment analysis of each issuer. Part of the
adviser's analysis includes studying various value measures such as
price/earnings ratios, using ratings assigned by nationally recognized
statistical rating organizations, researching the company's credit, reviewing
the issuer's historical performance, examining the issuer's dividend growth
record and considering market trends.
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 (e.g. decreased growth/earnings, new competition, or lessened
financial or managerial stability of the company)? (3) Has the adviser's
outlook changed (e.g. anticipated changes in the company's market place do not
result)?
DOMESTIC EQUITY SECURITIES The equity portion of the fund includes U.S. common
and preferred stocks. The adviser chooses stocks that it believes to be
undervalued compared to stocks contained in the Standard & Poor's 500 Composite
Stock Price Index. The companies in which the fund invests may be small, medium
or large in size. The adviser considers the following factors when using this
research technique:
|X| price/earnings ratios,
|X| historical and projected earnings growth rates,
|X| historical sales growth rates,
|X| historical return on equity,
|X| market capitalization,
|X| average daily trading volume, and
|X| credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The investment adviser uses the quantitative model together with economic
forecasts and assessment of the risk and volatility of the company's industry.
DOMESTIC FIXED-INCOME SECURITIES The fixed-income portion of the fund includes
short to long-term, investment grade domestic corporate debt obligations,
obligations of the United States government, and notes, bonds, and discount
notes of U.S. government agencies or instrumentalities. The adviser selects
bonds based on the outlook for interest rates and their yields compared to other
bonds of similar quality and maturity. The fund will only invest in bonds rated
Baa or higher by Moody's Investors Service, Inc. or rated BBB or higher by S&P
or Fitch IBCA, Inc. If the bonds are unrated, the adviser will evaluate the
bonds before investing in them to determine if they are of similar quality to
the ratings indicated. The fixed-income portion of the fund also includes
mortgage-backed securities, adjustable rate mortgage securities, collateralized
mortgage obligations and asset-backed securities.
FOREIGN SECURITIES The international portion of the fund includes equity
securities of non-U.S. companies and corporate and government fixed-income
securities denominated in non-U.S. currencies. The international equity
securities include international stocks traded domestically or abroad through
various stock exchanges, American Depository Receipts (ADRs) or International
Depository Receipts (IDRs). The fixed-income securities include ADRs, IDRs, and
government securities of other nations. The fund will only invest in securities
rated Baa or better by Moody's or BBB or better by S&P. If the securities are
unrated, the adviser will only invest in them if it deems the securities to be
of comparable quality. The fund may also invest in shares of open-end and
closed-end management investment companies which invest primarily in
international equity securities.
REAL ESTATE SECURITIES The real estate portion of the fund includes equity
securities and convertible debt securities of real estate related companies and
real estate investment trusts (REITs). The real estate securities are traded
publicly, primarily on an exchange. Real estate securities are not considered
domestic equity securities for purposes of the fund's asset allocation
limitation.
PRECIOUS METAL SECURITIES The precious metal securities of the fund include
domestic and international equity securities of companies that explore for,
extract, process, or deal in precious metals such as gold, silver, palladium,
and platinum. The fund may also invest up to 5% of its net assets in domestic
and international asset-backed securities including debt securities, preferred
stock, or convertible securities for which the principal amount, redemption
terms, or conversion terms are related to the market price of some precious
metals such as gold bullion. The fund may purchase only asset-backed securities
rated Baa or better by Moody's or BBB or better by S&P. If the securities are
unrated, the adviser will only invest in them if it deems the securities to be
of comparable quality.
SHORT-TERM SECURITIES The short-term money market securities in which the fund
may invest include:
|X| mortgage-backed securities, adjustable rate mortgage securities,
collateralized mortgage obligations and asset-backed securities
|X| commercial paper rated A-1 by S&P, Prime-1 by Moody's or F-1 by Fitch
|X| instruments of domestic and foreign banks and savings associations (i.e.,
certificates of deposit, demand and time deposits and bankers' acceptances)
|X| short-term instruments which are not rated but are determined by the
Adviser to be of comparable quality to the securities in which the fund may
invest
|X| domestic corporate debt obligations rated Baa or higher by Moody's or BBB or
higher by S&P or Fitch
|X| obligations of the U.S. government or its agencies or instrumentalities
(U.S. Treasury obligations)
|X| repurchase agreements
|X| money market mutual funds
INVESTMENT RISKS
The following risks are specific to this fund in addition to the risks mentioned
in the Overview section.
FOREIGN SECURITIES RISK The fund can invest in foreign securities, which can
carry higher returns, but involve more risks than those associated with domestic
investments. Additional risks include currency fluctuations, political and
economic instability, differences in financial reporting standards and less
stringent regulation of securities markets.
MORTGAGE AND ASSET-BACKED SECURITIES RISKS The main risk of mortgage and
asset-backed securities is that the borrower will prepay some or all of the
principal owed to the issuer. If that happens, the fund may have to replace the
security by investing the proceeds in a lower yielding security. This could
reduce the fund's share price and its income distributions.
SMALL- AND MEDIUM-SIZE COMPANIES RISKS The fund may invest in the stocks of
small- to medium-size 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 portfolios.
REAL ESTATE INVESTMENT TRUSTS RISKS Some of the risks associated with real
estate investment trusts (REITs) are that equity and mortgage REITs depend on
management skills and are not diversified. As a result, REITs are subject to the
risk of financing either single projects or any number of projects. REITs depend
on heavy cash flow and may be subject to defaults by borrowers and
self-liquidation. Additionally, equity REITs may be affected by any changes in
the value of the underlying property owned by the trusts. Mortgage REITs may be
affected by the quality of any credit extended. The adviser tries to minimize
these risks by selecting REITs diversified by sector (I.E., shopping malls,
apartment building complexes, health care facilities) and geographic location.
The fund will generally be subject to risks associated with direct ownership of
real estate, such as decreases in real estate values or fluctuations in rental
income caused by a variety of factors, including increases in interest rates,
increases in property taxes and other operating costs, casualty or condemnation
losses, possible environmental liabilities and changes in supply and demand for
properties.
PRECIOUS METAL SECURITIES RISKS Prices of precious metal securities
and precious metals tend to be subject to high volatility. The earnings and
financial condition of precious metal companies may be adversely affected by
volatile precious metal prices.
OPTIONS RISKS The fund may use options 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 a fund or if
the strategy does not correlate well with the fund's investments. The use of
options may produce a loss for the fund, even when used only for hedging
purposes and you could lose more money than you invested because of the fund's
use of options.
PAST PERFORMANCE
The bar chart and table below illustrate the variability of the STELLAR FUND'S
returns. The bar chart indicates the risks of investing in the fund by showing
the changes in the fund's performance from year to year (on a calendar year
basis). The table shows how the fund's average annual returns for one-year,
five-years, and since the fund's inception ended December 31, 1999 compare with
broad measures of market performance. THE FUND'S PAST PERFORMANCE DOES NOT
PREDICT FUTURE PERFORMANCE.
Stellar Fund - A Shares
Calendar Year Returns as of 12/31
1992 4.54%
1993 13.08%
1994 -2.11%
1995 16.30%
1996 15.43%
1997 12.26%
1998 6.08%
1999 10.59%
Sales charges are not reflected on the bar chart. If these amounts were
reflected, returns would be less than those shown.
BEST QUARTER: Q4 1999 9.87%
WORST QUARTER: Q3 1998 -7.24%
- ------------------------------- --------- -------- ------------
AVERAGE ANNUAL TOTAL RETURN Since
THROUGH 12/31/99 1 Year 5 Years inception1
- ------------------------------- --------- -------- ------------
Stellar Fund A Shares 5.62% 11.04% 9.22%
B Shares N/A N/A N/A
Y Shares 10.87% 12.38% 10.72%
Lehman Brothers
Government/Corporate Total -2.15% 7.60% 7.59%
Index2
5 Class Index3 6.90% 12.28% 10.99%
- ------------------------------- --------- -------- ------------
THE AVERAGE ANNUAL TOTAL RETURNS ABOVE REFLECT THE SALES CHARGES.
1 A Shares commenced operations on October 18, 1991. B Shares commenced
operations on March 31, 2000. Y Shares commenced operations on April 11, 1994.
The indices show returns since the inception of the A Shares on October 18,
1991.
2 Lehman Brothers Government/Corporate Total Index is an unmanaged index
composed of bonds which have maturities of at least one year and are rated
investment grade or higher by Moody's, S&P or Fitch, in that order.
3 The 5 Class Index consists of 20% each of the S&P 500 Index, Lehman Brothers
Government/Corporate Total Index, 90-day U.S. Treasury Bill, Morgan Stanley
Europe, Australasia and Far East (EAFE) Index and the National Association of
Real Estate Investment Trusts (NAREIT) Index. The index is an index blended by
the adviser used to reflect the relative components of the STELLAR FUND.
FUND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- -------------------------------------- --------- ------- -------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR CLASS A CLASS B CLASS Y
INVESTMENT)
- -------------------------------------- --------- ------- -------
MAXIMUM SALES CHARGE (LOAD) IMPOSED
ON PURCHASES (as a percentage of
offering price) 5.50% None None
MAXIMUM DEFERRED SALES CHARGE (LOAD)
(as a percentage of offering price)1 None 5.00% None
MAXIMUM SALES CHARGE (LOAD) IMPOSED
ON REINVESTED DIVIDENDS None None None
REDEMPTION FEE None None None
EXCHANGE FEE None None None
- -------------------------------------- --------- ------- -------
- -------------------------------------- --------- -------- -------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS) CLASS A CLASS B CLASS Y
- -------------------------------------- --------- -------- -------
MANAGEMENT FEES 0.95% 0.95% 0.95%
DISTRIBUTION AND SERVICE (12B-1) 0.25% 0.75% None
FEES2
OTHER EXPENSES3 0.52% 0.52% 0.52%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.72% 2.22% 1.47%
- -------------------------------------- --------- -------- -------
1 The contingent deferred sales charge for the B shares is 5.00% in the first
year, declining to 1.00% in the sixth year. Thereafter class B shares convert to
class A shares, which do not bear a contingent deferred sales charge. See
"Description of Classes."
2 "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 0.27% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at any time.
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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $715 $1,062 $1,432 $2,469
CLASS B $725 $ 994 $1,390 $2,554
CLASS Y $150 $ 465 $ 803 $1,757
- ------------- -------- --------- ---------- -----------
If you did not redeem your shares, you would pay the following expenses:
- ------------- -------- --------- ---------- -----------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $715 $1,062 $1,432 $2,469
CLASS B $225 $ 694 $1,190 $2,554
CLASS Y $150 $ 465 $ 803 $1,757
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 24.
CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
The CAPITAL APPRECIATION FUND'S investment objective is to maximize capital
appreciation.
INVESTMENT POLICIES AND PORTFOLIO SECURITIES
The fund attempts to achieve its investment goal by investing at least 50% of
the value of its total assets in equity securities of U.S. companies. The fund
typically invests in common stocks, preferred stocks and warrants of U.S.
companies that have between $200 million and $10 billion in equity and whose
shares are listed on the New York or American Stock Exchanges or traded on
NASDAQ or over-the-counter. The fund will maximize the amount of capital
appreciation that it can within the constraints of its investment policies and
restrictions.
The fund's investment adviser selects securities and attempts to maintain an
acceptable level of risk largely through the use of automated quantitative
measurement techniques. The adviser considers the following factors when using
this research technique:
|X| price/earnings ratios,
|X| historical and projected earnings growth rates,
|X| historical sales growth rates,
|X| historical return on equity,
|X| market capitalization,
|X| average daily trading volume, and
|X| credit rankings based on nationally recognized statistical rating
organizations (NRSROs).
The investment adviser uses the quantitative model together with economic
forecast and assessment of the risk and volatility of each 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 (e.g. decreased growth/earnings, new competition, or lessened
financial or managerial stability of the company)? (3) Has the adviser's
outlook changed (e.g. anticipated changes in the company's market place do not
result)?
To a limited degree, the fund may also invest in:
|X| domestic debt securities (i.e., notes, zero coupon bonds and convertible
securities of U.S. companies)
|X| U.S. government securities (i.e., direct obligations of the U.S. Treasury)
|X| international securities (including other investment companies, American
Depositary Receipts and International Depositary Receipts)
|X| options and futures
|X| money market instruments
TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other
conditions, the fund may invest up to 100% of its assets in U.S. and foreign
short-term money market instruments. The fund may invest up to 35% of its assets
in these securities to maintain liquidity. Some of the short-term money market
instruments include:
|X| commercial paper
|X| certificates of deposit, demand and time deposits and bankers' acceptances
|X| U.S. government securities
|X| repurchase agreements
|X| other short-term instruments
To the extent the fund engages in this temporary, defensive strategy, the fund
may not achieve its investment objective.
INVESTMENT RISKS
The following risks are specific to this fund in addition to the risks mentioned
in the Overview section.
SMALL- AND MEDIUM-SIZE COMPANIES RISKS The fund may invest in the stocks of
small- to medium-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 portfolios.
FOREIGN SECURITIES RISKS The fund can invest in foreign securities, which can
carry higher returns, but involve more risks than those associated with domestic
investments. Additional risks include currency fluctuations, political and
economic instability, differences in financial reporting standards and less
stringent regulation of securities markets.
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 a fund or if the strategy does not correlate well
with the fund's investments. The use of futures and options on futures may
produce a loss for the fund, even when used only for hedging purposes and you
could lose more money than you invested because of the fund's use of options.
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.
PAST PERFORMANCE
The bar chart and table below illustrate the variability of the CAPITAL
APPRECIATION FUND'S returns. The bar chart indicates the risks of investing in
the fund by showing the changes in the fund's performance from year to year (on
a calendar year basis). The table shows how the fund's average annual returns
for one-year, five-years, and since inception ended December 31, 1999 compare
with broad measures of market performance. THE FUND'S PAST PERFORMANCE DOES NOT
PREDICT FUTURE PERFORMANCE.
Capital Appreciation Fund - A Shares
Calendar Year Returns as of 12/31
1995 15.17%
1996 9.46%
1997 19.69%
1998 10.01%
1999 5.49%
Sales charges are not reflected on the bar chart. If these amounts were
reflected, returns would be less than those shown.
BEST QUARTER: Q4 1999 20.84%
WORST QUARTER: Q3 1998 -14.71%
- --------------------------------------- --------- ---------- ------------
AVERAGE ANNUAL TOTAL RETURN Since
THROUGH 12/31/99 1 Year 5 Years Inception1
- --------------------------------------- --------- ---------- ------------
Capital Appreciation Fund - A Shares 0.75% 10.82% 10.00%
B Shares N/A N/A N/A
S&P MidCap 400 Index2 14.75% 23.01% 20.63%
Lipper MidCap Average3 9.33% 16.55% N/A
- --------------------------------------- --------- ---------- ------------
THE AVERAGE ANNUAL TOTAL RETURNS ABOVE REFLECT THE SALES CHARGES.
1 A Shares commenced operations on June 13, 1994. B shares commenced operations
on March 31, 2000. The indices show returns since the inception of the A shares
on June 13, 1994.
2 The S&P MidCap 400 Index is an unmanaged index of 400 domestic stocks
created by Standard & Poor's Corporation which measures the performance of the
mid-range section of the U.S. Stock Market.
3 The Lipper MidCap Average shows the performance of a category of mutual funds
with similar goals to the CAPITAL APPRECIATION FUND.
FUND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- ---------------------------------------- --------- ---------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR CLASS A CLASS B
INVESTMENT)
- ---------------------------------------- --------- ---------
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON 5.50% None
PURCHASES (as a percentage of offering
price)
MAXIMUM DEFERRED SALES CHARGE (LOAD)1 None 5.00%
(as a percentage of offering price)
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON None None
REINVESTED DIVIDENDS
REDEMPTION FEE None None
EXCHANGE FEE None None
- ---------------------------------------- --------- ---------
- ---------------------------------------- --------- ---------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS) CLASS A CLASS B
- ---------------------------------------- --------- ---------
MANAGEMENT FEES 0.95% 0.95%
DISTRIBUTION AND SERVICE (12B-1) FEES2 0.25% 0.75%
OTHER EXPENSES3 0.50% 0.50%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.70% 2.20%
- ---------------------------------------- --------- ---------
1 The contingent deferred sales charge for the B shares is 5.00% in the first
year, declining to 1.00% in the sixth year. Thereafter class B shares convert to
class A shares, which do not bear a contingent deferred sales charge. See
"Description of Classes."
2 Currently, class A shares of the fund are not paying or accruing Rule 12b-1
fees. The class can pay up to 0.25% of average daily net assets as a Rule 12b-1
fee to the distributor if a Y class of shares is created. The B shares are
subject to a 12b-1 fee of 0.75% of average daily net assets.
3 "Other Expenses" includes (1) administration fees, transfer agency fees and
all other ordinary operating expenses of the fund not listed above which are
estimated to total 0.25% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at anytime.
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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $713 $1,056 $1,422 $2,448
CLASS B $723 $ 988 $1,380 $2,534
- ------------- -------- --------- ---------- -----------
If you did not redeem your shares, you would pay the following expenses:
- ------------- -------- --------- ---------- -----------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $713 $1,056 $1,422 $2,448
CLASS B $223 $ 688 $1,180 $2,534
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 24.
INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
The INTERNATIONAL EQUITY FUND'S investment objective is to achieve long-term
capital appreciation.
INVESTMENT POLICIES, PORTFOLIO SECURITIES AND RISKS
To achieve its investment goal, the fund invests, under normal market
conditions, at least 65% of the value of its total assets in shares of other
mutual funds whose portfolios consist of equity securities of non-U.S. issuers.
As an operational policy, the fund will likely invest substantially all of its
assets in international equity funds, but may invest a small portion in
individual foreign securities.
THE FUND INVESTS IN OTHER INTERNATIONAL EQUITY FUNDS (I.E., FUNDS THAT INVEST
PRIMARILY IN EQUITY SECURITIES OF COMPANIES LOCATED IN 3 OR MORE COUNTRIES
OUTSIDE THE U.S.)
The fund may purchase shares of both load and no-load funds including those with
a contingent deferred sales charge. However, the fund anticipates that it will
generally purchase no-load fund shares that qualify for a reduced sales charge
or sales charge waiver. The Investment Company Act of 1940 restricts the fund's
ability to purchase securities of another mutual fund, if as a result, the fund
(together with any affiliates) would own more than 3% of the total outstanding
securities of that mutual fund.
INVESTING IN NON-U.S. SECURITIES PROVIDES YOU WITH 3 POTENTIAL OPPORTUNITIES:
1. The opportunity to invest in foreign issuers believed by the adviser to have
superior growth potential;
2. The opportunity to invest in foreign countries with economic policies or
business cycles different from the U.S.; and
3. The opportunity to reduce portfolio volatility to the extent that the
securities markets inside and outside the U.S. do not move in harmony.
The investment adviser identifies and selects a varied portfolio of
international equity funds which represents the greatest long-term capital
growth potential based on the adviser's analysis of many factors. For instance,
the adviser may look for international equity funds that invest primarily in
emerging markets or funds that focus their investments on geographic regions.
Before investing in an international equity fund, the adviser
FIRST: assesses the relative attractiveness of individual countries,
geographic regions and/or emerging markets by examining the opinions
of various foreign market analysts such as Lehman Brothers, and Morgan
Stanley Dean Witter.
SECOND: considers the expected returns and risks of the fund relative to the
industries in which the fund invests. The adviser considers whether
the fund and the companies in which it invests have solid management,
new product lines. The adviser also performs a quantitative analysis
by considering a company's price/earnings ratios and projected
earnings.
THIRD: involves an initial peer group screening process that assesses fund
investment style, objectives, policies and management. The peer group
also considers independent rating services such as Baseline, Lehman
Brothers, and Morgan Stanley Dean Witter.
If, in the adviser's view, the mutual fund meets these criteria, then the
adviser will further evaluate the mutual fund's investment policies, historic
total return, size, volatility and operating expenses over various time periods.
The adviser also considers the differences between the funds and another mutual
fund's investment restrictions when making any investment decisions.
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 (e.g. decreased growth/earnings or new competition)? (3) Has the
adviser's outlook changed (e.g. anticipated changes in the company's market
place do not result)?
UNDERLYING FUNDS The underlying international equity funds in which the fund
invests may have similar policies as the fund, although this is not required.
The underlying funds may invest up to 100% of their total assets in equity
securities of foreign issuers, including international stocks.
Although the fund is a diversified investment portfolio, it may invest in
non-diversified mutual funds or in funds that invest a substantial portion of
its assets in a single country. This may result in greater fluctuation in the
total market value of the underlying fund's portfolio because of the higher
percentage of investments among fewer issuers or in a single country. The fund
intends to reduce these risks by holding shares of multiple funds.
The underlying funds may also be authorized to invest up to 100% of their
respective assets in securities of foreign issuers and engage in foreign
currency transactions with respect to these investments. The underlying funds
may invest primarily in either the securities of emerging market countries or in
the securities of a single country. The funds may invest 35% or more of their
respective assets in high yield securities (junk bonds) or warrants. They may
engage in short selling and in leveraged borrowing and enter into interest rate
swaps, currency swaps and other types of swap agreements such as caps, collars
and floors.
The fund will normally invest in open-end management investment companies, but
may also invest in closed-end management investment companies and/or unit
investment trusts. Unlike open-end funds that offer and sell their shares at net
asset value plus any applicable sales charge, the shares of closed-end funds may
trade at a market value that represents a premium, discount or spread to net
asset value.
TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other
conditions, the fund may invest up to 100% of its total assets in money market
mutual funds or in short-term debt securities. The fund may invest up to 35% of
the total assets in these securities to maintain liquidity. Short-term debt
securities include:
|X| commercial paper
|X| certificates of deposit, demand and time deposits and bankers' acceptances
|X| U.S. government securities
|X| repurchase agreements
|X| other short-term instruments
To the extent the fund engages in this temporary, defensive strategy, the fund
may not achieve its investment objective.
INVESTMENT RISKS
The following risks are specific to this fund in addition to the risks mentioned
in the Overview section.
UNDERLYING FUNDS RISKS The fund's performance directly relates to the
performance of the funds in which it invests. This investment strategy also
subjects the fund to additional expenses and certain tax consequences that would
not exist if you invested in those funds directly. By investing in the fund, you
bear not only the fund's total operating expenses, but the operating expenses of
the underlying funds as well.
FOREIGN SECURITIES RISKS Investing in foreign securities can carry higher
returns than those associated with domestic investments. However, foreign
securities may be substantially riskier than domestic investments. The economies
of foreign countries may differ from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
Furthermore, the economies of developing countries generally are heavily
dependent on international trade and, accordingly, have been, and may continue
to be, adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protective measures imposed or
negotiated by the countries with which they trade. These economies also have
been, and may continue to be, adversely affected by economic conditions in the
countries with which they trade.
Funds may be required to obtain prior governmental approval for foreign
investments in some countries under certain circumstances. Governments may
require approval to invest in certain issuers or industries deemed sensitive to
national interests, and the extent of foreign investment in certain debt
securities and domestic companies may be subject to limitation. Individual
companies may also limit foreign ownership to prevent, among other things,
violation of foreign investment limitations.
Some foreign investments may risk being subject to repatriation controls that
could render such securities illiquid. Other countries might undergo
nationalization, expropriation, political changes, governmental regulation,
social instability or diplomatic developments (including war) that could
adversely affect the economies of such countries or the value of the investments
in those countries. For this reason, funds that invest primarily in the
securities of a single country will be greatly impacted by any political,
economic or regulatory developments affecting the value of the securities.
Additional risks include currency fluctuations, political and economic
instability, differences in financial reporting standards and less stringent
regulation of securities markets.
SMALL- AND MEDIUM-SIZE COMPANIES RISKS The fund may invest in the stocks of
small- to medium-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 portfolios.
HIGH-YIELD BOND RISKS The fund (via underlying funds) may invest in high-yield
bonds (generally referred to as junk bonds). Junk bonds are considered
predominantly speculative by traditional investment standards. The market value
of these low-rated securities tends to be more sensitive to individual corporate
developments and changes in interest rates and economic conditions than
higher-rated securities. In addition, they generally present a higher degree of
credit risk. Issuers of low-rated securities are often highly leveraged, so
their ability to repay their debt during an economic downturn or periods of
rising interest rates may be impaired.
FUTURES AND OPTIONS ON FUTURES RISKS The fund (via underlying funds) 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 a fund or if the
strategy does not correlate well with the fund's investments. The use of futures
and options on futures, which are commonly referred to as derivatives, may
produce a loss for the fund, even when used only for hedging purposes.
PAST PERFORMANCE
The bar chart and table below illustrate the variability of the INTERNATIONAL
EQUITY FUND'S returns. The bar chart indicates the risks of investing in the
fund by showing the changes in the fund's performance from year to year (on a
calendar year basis). The table shows how the fund's average annual returns for
one-year and since inception ended December 31, 1999 compare with those of a
broad measure of market performance. THE FUND'S PAST PERFORMANCE DOES NOT
PREDICT FUTURE PERFORMANCE.
International Equity Fund - A Shares
Calendar Year Return as of 12/31
1998 8.51%
1999 37.25%
Sales charges are not reflected on the bar chart. If these amounts were
reflected, returns would be less than those shown.
BEST QUARTER: Q4 1999 25.23%
WORST QUARTER: Q3 1998 -15.65%
- ------------------------------------- --------- ------------
AVERAGE ANNUAL TOTAL RETURN Since
THROUGH 12/31/99 1 Year Inception1
- ------------------------------------- --------- ------------
International Equity Fund A Shares 35.20% 20.27%
EAFE Index2 25.26% 21.25%
- ------------------------------------- --------- ------------
THE AVERAGE ANNUAL TOTAL RETURNS ABOVE REFLECT THE SALES CHARGES.
1 A Shares commenced operations on December 3, 1997. The index shows returns
since the inception of the A shares on December 3, 1997.
2 The Morgan Stanley Europe, Australasia and Far East (EAFE) Index is widely
used to measure the performance of European, Australian, New Zealand and Far
Eastern Stock Markets. The Index is composed of securities drawn from 21
countries in the above regions.
FUND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- ------------------------------------------- --------------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A
- ------------------------------------------- --------------
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON 1.50%
PURCHASES (as a percentage of offering
price)
MAXIMUM DEFERRED SALES CHARGE (LOAD) None
(as a percentage of offering price)
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON None
REINVESTED DIVIDENDS
REDEMPTION FEE None
EXCHANGE FEE None
- ------------------------------------------- --------------
- ------------------------------------------- --------------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS) CLASS A
- ------------------------------------------- --------------
MANAGEMENT FEES 0.75%
DISTRIBUTION AND SERVICE (12B-1) FEES1 0.25%
OTHER EXPENSES2 0.52%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.52%
- ------------------------------------------- --------------
1 Currently, A shares of the fund are not paying or accruing Rule 12b-1 fees.
The class can pay up to 0.25% of average daily net assets as a Rule 12b-1 fee to
the distributor if a Y class of shares is created.
2 "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 0.27% of average daily net assets, plus (2) an annual
shareholder servicing fee of 0.25% of average daily net assets. The fund plans
to limit the shareholder servicing fee to an annual rate of 0.16% of average
daily net assets although this waiver can be modified or terminated at any time.
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 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $302 $623 $967 $1,935
- ------------- -------- --------- ---------- -----------
If you did not redeem your shares, you would pay the following expenses:
- ------------- -------- --------- ---------- -----------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- -------- --------- ---------- -----------
CLASS A $302 $623 $967 $1,935
- ------------- -------- --------- ---------- -----------
CLASS DESCRIPTIONS ARE ON PAGE 24.
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Firstar Investment Research & Management Company, LLC (FIRMCO), a wholly owned
subsidiary of Firstar Corporation, is the investment adviser for the funds.
Prior to April 1, 2000, the funds were managed by the Capital Management
Division of Firstar Bank, N.A., which is also a wholly owned subsidiary of
Firstar Corporation. As part of an internal restructuring of the investment
advisory function within Firstar Corporation, the investment management
resources of the Capital Management Division of Firstar Bank, N.A. have been
consolidated with those of FIRMCO. Management of the funds was not affected by
this consolidation. The investment decisions made by FIRMCO are subject to
direction of the funds' 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 funds and is
responsible for the purchase and sale of securities for the funds' portfolios.
The adviser receives an annual fee from each fund for its services as follows:
THE AMOUNTS SHOWN REPRESENT A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET
ASSETS.
- ----------------------------- -----------
Growth Equity Fund 0.75%
Relative Value Fund 0.75%
Science & Technology Fund 0.90%
Stellar Fund 0.95%
Capital Appreciation Fund 0.95%
International Equity Fund 0.75%
- ----------------------------- -----------
FIRMCO, located at the Firstar Center, 777 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, has provided investment advisory services since 1986. FIRMCO
currently has $35.3 billion in assets under management.
PORTFOLIO MANAGERS
JOSEPH P. BELEW, a Vice President, Trust Officer and Portfolio Manager of the
Firstar Trust Division at Firstar Bank, N.A., Butler County, has been employed
by Firstar Bank in various capacities since 1979. Mr. Belew has been the
portfolio manager of the RELATIVE VALUE FUND since its inception in June 1991.
He earned a Bachelor of Business Administration degree in Business Management
from Belmont College.
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 GROWTH EQUITY FUND since its inception in
October 1994. He managed the domestic equity securities component of the STELLAR
FUND from its inception in October 1991 through December 1995. In May 1999, Mr.
Keller became the portfolio manager of the INTERNATIONAL EQUITY FUND and became
the lead manager of the STELLAR FUND. He also supported the domestic and
international equity and fixed income components of CAPITAL APPRECIATION FUND
from its inception in June 1994 through December 1995. Mr. Keller became the
lead manager of the CAPITAL APPRECIATION FUND in March 1999. Mr. Keller has
managed the SCIENCE & TECHNOLOGY FUND since its inception on August 1999. Mr.
Keller earned a Bachelor of Business Administration Degree in Finance and
Accounting from the University of Cincinnati. He also earned his Masters in
Finance from Xavier University.
MARK DUBOIS, CFA, is a Vice President and Trust Officer in Firstar Trust's
Personal Trust area. As a Senior Portfolio Manager, Mr. DuBois has been
responsible for implementing and managing Firstar Bank's investment policy in
personal trusts, agencies, and IRAs since 1994. He is also the Health Care
analyst for Firstar Trust. Mr. DuBois has managed the domestic stock portion of
the STELLAR FUND since November 1997. Mr. DuBois joined Firstar Bank in 1986,
after graduating from Indiana University with a degree in Economics. In 1990, he
received his Chartered Financial Analyst designation.
KAREN L. BOWIE, CFA, is a Vice President in Firstar Trust's Personal Trust area.
As a Senior Portfolio Manager, Ms. Bowie is responsible for implementing and
communicating Firstar's investment policy in personal and charitable accounts.
Ms. Bowie is also the Banking, Brokerage and REIT analyst for Firstar Trust. Ms.
Bowie is the manager of the Firstar Select Reit-Plus Fund and she manages the
REIT portion of the STELLAR FUND. Ms. Bowie has over 15 years of trust and
investment management experience with five of those years spent at Firstar. Ms.
Bowie earned both her BSBA and MBA in Finance from Xavier University. She also
has a Juris Doctorate degree from Salmon P. Chase College of Law, Northern
Kentucky University. In 1987, Ms. Bowie received her Chartered Financial Analyst
designation.
KIRK F. MENTZER, Vice President and Director of Fixed Income Research for the
Capital Management Division of Firstar Bank since 1992, has been employed by
Firstar Bank in various capacities since 1989. Mr. Mentzer has managed the
domestic fixed income component of the STELLAR FUND since its inception in
October 1991 and has managed the cash equivalent components of the various
Firstar Stellar Funds since June 1998. Mr. Mentzer earned a Bachelor of Business
Administration degree in Finance from the University of Cincinnati and a Masters
degree in Finance from Xavier University.
FUND ADMINISTRATION, FUND ACCOUNTING, DIVIDEND DISBURSEMENT, AND CUSTODY
SERVICES
Firstar Mutual Fund Services, LLC, an affiliate of the funds' investment
adviser, provides administrative, accounting and dividend disbursement services
to the Firstar Stellar Funds and is located in Milwaukee, Wisconsin. Firstar
Bank, N.A., serves as custodian for the funds.
DISTRIBUTION OF SHARES
- --------------------------------------------------------------------------------
DISTRIBUTOR
Edgewood Services, Inc. is the distributor for shares of the funds. Edgewood is
based in Pittsburgh, Pennsylvania and is the distributor for a number of
investment companies around the country.
RULE 12B-1 PLAN
The funds have adopted a Rule 12b-1 Plan under the Investment Company Act of
1940. Under the Rule 12b-1 Plan, class A and B shares may pay up to an annual
rate of 0.25% of the average daily net asset value of shares to Edgewood (some
class B shares may pay up to 0.75% of average daily net assets). Edgewood uses
this fee to finance activities that promote the sale of the funds' 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 funds. 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
- --------------------------------------------------------------------------------
Firstar Stellar Funds offers four classes of shares - classes A, B, C and Y
shares. Class C shares are only offered with the money market funds and are
discussed in the money market prospectus. To receive a copy of the money market
or bond fund prospectus please call 1-800-677-FUND.
CLASS A SHARES
Class A shares are regular retail shares and may be purchased by individuals or
IRAs. With class A shares, you will pay a sales charge when you invest unless
you qualify for a waiver of the sales charge. Certain class A shares also impose
a Rule 12b-1 fee (as discussed previously) which is assessed against the shares
of the fund.
WHAT SHARES COST - CLASS A SHARES
If you purchase class A shares of the funds, except for the INTERNATIONAL EQUITY
FUND, you will pay the net asset value next determined after your order is
received PLUS a sales charge (shown in percentages below) depending on the
amount of your investment. The sales charge is calculated as follows:
- --------------- ----------- ----------- -------------
SALES SALES DEALERS
CHARGE AS CHARGE AS REALLOWANCE
A % OF A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE
- --------------- ----------- ----------- -------------
LESS THAN
$50,000 5.50% 5.82% 5.00%
- --------------- ----------- ----------- -------------
$50,000 TO
$100,000 4.50% 4.71% 4.00%
- --------------- ----------- ----------- -------------
$100,000 TO
$249,999 3.50% 3.63% 3.00%
- --------------- ----------- ----------- -------------
$250,000 TO
$499,999 2.50% 2.56% 2.00%
- --------------- ----------- ----------- -------------
$500,000 TO
$999,999 2.00% 2.04% 1.50%
- --------------- ----------- ----------- -------------
$1,000,000
AND ABOVE 0.50% 0.50% 0.40%
- --------------- ----------- ----------- -------------
If you purchase class A shares of the INTERNATIONAL EQUITY FUND, you will pay
the net asset value next determined after your order is received PLUS a sales
charge as follows:
- --------------- ----------- ----------- -------------
SALES SALES DEALERS
CHARGE AS CHARGE AS REALLOWANCE
A % OF A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE
- --------------- ----------- ----------- -------------
LESS THAN
$100,000 1.50% 1.52% 1.34%
- --------------- ----------- ----------- -------------
$100,000 -
$249,999.99 1.00% 1.01% 0.89%
- --------------- ----------- ----------- -------------
$250,000 -
$499,999.99 0.75% 0.76% 0.67%
- --------------- ----------- ----------- -------------
$500,000 + 0.50% 0.50% 0.45%
- --------------- ----------- ----------- -------------
NOTE: Sales charges are not imposed on shares purchased with reinvested
dividends.
WAIVERS - CLASS A SHARES
The following persons will not have to pay a sales charge on class A shares:
|X| Employees and retired employees of Firstar Bank or its affiliates,
and members of their families (including parents, grandparents,
siblings, spouses, children, and in-laws) of such employees or
retired employees;
|X| Firstar trust customers of Firstar Corporation and its subsidiaries; and
|X| non-trust customers of financial advisers
REDUCING YOUR SALES CHARGE - CLASS A SHARES
You can reduce the sales charge on purchases of class A shares by:
|X| purchasing larger quantities of shares or putting a number of purchases
together to obtain the quantity discounts indicated above;
|X| signing a letter of intent that you intend to purchase more than $100,000
worth of shares over the next 13 months;
|X| using the reinvestment privilege which allows you to redeem shares and then
immediately reinvest them without a sales charge within 60 days; and
|X| combining concurrent purchases of class A shares from different funds.
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 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.
WHAT SHARES COST - CLASS B SHARES
- ------------------------------ -------------------------------
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
- ------------------------------ -------------------------------
1 OR LESS 5.0%
1 - 2 4.0%
2 - 3 3.0%
3 - 4 3.0%
4 - 5 2.0%
5 - 6 1.0%
MORE THAN 6 None
- ------------------------------ -------------------------------
If you purchase class B shares of any of the funds, 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 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:
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
A redemption made under the Systematic Withdrawal Plan (see "Selling Shares")
will not be assessed CDSC as long as it does not amount to more than 10% of your
initial balance. CDSC is also not charged on:
|X| shares purchased by reinvesting your dividends or distributions of short or
long-term capital gains
|X| shares held for more than six full years after purchase
|X| redemptions made following death or disability (as defined by the IRS)
|X| 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
|X| redemptions made in shareholder accounts that do not have the required
minimum balance
WAIVERS - CLASS B SHARES
The following persons will not have to pay the CDSC on class B shares:
|X| Employees and retired employees of Firstar Bank or its affiliates, and
members of their families (including parents, grandparents, siblings,
spouses, children, and in-laws) of such employees or retired employees;
|X| Firstar trust customers of Firstar Corporation and its subsidiaries; and
|X| non-trust customers of financial advisers
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 other classes, the class Y shares do pay investment
management fees and other fees. Currently, the GROWTH EQUITY FUND, RELATIVE
VALUE FUND, SCIENCE & TECHNOLOGY FUND and STELLAR FUND sell class Y shares.
WHAT CLASS Y SHARES COST
If you purchase class Y shares of any of the funds, you will pay their NAV next
determined after your order is received. There is no sales charge on this class
at the time you purchase your shares.
PRICE OF 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 each 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. Currently the New York
Stock Exchange is closed on the following holidays:
New Year's Day Good Friday Labor Day
Martin Luther King, Jr.'s Day Memorial Day Thanksgiving Day
Presidents' Day Independence Day Christmas Day
NAV =
ASSETS - LIABILITIES
--------------------
# outstanding shares
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the funds' portfolio securities are determined as
follows:
1. FOR EQUITY SECURITIES: according to the last sale price on a national
securities exchange, if applicable.
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
funds' 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.
Regarding the INTERNATIONAL EQUITY FUND, the underlying funds in which the fund
invests may value securities in their portfolios for which market quotations are
readily available at their current market value (generally the last reported
sales price) and all other securities and assets at fair value pursuant to
methods established in good faith by the board of directors/trustees of the
underlying fund.
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
funds value 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.
PURCHASING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
To open an account, first determine if you are buying class A, B or Y shares
(see "Description of Classes"). The minimum initial investment amounts for each
fund are shown below. Additional investments may be made in any amount.
<TABLE>
<CAPTION>
- ------------------------------------------------------------ ---------------------------------------------------------
Class A and B Shares Class Y Shares
- ------------------------------------------------------------ ---------------------------------------------------------
<S> <C>
|X| $1,000 for individuals |X| $1,000 for trust or institutional customers of
Firstar Bank ($1,000 may be determined by
|X| $500 for Education IRA customers combining the amount in all mutual fund accounts
you maintain with Firstar Bank)
|X| $25 for Firstar Bank employees and members of
their immediate family, and persons contributing to
SIMPLE IRAs
- ------------------------------------------------------------ ---------------------------------------------------------
</TABLE>
TIMING OF REQUESTS
The price per share will be the next asset value next computed after the time
your request is received in good order and accepted by the funds or the funds'
authorized agent. All requests received in good order by the funds 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.
RECEIPT OF ORDERS
Shares may only be purchased on days the New York Stock Exchange and the Federal
Reserve wire system 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:
|X| the NAME of the fund
|X| the DOLLAR amount of shares to be purchased
|X| purchase application or investment stub
|X| check payable to Firstar Stellar Funds
<TABLE>
<CAPTION>
METHODS OF BUYING
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
<S> <C> <C>
|X| BY TELEPHONE Call Firstar Stellar Funds at 1-800-677-FUND to Call Firstar Stellar Funds at 1-800-677-FUND
(FIRSTAR BANK CUSTOMERS place the order. (Note: For security reasons, to place the order. (Note: For security
ONLY) requests by telephone will be recorded.) reasons, requests by telephone will be
recorded.)
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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 right.
Firstar Bank, N.A.
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 #)
The fund and its transfer agent are not
responsible for the consequences of delays
resulting from the banking or Federal Reserve
Wire system, or from incomplete wiring
instructions.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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 with initial period) will be taken automatically monthly
purchase application. or quarterly from your checking account.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| 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.
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
|X| BY EXCHANGE Call 1-800-677-FUND to obtain exchange Call 1-800-677-FUND to obtain exchange
information. See "Exchanging Shares." information. See "Exchanging Shares."
- ----------------------------------- ------------------------------------------------- ----------------------------------------------
</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 3011 615 E. Michigan Street, Third Floor
Milwaukee, Wisconsin 53201-3011 Milwaukee, Wisconsin 53202
NOTE: The funds do not consider the U.S. Postal Service or other independent
delivery services to be their 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 funds.
SELLING SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
METHODS OF SELLING
- ---------------------------------- -----------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ---------------------------------- -----------------------------------------------------------------------------------
<S> <C>
|X| BY TELEPHONE Call Firstar Stellar Funds at 1-800-677-FUND to sell shares.
(NOTE: For security reasons, requests by telephone will be recorded.)
- ---------------------------------- -----------------------------------------------------------------------------------
|X| 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, signatures 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.
- ---------------------------------- -----------------------------------------------------------------------------------
|X| 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.
- ---------------------------------- -----------------------------------------------------------------------------------
|X| SYSTEMATIC WITHDRAWAL 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.
- ---------------------------------- -----------------------------------------------------------------------------------
|X| SHAREHOLDER SERVICE Consult your account agreement for information on redeeming shares.
ORGANIZATION
- ---------------------------------- -----------------------------------------------------------------------------------
|X| BY EXCHANGE Call 1-800-677-FUND to obtain exchange information. See "Exchanging Shares."
- ---------------------------------- -----------------------------------------------------------------------------------
</TABLE>
WHEN REDEMPTION PROCEEDS ARE SENT TO YOU
Your shares may only be redeemed on days on which the funds compute their net
asset value. Your redemption requests cannot be processed on days the New York
Stock Exchange is closed or on federal holidays which restrict wire transfers.
When making a redemption request, make sure your request is in good order. "Good
order" means your letter of instruction includes:
|X| the NAME of the fund
|X| the NUMBER of shares or the DOLLAR amount of shares to be redeemed
|X| SIGNATURES of all registered shareholders exactly as the shares are
registered (guaranteed for IRAs)
|X| the ACCOUNT registration number
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). 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
You will need your signature guaranteed if:
|X| you are redeeming shares from an IRA account
|X| you request a redemption to be made payable to a person not on record with
the funds, or
|X| you request that a redemption be mailed to an address other than that on
record with the funds
You may obtain signature guarantees from most trust companies, commercial banks
or other eligible guarantor institutions. A notary public cannot guarantee
signatures.
EXCHANGING SHARES
- --------------------------------------------------------------------------------
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.
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 consequence 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.
REINSTATEMENT PRIVILEGE
If you sell shares of a Firstar Stellar Fund or of any Firstar family of funds,
you may reinvest some or all of the proceeds in class A shares of any Firstar
Stellar Fund within 60 days without a sales charge, as long as you notify the
transfer agent of your shareholder service organization at the time you
reinvest. All accounts involved must have the same shareholder 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 other Firstar Stellar Funds, or any other Firstar
family of funds.
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The RELATIVE VALUE FUND and STELLAR FUND each declare and pay dividends on a
quarterly basis. The GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND, CAPITAL
APPRECIATION FUND and the INTERNATIONAL EQUITY FUND declare and pay 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 any of the funds realize capital gains, they will be distributed once every
12 months.
TAX INFORMATION
The funds will pay no federal income tax because they expect to meet certain
Internal Revenue Code requirements. The funds will be treated as single,
separate entities for federal income tax purposes so that income (including
capital gains, if any) and losses realized by one fund will not be combined for
tax purposes with those realized by the other funds.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gain distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. All dividends paid by the funds and distributions of
net realized short-term capital gains are taxable as ordinary income.
Distributions paid by a fund from net realized long-term capital gains are
taxable as long-term capital gain. The capital gain holding period and the
applicable tax rate is determined by the length of time a fund has held the
security and not the length of time that you have held shares in the fund. The
funds expect that, because of their investment objectives, distributions will
consist primarily of long- and short-term capital gains. Each 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
funds' 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.
The funds 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.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables set forth below are intended to help you
understand the funds' financial performance for the past 5 years or for the
funds' period of operations, as the case may be. Most of the information
reflects financial results with respect to a single fund share. The total
returns in the tables represent the rates that an investor would have earned (or
lost) on an investment in a fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Arthur Andersen LLP, whose
report, along with the funds' financial statements, are included in the funds'
annual report, which is available upon request.
<TABLE>
<CAPTION>
GROWTH EQUITY FUND
(Class B Shares1) Period ended November 30,
1999 1998 1997 1996 1995
- ---------------------------------------------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.52 $17.17 $15.17 $12.70 $10.00
- ---------------------------------------------- ---------- ---------- ----------- ----------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.04) 0.02 0.19 0.17 0.24
Net gains or losses on securities (both 4.88 3.32 2.97 3.12 2.67
realized and unrealized)
Total from investment operations 4.84 3.34 3.16 3.29 2.91
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.02) (0.03) (0.14) (0.16) (0.21)
Distributions in excess of net investment (0.00)2 -- -- -- --
income
Distributions (from capital gains) (0.45) (0.96) (1.02) (0.66) --
Total distributions (0.47) (0.99) (1.16) (0.82) (0.21)
- ---------------------------------------------- ---------- ---------- ----------- ----------- ----------
NET ASSET VALUE, END OF PERIOD $23.89 $19.52 $17.17 $15.17 $12.70
- ---------------------------------------------- ---------- ---------- ----------- ----------- ----------
TOTAL RETURN3 25.26% 20.76% 22.65% 27.34% 29.44%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $90,468 $66,478 $45,025 $85,311 $48,699
Gross ratio of expenses to average net 1.52% 1.54% 1.29% 1.39% 1.40%4
assets5
Net ratio of expenses to average net 1.36% 1.34% 1.09% 1.19% 1.17%4
assets6
Gross ratio of net income to average net (0.24)% (0.08)% 0.66% 1.11% 1.77%4
assets5
Net ratio of net income to average net (0.08)% 0.12% 0.86% 1.31% 2.00%4
assets6
Portfolio turnover rate 28% 48% 60% 96% 171%
</TABLE>
1 The date of initial public investment for class B shares was December 12,
1994.
2 Less than one cent per share.
3 Based on net asset value, which does not reflect the contingent deferred sales
charge, if applicable.
4 Annualized.
5 Before waivers.
6 After waivers.
<TABLE>
<CAPTION>
GROWTH EQUITY FUND
(Class Y Shares1) Period ended November 30,
1999 1998 1997
- ---------------------------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.51 $17.18 $16.46
- ---------------------------------------------- ----------- ----------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.07 0.06 0.03
Net gains or losses on securities (both 4.83 3.30 0.73
realized and unrealized)
Total from investment operations 4.90 3.36 0.76
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.05) (0.07) (0.04)
Distributions in excess of net investment (0.01) -- --
income
Distributions (from capital gains) (0.45) (0.96) --
Total distributions (0.51) (1.03) (0.04)
- ---------------------------------------------- ----------- ----------- ------------
NET ASSET VALUE, END OF PERIOD $23.90 $19.51 $17.18
- ---------------------------------------------- ----------- ----------- ------------
TOTAL RETURN2 25.61% 20.91% 4.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $186,177 $121,475 $109,087
Gross ratio of expenses to average net 1.27% 1.29% 1.26%3
assets4
Net ratio of expenses to average net 1.11% 1.09% 1.06%3
assets5
Gross ratio of net income to average net 0.01% 0.17% 0.48%3
assets4
Net ratio of net income to average net 0.17% 0.37% 0.68%3
assets5
Portfolio turnover rate 28% 48% 60%
</TABLE>
1 The date of initial public investment for class Y shares was August 18, 1997.
2 Based on net asset value.
3 Annualized.
4 Before waivers.
5 After waivers.
<TABLE>
<CAPTION>
RELATIVE VALUE FUND
(Class A Shares1) Period ended November 30,
1999 1998 1997 1996 1995
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $26.26 $23.48 $19.03 $15.02 $11.36
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.10 0.11 0.67 0.27 0.29
Net gains or losses on securities (both 3.01 3.66 4.45 4.01 3.65
realized and unrealized)
Total from investment operations 3.11 3.77 5.12 4.28 3.94
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.16) (0.17) (0.28) (0.26) (0.28)
Distributions (from capital gains) (0.11) (0.82) (0.39) (0.01) --
Total distributions (0.27) (0.99) (0.67) (0.27) (0.28)
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
NET ASSET VALUE, END OF PERIOD $29.10 $26.26 $23.48 $19.03 $15.02
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
TOTAL RETURN2 11.89% 16.67% 27.69% 28.86% 35.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $54,825 $50,925 $37,748 $215,843 $131,979
Gross ratio of expenses to average net assets3 1.46% 1.49% 1.21% 1.24% 1.26%
Net ratio of expenses to average net assets4 1.30% 1.29% 1.01% 1.04% 1.06%
Gross ratio of net income to average net 0.36% 0.50% 1.20% 1.51% 1.97%
assets3
Net ratio of net income to average net assets4 0.52% 0.70% 1.40% 1.71% 2.17%
Portfolio turnover rate 11% 26% 18% 16% 24%
</TABLE>
1 The date of initial public investment for class A shares was June 5, 1991. For
the period from January 31, 1989 (start of business) to June 4, 1991, all
income was distributed to Federated Services Corporation, the administrator at
the time.
2 Based on net asset value, which does not reflect the sales charge, if
applicable.
3 Before waivers.
4 After waivers.
<TABLE>
<CAPTION>
RELATIVE VALUE FUND
(Class B Shares1) Period ended November 30,
1999 1998
- ---------------------------------------------- ----------- -----------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $26.28 $26.01
- ---------------------------------------------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.16 0.14
Net gains or losses on securities (both 2.94 0.24
realized and unrealized)
Total from investment operations 3.10 0.38
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.18) (0.11)
Distributions (from capital gains) (0.11) --
Total distributions (0.29) (0.11)
- ---------------------------------------------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $29.09 $26.28
- ---------------------------------------------- ----------- -----------
TOTAL RETURN2 11.84% 1.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $14,278 $7,847
Gross ratio of expenses to average net 1.46% 1.24%3
assets4
Net ratio of expenses to average net 1.30% 1.04%3
assets5
Gross ratio of net income to average net 0.36% 0.75%3
assets4
Net ratio of net income to average net 0.52% 0.95%3
assets5
Portfolio turnover rate 11% 26%
</TABLE>
1 The date of initial public investment for class B shares was March 31, 1998.
2 Based on net asset value, which does not reflect contingent deferred sales
charge, if applicable.
3 Annualized.
4 Before waivers.
5 After waivers.
RELATIVE VALUE FUND
(Class Y Shares1) Period ended November 30,
1999 1998 1997
- ---------------------------------------------- ----------- ----------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $26.27 $23.49 $22.67
- ---------------------------------------------- ----------- ----------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.23 0.18 0.08
Net gains or losses on securities (both 2.96 3.65 0.81
realized and unrealized)
Total from investment operations 3.19 3.83 0.89
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.23) (0.23) (0.07)
Distributions (from capital gains) (0.11) (0.82) --
Total distributions (0.34) (1.05) (0.07)
- ---------------------------------------------- ----------- ----------- ---------
NET ASSET VALUE, END OF PERIOD $29.12 $26.27 $23.49
- ---------------------------------------------- ----------- ----------- ---------
TOTAL RETURN2 12.20% 16.95% 3.93%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $466,203 $386,405 $312,056
Gross ratio of expenses to average net 1.21% 1.24% 1.20%3
assets4
Net ratio of expenses to average net 1.05% 1.04% 1.00%3
assets5
Gross ratio of net income to average net 0.61% 0.75% 1.15%3
assets4
Net ratio of net income to average net 0.77% 0.95% 1.35%3
assets5
Portfolio turnover rate 11% 26% 18%
1 The date of initial public investment for class Y shares was August 18, 1997.
2 Based on net asset value.
3 Annualized.
4 Before waivers.
5 After waivers.
SCIENCE & TECHNOLOGY FUND
(Class B Shares1) Period ended November 30,
1999
- ---------------------------------------------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ---------------------------------------------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income --
Net gains or losses on securities (both 4.52
realized and unrealized)
Total from investment operations 4.52
LESS DISTRIBUTIONS
Dividends (from net investment income) --
Distributions (from capital gains) --
Total distributions --
- ---------------------------------------------- -----------
NET ASSET VALUE, END OF PERIOD $14.52
- ---------------------------------------------- -----------
TOTAL RETURN2 45.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $1,345
Gross ratio of expenses to average net 2.09%3
assets4
Net ratio of expenses to average net 1.94%3
assets5
Gross ratio of net income to average net (1.34)%3
assets4
Net ratio of net income to average net (1.19)%3
assets5
Portfolio turnover rate 16%
1 The date of initial public investment for class B shares was August 9, 1999.
2 Based on net asset value, which does not reflect contingent deferred sales
charge, if applicable.
3 Annualized.
4 Before waivers.
5 After waivers.
SCIENCE & TECHNOLOGY FUND
(Class Y Shares1) Period ended November 30,
1999
- ---------------------------------------------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ---------------------------------------------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income --
Net gains or losses on securities (both 4.56
realized and unrealized)
Total from investment operations 4.56
LESS DISTRIBUTIONS
Dividends (from net investment income) --
Distributions (from capital gains) --
Total distributions --
- ---------------------------------------------- -----------
NET ASSET VALUE, END OF PERIOD $14.56
- ---------------------------------------------- -----------
TOTAL RETURN2 45.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $40,936
Gross ratio of expenses to average net 1.84%3
assets4
Net ratio of expenses to average net 1.69%3
assets5
Gross ratio of net income to average net (1.09)%3
assets4
Net ratio of net income to average net (0.94)%3
assets5
Portfolio turnover rate 16%
1 The date of initial public investment for class Y shares was August 9, 1999.
2 Based on net asset value.
3 Annualized.
4 Before waivers.
5 After waivers.
<TABLE>
<CAPTION>
STELLAR FUND
(Class A Shares1) Period ended November 30,
1999 1998 1997 1996 1995
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.35 $14.27 $13.59 $12.17 $10.90
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.31 0.38 0.36 0.34 0.34
Net gains or losses on securities (both 0.52 0.35 1.18 1.62 1.33
realized and unrealized)
Total from investment operations 0.83 0.73 1.54 1.96 1.67
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.35) (0.35) (0.36) (0.34) (0.35)
Distributions (from capital gains) (1.16) (1.30) (0.50) (0.20) (0.05)
Total distributions (1.51) (1.65) (0.86) (0.54) (0.40)
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
NET ASSET VALUE, END OF PERIOD $12.67 $13.35 $14.27 $13.59 $12.17
- -------------------------------------------------- ----------- ---------- ----------- ---------- -----------
TOTAL RETURN2 6.92% 5.74% 11.94% 16.64% 15.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $40,133 $46,613 $50,398 $50,094 $48,902
Gross ratio of expenses to average net assets3 1.76% 1.85% 1.76% 1.86% 1.85%
Net ratio of expenses to average net assets4 1.60% 1.65% 1.56% 1.66% 1.65%
Gross ratio of net income to average net 2.33% 2.51% 2.43% 2.56% 2.78%
assets3
Net ratio of net income to average net assets4 2.49% 2.71% 2.63% 2.76% 2.98%
Portfolio turnover rate 39% 77% 64% 65% 104%
</TABLE>
1 The date of initial public investment for class A shares was October 18, 1991.
2 Based on net asset value, which does not reflect the sales charge, if
applicable.
3 Before waivers.
4 After waivers.
<TABLE>
<CAPTION>
STELLAR FUND
(Class Y Shares1) Period ended November 30,
1999 1998 1997 1996 1995
- ---------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.36 $14.27 $13.59 $12.17 $10.90
- ---------------------------------------------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.35 0.42 0.40 0.37 0.38
Net gains or losses on securities (both 0.51 0.36 1.18 1.62 1.32
realized and unrealized)
Total from investment operations 0.86 0.78 1.58 1.99 1.70
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.39) (0.39) (0.40) (0.37) (0.38)
Distributions (from capital gains) (1.16) (1.30) (0.50) (0.20) (0.05)
Total distributions (1.55) (1.69) (0.90) (0.57) (0.43)
- ---------------------------------------------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $12.67 $13.36 $14.27 $13.59 $12.17
- ---------------------------------------------- ---------- ---------- ---------- ---------- ----------
TOTAL RETURN2 7.15% 6.11% 12.22% 16.94% 15.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $47,491 $58,572 $63,742 $67,047 $64,754
Gross ratio of expenses to average net 1.51% 1.60% 1.51% 1.59% 1.60%
assets3
Net ratio of expenses to average net 1.35% 1.40% 1.31% 1.39% 1.40%
assets4
Gross ratio of net income to average net 2.58% 2.76% 2.69% 2.65% 3.03%
assets3
Net ratio of net income to average net 2.74% 2.96% 2.89% 2.85% 3.23%
assets4
Portfolio turnover rate 39% 77% 64% 65% 104%
</TABLE>
1 The date of initial public investment for class Y shares was April 11, 1994.
For the period from April 5, 1994 (start of business) to April 10, 1994, all
income was distributed to Federated Services Corporation, the administrator at
the time.
2 Based on net asset value.
3 Before waivers.
4 After waivers.
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND
(Class A Shares1) Period ended November 30,
1999 1998 1997 1996 1995
- ---------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.75 $14.34 $12.55 $11.82 $10.15
- ---------------------------------------------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income -- (0.05) 0.02 (0.03) 0.03
Net gains or losses on securities (both 0.57 0.56 1.77 1.05 1.72
realized and unrealized)
Total from investment operations 0.57 0.51 1.79 1.02 1.75
LESS DISTRIBUTIONS
Dividends (from net investment income) -- (0.02) -- -- (0.04)
Distributions in excess of net investment -- -- -- -- (0.00)6
income2
Distributions (from capital gains) -- (3.08) -- (0.29) (0.04)
Total distributions -- (3.10) -- (0.29) (0.08)
- ---------------------------------------------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $12.32 $11.75 $14.34 $12.55 $11.82
- ---------------------------------------------- ---------- ---------- ---------- ---------- ----------
TOTAL RETURN3 4.85% 4.75% 14.26% 8.95% 17.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $85,257 $79,981 $83,118 $79,163 $56,430
Gross ratio of expenses to average net 1.47% 1.52% 1.49% 1.52% 1.68%
assets4
Net ratio of expenses to average net 1.31% 1.32% 1.29% 1.32% 1.47%
assets5
Gross ratio of net income to average net (0.49)% (0.64)% (0.04)% (0.44)% 0.07%
assets4
Net ratio of net income to average net (0.33)% (0.44)% 0.16% (0.24)% 0.28%
assets5
Portfolio turnover rate 92% 94% 262% 174% 144%
</TABLE>
1 The date of initial public investment for class A shares was June 13, 1994.
2 Distributions are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting principles.
3 Based on net asset value, which does not reflect the sales charge, if
applicable.
4 Before waiver.
5 After waivers.
6 Less than one cent per share.
INTERNATIONAL EQUITY FUND
(Class A Shares1) Period ended November 30,
1999 1998
- ---------------------------------------------- ----------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $10.35 $10.00
- ---------------------------------------------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.09 0.05
Net gains or losses on securities (both 2.78 0.34
realized and unrealized)
Total from investment operations 2.87 0.39
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.10) (0.04)
Distributions (from capital gains) (0.18) --
Total distributions (0.28) (0.04)
- ---------------------------------------------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $12.94 $10.35
- ---------------------------------------------- ----------- -----------
TOTAL RETURN2 28.44% 3.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $59,496 $48,459
Gross ratio of expenses to average net 1.29% 1.51%3
assets4
Net ratio of expenses to average net 1.13% 1.31%3
assets5
Gross ratio of net income to average net 0.11% 0.17%3
assets4
Net ratio of net income to average net 0.27% 0.37%3
assets5
Portfolio turnover rate 34% 3%
1 The date of initial public investment for class A shares was December 3, 1997.
2 Based on net asset value, which does not reflect the sales charge, if
applicable.
3 Annualized.
4 Before waivers.
5 After waivers.
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 annual and semi-annual reports
provide the funds' most recent
financial statements and portfolio
listings. The annual report contains a
discussion of the market conditions and
investment strategies that affected the
funds' performances during the last
fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
(SAI) DATED MARCH 31, 2000
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
funds' policies and management.
TO RECEIVE ANY OF THESE DOCUMENTS OR
PROSPECTUSES ON THE FIRSTAR STELLAR
FUNDS:
BY TELEPHONE
1-800-677-FUND
BY MAIL:
Firstar Stellar Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
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
1-202-942-8090 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
or by sending an electronic request to
the SEC at the following e-mail
address: [email protected].
Investment Company Act File # 811-05762
FIRSTAR STELLAR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
March 31, 2000
MONEY MARKET FUNDS
Firstar Stellar Treasury Fund
Firstar Stellar Tax-Free Money Market Fund
Firstar Stellar Ohio Tax-Free Money Market Fund
BOND FUNDS
Firstar Stellar Strategic Income Fund
Firstar Stellar U.S. Government Income Fund
Firstar Stellar Insured Tax-Free Bond Fund
STOCK FUNDS
Firstar Stellar Growth Equity Fund
Firstar Stellar Relative Value Fund
Firstar Science and Technology Fund
Firstar Stellar Fund
Firstar Stellar Capital Appreciation Fund
Firstar Stellar International Equity Fund
This Statement of Additional Information is not a
prospectus and should be read together with the
prospectuses of the Money Market Funds, Bond Funds
and Stock Funds of the Firstar Stellar Funds dated
March 31, 2000. To receive a copy of the
prospectuses, write to Firstar Stellar Funds or call
1-800-677-FUND.
The Funds' audited financial statements for the
fiscal year ended November 30, 1999 are incorporated
by reference to the Funds' 1999 Annual Reports.
FIRSTAR STELLAR FUNDS
C/O FIRSTAR MUTUAL FUND SERVICES, LLC
P.O. BOX 3011
MILWAUKEE, WISCONSIN 53201-3011
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT FIRSTAR STELLAR FUNDS................................3
CAPITAL STOCK..................................................................3
DESCRIPTION OF THE FUNDS.......................................................4
THE FUNDS' INVESTMENTS AND RISKS...............................................5
MORE INFORMATION ABOUT THE OHIO TAX-FREE MONEY MARKET FUND
AND INVESTMENT RISKS..........................................................28
MORE INFORMATION ABOUT THE INTERNATIONAL EQUITY FUND AND
INVESTMENT RISKS..............................................................29
THE FUNDS' INVESTMENT LIMITATIONS.............................................38
TEMPORARY INVESTMENTS.........................................................44
PORTFOLIO TURNOVER RATES......................................................46
MANAGEMENT OF THE FUND........................................................46
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...........................49
INVESTMENT ADVISORY SERVICES..................................................49
BROKERAGE TRANSACTIONS........................................................51
ADMINISTRATIVE SERVICES.......................................................52
FUND ACCOUNTING AND DIVIDEND PAYING AGENT SERVICES............................53
CUSTODIAN.....................................................................53
DISTRIBUTION PLAN.............................................................53
DETERMINING NET ASSET VALUE...................................................54
PURCHASE, EXCHANGE AND PRICING OF SHARES......................................55
TAX STATUS....................................................................60
UNDERWRITERS..................................................................62
CALCULATION OF PERFORMANCE DATA...............................................63
PERFORMANCE COMPARISONS.......................................................70
INDEPENDENT PUBLIC ACCOUNTANTS................................................72
FINANCIAL STATEMENTS..........................................................72
APPENDIX......................................................................73
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 (the "Funds"), which are all open-ended
management investment company funds. The Trust was organized under the name
"Value Plus Funds," but was changed on March 29, 1989 to "Losantiville Funds."
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 (the "Trustees") approved
changing the Trust's name to "Firstar Stellar Funds" effective March 1, 1999. On
September 20, 1999, Firstar Corporation merged with Mercantile Bancorporation,
Inc. Subsequently, as part of an internal restructuring of the investment
advisory function within the Firstar Corporation family, the investment
management resources of the Capital Management Division of Firstar Bank, N.A.
were consolidated with those of Firstar Investment Research & Management
Company, LLC ("FIRMCO"), a wholly owned subsidiary of Firstar Corporation. Prior
to April 1, 2000, the Funds were managed by the Capital Management Division of
Firstar Bank, N.A. Effective April 1, 2000, FIRMCO is the investment adviser for
the Funds.
CAPITAL STOCK
- --------------------------------------------------------------------------------
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 Funds 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).
<TABLE>
<CAPTION>
- --------------------------------------------- ------------------------------------------ -------------------------------------------
Money Market Funds Bond Funds Stock Funds
- --------------------------------------------- ------------------------------------------ -------------------------------------------
<S> <C> <C>
Treasury Fund - C, Y Insured Tax-Free Bond Fund - A, B Growth Equity Fund - A, B, Y
Tax-Free Money Market Fund - C U.S. Government Income Fund - A, B Relative Value Fund - A, B, Y
Ohio Tax-Free Money Market Fund - C Strategic Income Fund - A, B Science & Technology Fund - A, B, Y
Stellar Fund - A, B, Y
Capital Appreciation Fund - A, B
International Equity Fund - A
- --------------------------------------------- ------------------------------------------ -------------------------------------------
</TABLE>
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 Funds 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 each 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 Prospectuses.
MASSACHUSETTS PARTNERSHIP 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 FUNDS
- --------------------------------------------------------------------------------
The investment objectives listed below are fundamental objectives and therefore
cannot be changed without the approval of shareholders.
MONEY MARKET FUNDS
The TREASURY FUND, TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE MONEY MARKET
FUND may follow non-fundamental operational policies that are more restrictive
than fundamental investment limitations, as set forth in this SAI in order to
comply with applicable laws and regulations, including the provisions of and
regulations under the Investment Company Act of 1940 ("1940 Act"). In
particular, the Funds will comply with the various requirements of Rule 2a-7,
which regulates money market mutual funds. The Funds will also determine the
effective maturity of their investments, as well as their ability to consider a
security as having received the requisite short-term ratings by a nationally
recognized rating organization (NRSRO) according to Rule 2a-7. The Funds may
change these operational policies to reflect changes in the laws and regulations
without the approval of shareholders.
The overall objective of the money market funds is to provide current income
while preserving capital. The TREASURY FUND is a diversified fund and seeks
current income consistent with maintaining stable principal. The TAX-FREE MONEY
MARKET FUND is a diversified fund and seeks current income exempt from federal
regular income tax consistent with maintaining stable principal. The OHIO
TAX-FREE MONEY MARKET FUND is a non-diversified fund and seeks current income
exempt from federal regular income tax and Ohio state personal income taxes
consistent with maintaining stable principal. Specific information regarding the
state of Ohio with respect to the OHIO TAX-FREE MONEY MARKET FUND and its
non-diversified status is located on page 28.
BOND FUNDS
The general goal of the bond funds is to provide current income by investing in
choice fixed-income securities. The STRATEGIC INCOME FUND is a diversified fund
and its investment objective is to generate high current income. The U.S.
GOVERNMENT INCOME FUND is a diversified fund that seeks to provide current
income. The INSURED TAX-FREE BOND FUND is a diversified fund that seeks to
provide current income exempt from federal income tax by primarily purchasing
insured municipal bonds. The Fund's secondary objective is to achieve capital
appreciation.
STOCK FUNDS
The overall objective of the stock funds is to maximize capital appreciation by
investing in choice equity securities. The GROWTH EQUITY FUND and CAPITAL
APPRECIATION FUND are both diversified funds that seek to maximize capital
appreciation. The RELATIVE VALUE FUND is a diversified fund and its goal is to
obtain the highest total return from income and capital appreciation. 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 STELLAR FUND is a diversified fund
that seeks to maximize total returns that are derived from a combination of
dividend income and capital appreciation. The INTERNATIONAL EQUITY FUND is a
diversified fund and its investment objective is to achieve long-term capital
appreciation. Specific information regarding international investments in the
INTERNATIONAL EQUITY FUND is provided on page 29.
THE FUNDS' INVESTMENTS AND RISKS
- --------------------------------------------------------------------------------
The respective prospectuses describe the principal strategies and risks of each
of the Funds. This section provides additional information regarding investments
and transactions the Funds are permitted to make. Unless otherwise indicated,
the investment policies of the Funds may be changed by the Trustees without
approval of shareholders. Shareholders will be notified before any material
change in these policies becomes effective. The investment objective and the
policies and limitations of the TREASURY FUND cannot be changed without
shareholder approval. Unless otherwise indicated, the investment objective and
the policies and limitations of the TAX-FREE MONEY MARKET FUND cannot be changed
without shareholder approval.
REPURCHASE AGREEMENTS
Each Fund (or underlying 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 Funds or their 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 Funds believe that under the regular procedures
normally in effect for custody of the Funds' portfolio securities subject
to repurchase agreements, a court of competent jurisdiction would rule in
favor of the Funds and allow retention or disposition of such securities.
The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are
deemed by the Funds' adviser to be creditworthy pursuant to guidelines
established by the Board of Trustees.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each Fund (or underlying 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 Funds. 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 Funds do not intend to engage in when-issued and delayed
delivery transactions to an extent that would cause the segregation of
more than 20% of the total value of their respective assets.
RESTRICTED AND ILLIQUID SECURITIES
All of the Funds 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 Funds may invest pursuant to their investment
objective and policies but which are subject to restrictions on resale
under federal securities laws. The Funds' Board of Trustees has
established criteria that allows the adviser to consider certain
restricted securities as liquid.
The STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, GROWTH EQUITY
FUND, RELATIVE VALUE FUND, SCIENCE & TECHNOLOGY FUND, STELLAR FUND,
CAPITAL APPRECIATION FUND and INTERNATIONAL EQUITY FUND (via underlying
funds) may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors,
such as the Funds, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale
by the purchaser must be in an exempt transaction. Section 4(2) commercial
paper is normally resold to other institutional investors like the Funds
through or with the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus providing liquidity.
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.
OTHER INVESTMENT COMPANIES
As an efficient means of carrying out their investment policies, each Fund
may invest in the securities of other investment companies. In addition,
the CAPITAL APPRECIATION FUND may purchase shares of closed-end investment
companies that invest in securities that approximate the composition of a
stock index. 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.
U.S. GOVERNMENT OBLIGATIONS
The STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, INSURED TAX-FREE
BOND FUND, GROWTH EQUITY FUND, RELATIVE VALUE FUND, STELLAR FUND and
CAPITAL APPRECIATION FUND may invest in U.S. government obligations. The
types of U.S. government obligations in which these Funds 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.
DERIVATIVES
The SCIENCE & TECHNOLOGY FUND may invest in 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
The SCIENCE & TECHNOLOGY FUND may invest in synthetic securities.
Synthetic securities are a form of securities where fixed rate bonds of a
single state or municipal issuer are deposited in a trust by a sponsor and
interests in the trust are sold to investors. The use of synthetic
securities exposes the Fund to additional risks and transaction losses.
Furthermore, synthetic securities are subject to the greater risks
inherent in bond investing (i.e., varying interest rates and credit
quality rating).
PRECIOUS METALS
The STELLAR FUND may invest in precious metals as described in the
prospectus. Precious metal securities of foreign issuers will not be
aggregated with other international securities for purposes of calculating
the Fund's investments in international securities under the Fund's
investment allocation policy.
SHORT SELLING
The STRATEGIC INCOME FUND and INTERNATIONAL EQUITY FUND (via underlying
funds) may make short sales. Short sales are transactions where funds sell
securities they don't own in anticipation of a decline in the market value
of the securities. A Fund must borrow the security to deliver it to the
buyer. The Fund is then obligated to replace the security borrowed at the
market price at the time of replacement. Until the security is replaced,
the Fund is required to pay the lender any dividends or interest which
accrue on the security during the loan period. To borrow the security, the
Fund also may be required to pay a premium, which would increase the cost
of the security sold. To the extent necessary to meet margin requirements,
the broker will retain proceeds of the short sale until the short position
is closed out.
Until the Fund replaces a borrowed security in connection with a short
sale, the Fund will be required to maintain daily a segregated account,
containing cash or U.S. government securities, at such a level that:
o the amount deposited in the account plus the amount deposited with
the broker as collateral will at all times equal at least 100% of
the current value of the security sold short and
o the amount deposited in the segregated account plus the amount
deposited with the broker as collateral will not be less than the
market value of the security at the time it was sold short.
The Funds may purchase call options to provide a hedge against an increase
in the price of a security sold short by the Funds. When a Fund purchases
call options, it has to pay a premium to the person writing the option and
a commission to the broker selling the options. If the options are
exercised by the Fund, the premium and the commission paid may be more
than the amount of the brokerage commission charged if the securities were
to be purchased directly.
As for the STRATEGIC INCOME FUND, the adviser anticipates that the
frequency of short sales will vary substantially under different market
conditions, and it does not intend that any specified portion of its
assets, as a matter of practice, will be in short sales. However, as an
operating policy which may be changed without shareholder approval, no
securities will be sold short if, after effect is given to any such short
sale, the total market value of all securities sold short would exceed 25%
of the value of the Fund's net assets. The Fund may not sell short the
securities of any single issuer listed on a national securities exchange
to the extent of more than 2% of the value of the Fund's net assets. The
Fund may not sell short the securities of any class of an issuer to the
extent, at the time of the transaction, of more than 2% of the outstanding
securities of that class.
In addition to the short sales discussed above, the Funds may also make
short sales "against the box," a transaction in which a Fund enters into a
short sale of a security that the Fund owns. A broker holds the proceeds
of the short sale until the settlement date, at which time the Fund
delivers the security to close the short position. The Fund receives the
net proceeds from the short sale. The STRATEGIC INCOME FUND at no time
will have more than 15% of the value of its net assets in deposits on
short sales against the box.
A Fund will incur losses as a result of a short sale if the price of the
security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. Conversely, the Fund will
realize a gain if the security declines in price between those dates. This
result is the opposite of what one would expect from a cash purchase of a
long position in a security. The amount of any gain will be decreased, and
the amount of any loss increased, by the amount of any premium or amounts
in lieu of interest the Fund may be required to pay in connection with a
short sale.
WARRANTS
The STRATEGIC INCOME FUND, GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND,
CAPITAL APPRECIATION FUND and INTERNATIONAL EQUITY FUND (via underlying
funds) 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 STRATEGIC INCOME FUND, GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND,
RELATIVE VALUE FUND, STELLAR FUND and CAPITAL APPRECIATION 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 prospectuses) 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 Funds,
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 U.S. GOVERNMENT INCOME FUND, INSURED TAX-FREE BOND FUND, GROWTH EQUITY
FUND, SCIENCE & TECHNOLOGY FUND, STELLAR FUND and CAPITAL APPRECIATION
FUND may invest in zero-coupon securities. These Funds 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 their qualification as regulated
investment companies and to avoid liability of federal income taxes, the
Funds 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 STRATEGIC INCOME FUND, GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND,
and STELLAR FUND may invest in equity or mortgage real estate investment
trusts (REITs) that together produce income. A real estate investment
trust is a managed portfolio of real estate investments. Regarding the
Funds' asset allocation policy, real estate of domestic issuers will not
be considered domestic equity securities. REITs will be diversified by
geographic location and by sector (such as shopping malls, apartment
building complexes and health care facilities). An equity REIT holds
equity positions in real estate and provides its shareholders with income
from the leasing of its properties and capital gains from any sales of
properties. A mortgage REIT specializes in lending money to developers of
properties and passes any interest income earned to its shareholders.
Risks associated with real estate investments include the fact that equity
and mortgage real estate investment trusts are dependent upon management
skill and are not diversified, and are, therefore, subject to the risk of
financing single projects or unlimited number of projects. They are also
subject to heavy cash flow dependency, defaults by borrowers, and
self-liquidation. Additionally, equity real estate investment trusts may
be affected by any changes in the value of the underlying property owned
by the trusts, and mortgage real estate investment trusts may be affected
by the quality of any credit extended. The investment adviser seeks to
mitigate these risks by selecting real estate investment trusts
diversified by sector (shopping malls, apartment building complexes and
health care facilities) and geographic location.
OVER-THE-COUNTER OPTIONS
The STRATEGIC INCOME FUND, INSURED TAX-FREE BOND FUND, GROWTH EQUITY FUND,
SCIENCE & TECHNOLOGY FUND, STELLAR FUND, CAPITAL APPRECIATION FUND and
INTERNATIONAL EQUITY FUND (via underlying funds) 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 these Funds are not traded on an exchange. The Funds
purchase 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 TREASURY FUND, STRATEGIC INCOME FUND, INSURED TAX-FREE BOND FUND,
GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND, RELATIVE VALUE FUND,
STELLAR FUND, CAPITAL APPRECIATION FUND and INTERNATIONAL EQUITY FUND (via
underlying funds) 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.
INVESTMENTS IN CASH
From time to time, such as when suitable municipal bonds are not
available, the INSURED TAX-FREE BOND FUND may invest a portion of its
assets in cash. Any portion of the Fund's assets maintained in cash will
reduce the amount of assets in municipal securities and thereby reduce the
Fund's yield.
LEVERAGE THROUGH BORROWING
The STRATEGIC INCOME FUND, INSURED TAX-FREE BOND FUND and INTERNATIONAL
EQUITY FUND (via underlying funds) may borrow money for investment
purposes. This borrowing, which is known as leveraging, generally will be
unsecured, except to the extent a Fund enters into reverse repurchase
agreements. The 1940 Act requires the Funds to maintain continuous asset
coverage (that is, total assets including borrowings, less liabilities
exclusive of borrowings) of 300% of the amount borrowed. If the 300% asset
coverage should decline as a result of market fluctuations or other
reasons, the Funds may be required to sell some of their portfolio
holdings within three days to reduce the debt and restore the 300% asset
coverage. However, it may be disadvantageous from an investment standpoint
to sell securities at that time.
Among the forms of borrowing in which a Fund may engage is the entry into
reverse repurchase agreements with banks, brokers or dealers. These
transactions involve the transfer by a Fund of an underlying debt
instrument in return for cash proceeds based on a percentage of the value
of the security. The Fund retains the right to receive interest and
principal payments on the security. At an agreed upon future date, a Fund
repurchases the security at an agreed-upon price. In certain types of
agreements, there is no agreed upon repurchase date, and interest payments
are calculated daily, often based on the prevailing U.S. government
securities or other high-quality liquid debt securities at least equal to
the aggregate amount of its reverse repurchase obligations, plus accrued
interest, in certain cases, in accordance with releases promulgated by the
SEC. The SEC views reverse repurchase transactions as collateralized
borrowings by a Fund. These agreements, which are treated as if
reestablished each day, are expected to provide a Fund with a flexible
borrowing tool.
Borrowing by a Fund creates an opportunity for increased net income, but
at the same time, creates special risk considerations. For example,
leveraging may exaggerate the effect on net asset value of any increase or
decrease in the market value of a Fund's portfolio. To the extent the
income derived from securities purchased with borrowed Funds exceeds the
interest a Fund will have to pay, the Fund's net income will be greater
than if borrowing were not used.
Conversely, if the income from the assets retained with borrowed Funds is
not sufficient to cover the cost of borrowing, the net income of a Fund
will be less than if borrowing were not used, and, therefore, the amount
available for distribution to shareholders as dividends will be reduced. A
Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to
maintain a line of credit; either of these requirements would increase the
cost of borrowing over the stated interest rate.
LENDING OF PORTFOLIO SECURITIES
The STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, GROWTH EQUITY
FUND, SCIENCE & TECHNOLOGY FUND, CAPITAL APPRECIATION FUND and
INTERNATIONAL EQUITY FUND (via underlying funds) may lend portfolio
securities to one-third of the value of their 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 lend 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.
BANK INSTRUMENTS
The RELATIVE VALUE FUND may invest in domestic bank obligations such as:
|X| certificates of deposit,
|X| demand and time deposits,
|X| bankers' acceptances,
|X| notes,
|X| bonds, and
|X| discount notes of the following U.S. government agencies or
instrumentalities:
(i) Federal Home Loan Banks,
(ii) FNMA,
(iii) GNMA,
(iv) National Bank for Cooperatives,
(v) Banks for Cooperatives,
(vi) Tennessee Valley Authority,
(vii) Export-Import Bank of the United States,
(viii) Commodity Credit Corporation,
(ix) Federal Financing Bank,
(x) The Student Loan Marketing Association,
(xi) FHLMC, or
(xii) National Credit Union Administration.
In addition to domestic bank obligations, the Fund may invest in:
|X| Eurodollar Certificates of Deposit issued by foreign branches of U.S.
or foreign banks;
|X| Eurodollar Time Deposits, which are U.S. dollar-denominated deposits
in foreign branches of U.S. or foreign banks;
|X| Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United States;
and
|X| Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and held
in the United States.
MONEY MARKET SECURITIES
The STRATEGIC INCOME FUND, GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND
and CAPITAL APPRECIATION FUND may invest in U.S. dollar and foreign dollar
short-term money market instruments. The U.S. GOVERNMENT INCOME FUND may
invest in only U.S. short-term money market instruments. The short-term
money market instruments include:
|X| 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;
|X| 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;
|X| obligations of the U.S. government or its agencies or
instrumentalities;
|X| repurchase agreements; and
|X| 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 STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, GROWTH EQUITY
FUND, SCIENCE & TECHNOLOGY FUND, RELATIVE VALUE FUND, STELLAR FUND,
CAPITAL APPRECIATION FUND and INTERNATIONAL EQUITY FUND (via underlying
funds) may invest in foreign securities.
The types of international securities in which the GROWTH EQUITY FUND,
STELLAR FUND and CAPITAL APPRECIATION 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.
Although considered separate securities categories for purposes of the
STELLAR FUND'S investment policies, the Fund's investment in money market
securities issued by foreign banks and in international securities could
result in up to 50% of the Fund's net assets being invested in securities
of foreign issuers. In addition, the Fund's investment in precious metals
securities of foreign issuers, when aggregated with the above, could
result in greater than 50% of the Fund's net assets being invested in
securities of foreign issuers. The GROWTH EQUITY FUND and CAPITAL
APPRECIATION FUND do 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
o it is likely that foreign securities may be less liquid or more volatile
o 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.
FOREIGN CURRENCY TRANSACTIONS
The STRATEGIC INCOME FUND may use foreign currency transactions to settle
securities transactions. Currency transactions may be conducted either on
a spot or cash basis at prevailing rates or through forward foreign
currency exchange contracts (see below). Because foreign securities may be
denominated in foreign currencies, changes in foreign currency exchange
rates could affect the Fund's net asset value, the value of interest
earned, gains and losses realized on the sale of securities, and net
investment income and capital gain. If the value of a foreign currency
rises against the U.S. dollar, the value of an underlying fund's assets
denominated in that currency will increase. If the value of the foreign
currency declines against the U.S. dollar, the value of the underlying
fund assets denominated in that currency decrease. Foreign currency
transactions may be used to protect assets against adverse changes in
foreign currency exchange rates or exchange control regulations. However,
these transactions may limit potential gains that might result from an
increase in the value of the currency and could cause losses.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The STRATEGIC INCOME FUND may engage in forward foreign currency exchange
contracts, which are obligations to purchase or sell an amount of a
particular currency at a specific price and on a future date agreed upon
by the parties. The Fund may be able to protect against the decline of a
particular foreign currency be entering into a forward contract to sell an
amount of the currency at an approximated value of all or a portion of the
assets in that currency. However, this type of short-term hedging strategy
is very uncertain due to the difficulties of predicting short-term
currency market movement and of precisely matching forward contract
amounts with the constantly changing value of the securities involved.
Also, although the Fund may purchase and write put and call options on
foreign currencies to protect against decline, those transactions involve
a degree of risk. For instance, the Fund could be required to purchase or
sell foreign currencies at disadvantageous exchange rates that would cause
the Fund to incur losses.
Generally, no commission charges or deposits are involved. At the time the
Fund enters into a forward contract, Fund assets with a value equal to the
Fund's obligation under the forward contract are segregated on the Fund's
records and are maintained until the contract has been settled. The Fund
will not enter into a forward contract with a term of more than one year.
The Fund will generally enter into a forward contract to provide the
proper currency to settle a securities transaction at the time the
transaction occurs ("trade date"). The period between the trade date and
settlement date will vary between 24 hours and 30 days, depending upon
local custom.
Although the adviser will consider the likelihood of changes in currency
values when making investment decisions, the adviser believes that it is
important to be able to enter into forward contracts when it believes the
interests of the Fund will be served. The Fund will not enter into forward
contracts for hedging purposes in a particular currency in an amount in
excess of the Fund's assets denominated in that currency.
OPTIONS TRANSACTIONS
The STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, GROWTH EQUITY
FUND, SCIENCE & TECHNOLOGY FUND, STELLAR FUND and CAPITAL APPRECIATION
FUND may engage in options transactions. These Funds 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 Funds may write (sell) covered call options and covered put options.
(The STRATEGIC INCOME FUND may only write covered call and put options to
the extent of 20% of the value of its net assets at the time such option
contracts are written.) By writing a call option, a Fund become 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 Funds 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 Funds will be considered "covered" with respect to a put option they
write if, so long as it is obligated as the writer of the put option, they
deposit and maintain with their custodian in a segregated account liquid
assets having a value equal to or greater than the exercise price of the
option. (In the case of the STELLAR FUND, the aggregate value of the
obligations underlying the puts will not exceed 50% of the Fund's net
assets.)
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 Funds receive a premium
from writing a call or put option that they retain 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 STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, INSURED TAX-FREE
BOND FUND, GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND, CAPITAL
APPRECIATION FUND and INTERNATIONAL EQUITY FUND (via underlying funds) may
invest in futures and options transactions as a means of reducing
fluctuations in the Funds' net asset value. These Funds 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 Funds may also purchase put options on
portfolio securities to hedge a portion of their portfolio investments.
The Funds 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 Funds 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 or 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 STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, INSURED
TAX-FREE BOND FUND, GROWTH EQUITY FUND, CAPITAL APPRECIATION FUND and
INTERNATIONAL EQUITY FUND (via underlying funds) and may engage in
margin in futures transactions. Unlike the purchase or sale of a
security, the Funds do 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.
Regarding INSURED TAX-FREE BOND FUND, to the extent required to comply
with CFTC Regulation 4.5 and thereby avoid status as a "commodity pool
operator," the Fund will not enter into a futures contract for other
than bona fide hedging purposes. The Fund will also not purchase an
option on a futures contract if immediately thereafter the initial
margin deposits for futures contracts held by the Fund, plus premiums
paid by it for open options on futures contracts, would exceed 5% of
the market value of the Fund's net 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%.
Second, INSURED TAX-FREE BOND FUND will not enter into these contracts
for speculative purposes; rather, these transactions are entered into
only for bona fide hedging purposes, or other permissible purposes
pursuant to regulations promulgated by the CFTC. Third, since the Fund
does not constitute a commodity pool, it will not market itself as
such, nor serve as a vehicle for trading in commodity futures or
commodity options markets. Finally, because the Fund will submit to the
CFTC special calls for information, the Fund will not register as a
commodities pool operator.
PUT OPTIONS ON FUTURES CONTRACTS
The STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, INSURED
TAX-FREE BOND FUND, GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND,
CAPITAL APPRECIATION FUND and INTERNATIONAL EQUITY FUND (via underlying
funds) 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, a 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.
The INSURED TAX-FREE BOND FUND may write listed put options on futures
contracts to hedge its portfolio against a decrease in market interest
rates. The Fund will use these transactions to attempt to protect its
ability to purchase portfolio securities in the future at price levels
existing at the time it enters into the transaction. When the Fund
writes (sells) a put on a futures contract, it receives a cash premium
in exchange for granting to the purchaser of the put the right to
receive from the Fund, at the strike price, a short position in the
futures contract. (The Fund undertakes the obligation to assume a long
futures position.) This is done even though the strike price upon
exercise of the option is greater than the value of the futures
position received by such holder. As market interest rates decrease,
the market price of the underlying futures contract normally increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the
buyer can sell the same futures contract at a higher price in the
market. If the value of the underlying futures position is not such
that exercise of the option would be profitable to the option holder,
the option will generally expire without being exercised. The premium
received by the Fund can then be used to offset the higher prices of
portfolio securities to be purchased in the future.
To avoid the exercise of an option sold by the INSURED TAX-FREE BOND
FUND, the general policy of the Fund is to cancel its obligations under
an option by entering into a closing purchase transaction, if
available. However, if the Fund determines that it is in its best
interest to deliver the underlying futures position, the Fund will not
cancel its option obligations. A closing purchase transaction consists
of the purchase by the Fund of an option having the same term as the
option sold by the Fund, and has the effect of canceling the Fund's
position as a seller. The premium paid by the Fund in executing a
closing purchase transaction may be higher than the premium received
when the option was sold depending, in large part, upon the relative
price of the underlying futures position at the time of each
transaction. If the hedge is successful, the cost of buying the second
option will be less than the premium received by the Fund for the
initial option.
CALL OPTIONS ON FUTURES CONTRACTS
In addition to purchasing put options on futures, the STRATEGIC INCOME
FUND, U.S. GOVERNMENT INCOME FUND, INSURED TAX-FREE BOND FUND, GROWTH
EQUITY FUND, SCIENCE & TECHNOLOGY FUND, CAPITAL APPRECIATION FUND and
INTERNATIONAL EQUITY FUND (via underlying funds) 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.
An additional way in which the INSURED TAX-FREE BOND FUND may hedge
against decreases in market interest rates is to buy a listed call
option on a futures contract. The Fund will use these transactions to
attempt to protect its ability to purchase portfolio securities in the
future at price levels existing at the time it enters into the
transaction. When the Fund purchases a call on a futures contract, it
receives the right (but not the obligation) to enter into the
underlying futures contract at a strike price determined at the time
the call was purchased. The Fund is able to do this regardless of the
comparative market value of the futures position at the time that the
option is exercised. The holder of a call option has the right to
receive a long (or buyer's) position in the underlying futures
contract. As market interest rates fall or stock prices increase, the
value of the underlying futures contract will normally increase,
resulting in an increase in value of the Fund's option position. When
the market price of the underlying futures contract increases above the
strike price plus premium paid, the Fund could exercise its option and
buy the futures contract below market price. Prior to the exercise or
expiration of the call option, the Fund could sell an identical call
option and close out its position. If the premium received upon selling
the offsetting call is greater than the premium originally paid, the
Fund has completed a successful hedge.
CALL OPTIONS ON STOCK INDEX FUTURES CONTRACTS
In addition to writing call options on futures contracts, the STRATEGIC
INCOME FUND, GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND, CAPITAL
APPRECIATION FUND and INTERNATIONAL EQUITY FUND (via underlying funds)
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 STRATEGIC INCOME BOND FUND, GROWTH EQUITY FUND, SCIENCE &
TECHNOLOGY FUND, CAPITAL APPRECIATION FUND and INTERNATIONAL EQUITY
FUND (via underlying funds) 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 write 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.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The INSURED TAX-FREE BOND FUND, U.S. GOVERNMENT INCOME FUND and
INTERNATIONAL FUND (via underlying funds) may purchase put options on
portfolio securities to protect against price movements in their Funds'
portfolio securities. 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.
PURCHASING CALL OPTIONS ON PORTFOLIO SECURITIES
The INTERNATIONAL EQUITY FUND (via underlying funds) may purchase call
options on portfolio securities to protect against price movements in
the Fund's portfolio securities. A call option gives the underlying
Fund, in return for a premium, the right (but not the obligation) to
buy the underlying securities from the seller at a specified price
during the term of the option.
WRITING COVERED PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The U.S. GOVERNMENT INCOME FUND may write covered call options to
generate income. As writer of a call option, the Fund has the
obligation upon exercise of the option during the option period to
deliver the underlying security upon payment of the exercise price. The
Fund may only sell call options either on securities held in its
portfolio or on securities, which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount
of any additional consideration).
The INTERNATIONAL EQUITY FUND (via underlying funds) may write covered
put and call options to generate income and thereby protect against
price movements in particular securities in the underlying funds'
portfolios. As the writer of a call option, an underlying fund has the
obligation upon exercise of the option during the option period to
deliver the underlying security upon payment of the exercise price.
Where an underlying fund writes a put option on a futures contract, it
is undertaking to buy a particular futures contract at a fixed price at
any time during a specified period if the option is exercised.
An underlying fund may only write call options either on securities
held in its portfolio or on securities, which it has the right to
obtain without payment of further consideration (or has segregated cash
in the amount of any additional consideration). In the case of put
options, the underlying fund will segregate cash, U.S. Treasury
obligations or liquid securities with a value equal to or greater than
the exercise price of the underlying securities.
RISKS
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 STRATEGIC INCOME FUND, GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND,
STELLAR FUND and U.S. GOVERNMENT INCOME 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 GROWTH EQUITY FUND, STRATEGIC INCOME FUND, SCIENCE & TECHNOLOGY FUND,
STELLAR FUND and U.S. GOVERNMENT INCOME FUND may invest in ARMS. ARMS are
actively traded, mortgage-backed securities representing interests in
adjustable rather than fixed interest rate mortgages. These Funds invest
in ARMS issued by GNMA, FNMA, and FHLMC. 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 STRATEGIC INCOME FUND, GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND,
STELLAR FUND and U.S. GOVERNMENT INCOME 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 Funds 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 Funds invest 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 GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND, STRATEGIC INCOME FUND,
STELLAR FUND and U.S. GOVERNMENT INCOME 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. These
Funds 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.
MUNICIPAL SECURITIES
The TAX -FREE MONEY MARKET FUND, OHIO TAX-FREE MONEY MARKET FUND and
INSURED TAX-FREE BOND FUND invest primarily in municipal securities.
Municipal securities are debt obligations issued by or on behalf of
states, territories, and possessions of the United States, including the
District of Columbia, and any political subdivisions or financing
authority of any of these, the income from which is, in the opinion of
qualified legal counsel, exempt from federal regular income tax
("Municipal Securities").
Municipal Securities are generally issued to finance public works such as
airports, bridges, highways, housing, hospitals, mass transportation
projects, schools, street, and water and sewer works. They are also issued
to repay outstanding obligations, to raise Funds for general operating
expenses, and to make loans to other public institutions and facilities.
Municipal Securities include industrial development bonds issued by or on
behalf of public authorities to provide financing aid to acquire sites or
construct and equip facilities for privately or publicly owned
corporations. The availability of this financing encourages these
corporations to locate within the sponsoring communities and thereby
increases local employment.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith and credit and taxing power for the
payment of principal and interest. Interest on and principal of revenue
bonds, however, are payable only from the revenue generated by the
facility financed by the bond or other specified sources of revenue.
Revenue bonds do not represent a pledge of credit or create any debt of or
charge against the general revenues of a municipality or public authority.
Industrial development bonds are typically classified as revenue bonds.
The TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE MONEY MARKET FUND invest
in Municipal Securities with remaining maturities of 397 days or less at
the time of purchase by a Fund.
The INSURED TAX-FREE BOND FUND may invest in, but is not limited to, the
following types of Municipal Securities:
|X| industrial development bonds;
|X| municipal notes and bonds;
|X| serial notes and bonds sold with a series of maturity dates;
|X| tax anticipation notes and bonds sold to finance working capital needs of
municipalities in anticipation of receiving taxes at a later date;
|X| bond anticipation notes sold in anticipation of the issuance of longer-term
bonds in the future;
|X| prerefunded municipal bonds refundable at a later date (payment of principal
and interest on prerefunded bonds are assured through the first call date by
the deposit in escrow of U.S. government securities); and
|X| general obligation bonds secured by a municipality's pledge of taxation.
CHARACTERISTICS
When determining whether a Municipal Security presents minimal credit
risks, the investment adviser considers the creditworthiness of the
issuer of a Municipal Security, the issuer of a demand feature if a
Fund has the unconditional right to demand payment from the issuer of
the interest, or the credit enhancer of payment by either of those
issuers. A Fund is not required to sell a Municipal Security if the
security's rating is reduced below the required minimum subsequent to
the Fund's purchase of the security. The Trustees and the investment
adviser consider this event, however, in the determination of whether a
Fund should continue to hold the security in its portfolio. If ratings
made by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
"S&P", or Fitch Investors Service, Inc. ("Fitch"), change because of
changes in those organizations or in their rating systems, the Funds
will try to use comparable ratings as standards in accordance with the
investment policies described in the Funds' prospectuses.
Regarding the INSURED TAX-FREE BOND FUND, securities rated Baa or BBB
by an NRSRO have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than higher rated
bonds. If any security invested in by the Fund loses its rating or has
its rating reduced after the Fund has purchased it, the Fund is not
required to sell or otherwise dispose of the security, but may consider
doing so.
There are no restrictions on the maturity of municipal securities in
which the Fund may invest. The Fund will seek to invest in Municipal
Securities of such maturities as the investment adviser believes will
produce current income consistent with prudent investment. The
investment adviser will also consider current market conditions and the
cost of the insurance obtainable on such securities.
PARTICIPATION INTERESTS
The financial institutions from which the tax-free funds purchase
participation interests frequently provide or secure from other
financial institutions irrevocable letters of credit or guarantees and
give the Funds the right to demand payment on specified notice
(normally within 7 days for the money market fundsand 30 days for the
bond fund) from the issuer of the letter of credit or guarantee. These
financial institutions may charge certain fees in connection with their
repurchase commitments, including a fee equal to the excess of the
interest paid on the municipal securities over the negotiated yield at
which the participation interests were purchased by a Fund. By
purchasing participation interests, the Fund is buying a security
meeting its quality requirements and is also receiving the tax-free
benefits of the underlying securities.
In the acquisition of participation interests, the investment adviser
will consider the following quality factors:
o a high-quality underlying municipal security (of which the Fund
takes possession);
o a high-quality issuer of the participation interest; or
o a guarantee or letter of credit from a high-quality financial
institution supporting the participation interest.
MUNICIPAL LEASES
The TAX-FREE MONEY MARKET FUND, OHIO TAX-FREE MONEY MARKET FUND and
INSURED TAX-FREE BOND FUND may purchase Municipal Securities in the
form of participation interests that represent an undivided
proportional interest in lease payments by a governmental or nonprofit
entity. The lease payments and other rights under the lease provide for
and secure payments on the certificates. Municipal charters or the
nature of the appropriation for the lease may limit lease obligations.
In particular, lease obligations may be subject to periodic
appropriation. If the entity does not appropriate Funds for future
lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the participants cannot
accelerate lease obligations upon default. The participants would only
be able to enforce lease payments as they became due. In the event of a
default or failure of appropriation, unless the participation interests
are credit enhanced, it is unlikely that the participants would be able
to obtain an acceptable substitute source of payment.
Municipal leases may be considered illiquid so the adviser must
carefully examine the liquidity of the lease before investing. The
adviser considers:
1. whether the lease can be terminated by the lessee;
2. the potential recovery, if any, from a sale of the leased property
if the lease was terminated;
3. the lessee's general credit strength;
4. the possibility that the lessee will discontinue appropriating
funding for the lease property because the property is no longer
deemed essential to its operations; and
5. any credit enhancement or legal recourse provided upon an event of
nonappropriation or other termination of the lease.
RATINGS
The securities in which the TAX-FREE MONEY MARKET FUND and OHIO
TAX-FREE MONEY MARKET FUND are permitted to invest are rated in the
highest short-term rating category by one or more ("NRSROs"). A NRSRO's
highest rating category is determined without regard for sub-categories
and gradations. For example, securities rated A-1 or A-1+ by "S&P",
Prime-1 by Moody's, or F-1 (+ or -) by Fitch are all considered rated
in the highest short-term rating category. The Funds will follow
applicable regulations in determining whether a security rated by more
than one NRSRO can be treated as being in the highest short-term rating
category. Additionally, the Funds may purchase unrated securities which
are determined to be of comparable quality of securities rated in the
highest short-term rating category by NRSRO's and which are otherwise
eligible for purchase by the Funds.
The Funds may also purchase bonds which have no short-term ratings but
which have long-term ratings by NRSROs in the two highest ratings
categories. The Funds have the ability but no present intention of
investing in Municipal Securities that are rated MIG2 or VMIG2 by
Moody's, F-2 by Fitch, or A-2 or SP-2 by S&P and tax-exempt commercial
paper that is rated P-2 by Moody's, A-2 by S&P, or F-2 by Fitch, or
securities which are not rated but are deemed to be of comparable
quality. Shareholders of the Funds will be notified should the Funds
decide to invest in these securities.
CREDIT ENHANCEMENT
Some of the investments of the TAX-FREE MONEY MARKET FUND and OHIO
TAX-FREE MONEY MARKET FUND may be credit enhanced by a guaranty, letter
of credit or insurance. Any bankruptcy, receivership, default or change
in the credit quality of the credit enhancer will adversely affect the
quality and marketability of the underlying security and could cause
losses to a Fund and affect its share prices. The Funds may have more
than 25% of their respective total assets invested in securities
credit-enhanced by banks. The Funds typically evaluate the credit
quality and ratings of credit-enhanced securities based upon the
financial condition and ratings of the party providing the credit
enhancement, rather than the issuer.
DEMAND FEATURES
The TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE MONEY MARKET FUND may
purchase securities subject to puts and standby commitments which allow
them to purchase securities at their principal amount within a fixed
period of time following a demand by the Funds. The demand feature may
be issued by the issuer of the underlying securities, a dealer in the
securities or by another third party and may not be separated from the
underlying security. These arrangements provide the Funds with
liquidity, but do not protect the Funds against changes in the market
value of the securities. If the issuer of the demand feature enters
bankruptcy, receivership or some other event terminates the demand
feature before its exercise, the liquidity of the underlying security
will be adversely affected. Demand features that are exercisable after
payment default on the underlying security may be treated as a form of
credit enhancement.
VARIABLE RATE MUNICIPAL SECURITIES
The INSURED TAX-FREE BOND FUND may purchase some municipal securities
with variable interest rates. Variable interest rates are ordinarily
stated as a percentage of the prime rate of a bank or some similar
standard, such as the 91-day U.S. Treasury bill rate. Variable interest
rates are adjusted on a periodic basis (i.e., every 30 days). Many
variable rate municipal securities are subject to payment of principal
on demand by the Fund, usually in not more than seven days. If a
variable rate municipal security does not have this demand feature, or
the demand feature extends beyond seven days and the adviser believes
the security cannot be sold within seven days, the adviser may consider
the security to be illiquid. However, the Fund's investment limitations
provide that it will not invest more than 15% of its net assets in
illiquid securities. All variable rate municipal securities will meet
the quality standards for the Fund. The adviser has been instructed by
the Trustees to monitor the pricing quality and liquidity of the
variable rate municipal securities, including participation interests
held by the Fund, on the basis of published financial information and
reports of NRSROs and other analytical services.
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly,
as interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations. Many municipal securities
with variable interest rates purchased by the Fund are subject to
repayment of principal (usually within seven days) on the Fund's
demand. The terms of these variable rate demand instruments require
payment of principal and accrued interest from the issuer of the
municipal obligations, the issuer of the participation interests, or a
guarantor of either issuer.
INDUSTRIAL DEVELOPMENT BONDS
The INSURED TAX-FREE BOND FUND may invest in industrial development
bonds, which is a type of municipal security. Industrial development
bonds are generally issued to provide financing aid to acquire sites or
construct and equip facilities for use by privately or publicly owned
entities. Most state and local governments have the power to permit the
issuance of industrial development bonds to provide financing for such
entities in order to encourage the corporations to locate within their
communities. Industrial development bonds, which are in most cases
revenue bonds, do not represent a pledge of credit or create any debt
of a municipality or a public authority, and no taxes may be levied for
the payment of principal or interest on these bonds. The principal and
interest is payable solely out of monies generated by the entities
using or purchasing the sites or facilities. These bonds will be
considered municipal securities eligible for purchase by the Fund if
the interest paid on them, in the opinion of bond counsel or in the
opinion of the officers of the Trust and/or the adviser, is exempt from
federal income tax. The Fund may invest more than 25% of its total
assets in industrial development bonds (including pollution control
revenue bonds) as long as they are not from the same facility or
similar types of facilities or projects.
RISKS
Yields on municipal securities depend on a variety of factors,
including: the general conditions of the money market and the taxable
and municipal securities markets; the size of the particular offering;
the maturity of the obligations; and the credit quality of the issue.
The ability of the Funds to achieve their investment objectives also
depends on the continuing ability of the issuers of municipal
securities to meet their obligations for the payment of interest and
principal when due.
Regarding the INSURED TAX-FREE BOND FUND, the value of the Fund's
shares will fluctuate. The amount of this fluctuation is dependent upon
the quality and maturity of the municipal securities in the Fund's
portfolio, as well as on market conditions. Municipal securities prices
are interest rate sensitive, which means that their value varies
inversely with market interest rates. Thus, if market interest rates
have increased from the time a security was purchased, the security, if
sold, might be sold at a price less than its cost. Similarly, if market
interest rates have declined from the time a security was purchased,
the security, if sold, might be sold at a price greater than its cost.
(In either instance, if the security was held to maturity, no loss or
gain normally would be realized as a result of interim market
fluctuations.)
Further, any adverse economic conditions or developments affecting the
states or municipalities could impact the Fund's portfolio. Investing
in municipal securities that meet the Fund's quality standards may not
be possible if the states and municipalities do not maintain their
current credit ratings.
MUNICIPAL BOND INSURANCE
The INSURED TAX-FREE BOND FUND may purchase municipal securities
covered by insurance. The insurance guarantees the timely payment of
principal at maturity and interest on such securities. These insured
municipal securities are either:
1. covered by an insurance policy applicable to a particular security,
whether obtained by the issuer of the security or by a third party
("Issuer-Obtained Insurance"), or
2. insured under master insurance policies issued by municipal bond
insurers, which may be purchased by the Fund (the "Policies ").
The Fund will require or obtain municipal bond insurance when
purchasing municipal securities that would not otherwise meet the
Fund's quality standards. The Fund may also require or obtain municipal
bond insurance when purchasing or holding specific municipal securities
when, in the opinion of the adviser, such insurance would benefit the
Fund, for example, through improvement of portfolio quality or
increased liquidity of certain securities. The adviser anticipates that
at least 65% of the Fund's total assets will be invested in insured
municipal securities.
Issuer-Obtained Insurance Policies are non-cancelable and continue in
force as long as the municipal securities are outstanding and their
respective insurers remain in business. If a municipal security is
covered by Issuer-Obtained Insurance, then such security need not be
insured by the Policies purchased by the Fund.
The Fund may purchase two types of Policies issued by municipal bond
insurers.
1. One type of Policy covers certain municipal securities only during
the period in which they are in the Fund's portfolio. In the event
that a municipal security covered by such a Policy is sold from
the Fund, the insurer of the relevant Policy will be liable only
for those payments of interest and principal which are then due
and owing at the time of sale.
2. The other type of Policy covers municipal securities not only while
they remain in the Fund's portfolio, but also until their final
maturity even if they are sold out of the Fund's portfolio. This
allows the securities to have coverage that benefits all subsequent
holders of those municipal securities. The Fund will obtain insurance
covering municipal securities until final maturity even after they are
sold out of the Fund's portfolio only if, in the judgment of the
adviser, the Fund would receive net proceeds from the sale of those
securities. Net proceeds are calculated AFTER deducting the cost of
the permanent insurance and related fees. Also, the proceeds received
must be significantly more than the proceeds the Fund would have
received if the municipal securities were sold without insurance.
Payments received from municipal bond insurers may not be tax-exempt
income to shareholders of the Fund.
The Fund pays the premiums for the Policies and, as a result, the yield
on the Fund's portfolio is reduced. Premiums for the Policies are paid
by the Fund monthly, and are adjusted for purchases and sales of
municipal securities during the month. Depending upon the
characteristics of the municipal security held by the Fund, the annual
premiums for the Policies are estimated to range from 0.10% to 0.25% of
the value of the municipal securities covered under the Policies, with
an average annual premium rate of approximately 0.175%.
The Fund may purchase Policies from Municipal Bond Investors Assurance
Corp. ("MBIA"), AMBAC Indemnity Corporation ("AMBAC"), Financial
Guaranty Insurance Company ("Financial Guaranty"), Financial Security
Assurance ("FSA") or any other municipal bond insurer which is rated in
the highest rating category by an NRSRO. Under each Policy, the insurer
is obligated to provide insurance payments pursuant to valid claims.
The claims must be equal to the payment of principal and interest on
those municipal securities the Policy insures. The Policies will have
the same general characteristics and features. A municipal security
will be eligible for coverage if it meets certain requirements set
forth in a Policy. In the event interest or principal on an insured
municipal security is not paid when due, the insurer covering the
security will be obligated under its Policy to make such payment not
later than 30 days after it has been notified by the Fund that such
non-payment has occurred. The insurance feature is intended to reduce
financial risk, but the cost of the insurance and compliance with the
investment restrictions imposed by the guidelines in the Policies will
reduce the yield to shareholders of the Fund.
MBIA, AMBAC, Financial Guaranty and FSA will not have the right to
withdraw coverage on securities insured by their Policies so long as
such securities remain in the Fund's portfolio. Also neither, MBIA,
AMBAC, Financial Guaranty or FSA may cancel their Policies for any
reason except failure to pay premiums when due. MBIA, AMBAC, Financial
Guaranty and FSA will reserve the right at any time upon 90 days'
written notice to the Fund to refuse to insure any additional municipal
securities purchased by the Fund after the effective date of such
notice. The Trustees will reserve the right to terminate any of the
Policies if they determine that the benefits to the Fund of having its
portfolio insured under such Policy are not justified by the expense
involved.
Additionally, the Board of Trustees reserves the right to enter into
contracts with insurance carriers other than MBIA, AMBAC, Financial
Guaranty or FSA if such carriers are rated in the highest rating
category by an NRSRO.
Under the Policies, municipal bond insurers unconditionally guarantee
to the Fund the timely payment of principal and interest on the insured
municipal securities when and as such payments become due. However, the
issuer does not pay principal and interest. In the event of any
acceleration of the due date of the principal, the guaranteed payments
will be made in such amounts and at such times as payments of principal
would have been due had there been no acceleration. Reasons for
possible acceleration are mandatory or optional redemption (other than
acceleration by reason of mandatory sinking Fund payments), default or
otherwise. The municipal bond insurers will be responsible for such
payments less any amounts received by the Fund from any trustee for the
municipal bond holders or from any other source. The Policies do not
guarantee payment on an accelerated basis, the payment of any
redemption premium, the value for the shares of the Fund or payments of
any tender purchase price upon the tender of the municipal securities.
The Policies also do not insure against nonpayment of principal of or
interest on the securities resulting from the insolvency, negligence or
any other act or omission of the trustee or other paying agent for the
securities. However, with respect to small-issue industrial development
municipal bonds and pollution-control revenue municipal bonds covered
by the Policies, the municipal bond insurers guarantee the full and
complete payments required to be made by or on behalf of an issuer. The
insurers do this if there are any changes in the tax-exempt status of
interest on such municipal securities, including principal, interest or
premium payments required to be made by or on behalf of the issuer
pursuant to the terms of the municipal securities. A "when-issued"
municipal security will be covered under the Policies upon the
settlement date of the original issue of such "when-issued" municipal
security. In determining whether to insure municipal securities held by
the Fund, each municipal bond insurer will apply its own standard,
which corresponds generally to the standards it has established for
determining the insurability of new issues of municipal securities.
Regarding marketability of the Fund, if the Fund holds the first type
of Policy where the municipal bond insurers are liable only for the
Fund's payments of principal and interest, then the Fund has no
marketability benefit because the Policy terminates on the date of a
sale. On the other hand, since Issuer-Obtained Insurance will remain in
effect as long as the insured municipal securities are outstanding,
such insurance may enhance the marketability of municipal securities
covered thereby, but the exact effect, if any, on marketability cannot
be estimated. The Fund generally intends to retain any securities that
are in default or subject to significant risk of default. The Fund will
also place a value on the insurance, which ordinarily will be the
difference between the market value of the defaulted security and the
market value of similar securities of minimum high grade (i.e., rated
in the highest rating category by an NRSRO) that are not in default. To
the extent the Fund holds defaulted securities, it may be limited in
its ability to manage its investment and to purchase other municipal
securities. Except as described above with respect to securities that
are in default or subject to significant risk of default, the Fund will
not place any value on the insurance in valuing the municipal
securities that it holds.
Further information regarding the insurance companies is as follows:
|X| MUNICIPAL BOND INVESTORS ASSURANCE CORP. Municipal Bond
Investors Assurance Corp. is a wholly owned subsidiary of MBIA,
Inc., a Connecticut insurance company, which is owned by Aetna
Life and Casualty, Credit Local DeFrance CAECL, S.A., The Fund
American Companies and the public. The investors of MBIA, Inc.,
are not obligated to pay the obligations of MBIA. MBIA, domiciled
in New York, is regulated by the New York State Insurance
Department and licensed to do business in various states. The
address of MBIA is 113 King Street, Armonk, New York 10504, and
its telephone number is (914) 273-4345.
|X| AMBAC INDEMNITY CORPORATION AMBAC Indemnity Corporation is a
Wisconsin-domiciled stock insurance company, regulated by the
Insurance Department of Wisconsin, and licensed to do business in
various states. AMBAC is a wholly owned subsidiary of AMBAC, Inc.,
a financial holding company that is owned by the public. Copies of
certain statutory required filings of AMBAC can be obtained from
AMBAC. The address of AMBAC's administrative offices is One State
Street Plaza, 17th Floor, New York, New York 10004, and its
telephone number is (212) 668-0340.
|X| FINANCIAL GUARANTY INSURANCE COMPANY Financial Guaranty Insurance
Company ("FGIC") is a wholly owned subsidiary of FGIC Corporation,
a Delaware holding company. FGIC Corporation is wholly owned by
General Electric Capital Corporation. The investors in FGIC
Corporation are not obligated to pay the debts of or the claims
against Financial Guaranty. Financial Guaranty is subject to
regulation by the State of New York Insurance Department and is
licensed to do business in various states. The address of
Financial Guaranty is 175 Water Street, New York, New York 10038,
and its telephone number is (212) 607-3000.
|X| FINANCIAL SECURITY ASSURANCE HOLDINGS Financial Security Assurance
("FSA"), a wholly-owned subsidiary of Financial Security Assurance
Holdings domiciled in New York, is a mono-line financial guaranty
insurer of municipal bonds and asset-backed securities. The
investors in FSA are not obligated to pay the debts of or the
claims against FSA. FSA is subject to regulation by the State of
New York Insurance Department and is licensed to do business in
all fifty states and in the District of Columbia. The address of
FSA is 350 Park Avenue, New York, NY 10022, and its telephone
number is (212) 688-3101.
MORE INFORMATION ABOUT THE OHIO TAX-FREE MONEY MARKET FUND AND INVESTMENT RISKS
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As a non-diversified fund, the OHIO TAX-FREE MONEY MARKET FUND has no limit on
the percentage of assets that it may invest in any single issuer. An investment
in the Fund, therefore, will entail greater risk than would exist in a
diversified investment company because the higher percentage of investments
among fewer issuers may result in greater fluctuation in the total market value
of the Fund's portfolio. Any economic, political, or regulatory developments
affecting the value of securities in the Fund's portfolio will have a greater
impact on the total value of the portfolio than would be the case if the
portfolio were diversified among more issuers. The Fund may purchase an issue of
municipal securities in its entirety. The Fund intends to comply with Subchapter
M of the Internal Revenue Code. This undertaking requires that at the end of
each quarter of the taxable year, the aggregate value of all investments in any
one issuer (except U.S. government obligations, cash and cash items) that exceed
5% of the Fund's total assets shall not exceed 50% of the value of its total
assets. In addition, not more than 25% of its total assets will be invested in
the securities of any one issuer, except government securities or securities of
regulated investment companies.
The Fund invests in obligations of Ohio (the "State") issuers which result in
the Fund's performance being subject to risks associated with the overall
conditions present within the State. The following information is a brief
summary of the prevailing economic conditions and general summary of the State's
financial condition. This information is based on official statements relating
to securities that are believed to be reliable but should not be considered as a
complete description of all relevant information.
The Ohio economy is largely composed of manufacturing which is concentrated in
the automobile sector and other durable goods. The exposure to these industries,
particularly the auto sector, leaves the State vulnerable to an economic
slowdown associated with business cycles. The State has diversified its economy
over the past decade with services and trade composing roughly 50% of the
economy. Unemployment in Ohio over the past two years has been below the
national average, but population growth, as in many states around the Great
Lakes, has been stagnant.
The State acted promptly in addressing the fall in revenue from the last
recession with an expansion of the sales tax and cuts in appropriations. As a
result of prudent financial management, the State restored the budget
stabilization Fund in fiscal 1993. Strong performance resulted in reserve levels
that are well above the levels of 1990.
The overall condition of the State is further demonstrated by its debt ratings.
Ohio, rated Aaa by Moody's in the 1970's, was downgraded to Aa in 1979. Moody's
recently revised Ohio's rating upward to Aa1 in September of 1996. S&P first
rated the State in 1984 at AA; that rating was also upgraded to AA+ in October
of 1996.
The Fund's concentration in securities issued by the State and its political
subdivisions provides a greater level of risk than a Fund whose assets are
diversified across numerous states and municipal issuers. The ability of the
State or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political and demographic
conditions within the State; and the underlying fiscal condition of the State,
its counties and its municipalities.
MORE INFORMATION ABOUT THE INTERNATIONAL EQUITY FUND AND INVESTMENT RISKS
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Investing in mutual funds involves risk. This risk may be increased when
investing in the INTERNATIONAL EQUITY FUND because the Fund invests in a number
of underlying mutual funds. Moreover, investing through the Fund in an
underlying portfolio of mutual funds involves certain additional expenses and
certain tax results that would not be present in a direct investment in the
underlying funds.
The Fund's investment strategy of investing in the shares of other international
equity funds is designed (but not guaranteed) to reduce the risk associated with
investing in a single underlying fund with a single manager. Holding a
diversified portfolio of international equity funds also may provide access to a
wider range of management talent, companies, industries, countries and markets
than would be available through any one underlying fund. International
securities and markets are subject to currency rate fluctuations and potentially
greater price volatility and liquidity considerations than U.S. securities.
Investors have historically sought to reduce these risks through multi-country
diversification. The Fund is designed to give shareholders a single investment
that offers broad international diversification.
The 1940 Act provides that the Fund may not purchase the securities of an
underlying fund, if as a result, the Fund, together with any of its affiliates,
would own more than 3% of the total outstanding securities of that underlying
fund. For this purpose, shares of underlying funds held by private discretionary
investment advisory accounts managed by the adviser will be aggregated with
those held by the Fund. Thus, the Fund's ability to invest in shares of certain
underlying funds could be restricted and the adviser may have to select
alternative investments. Accordingly, when affiliated persons and other accounts
managed by the adviser hold shares of any of the underlying funds, the Fund's
ability to invest fully in shares of those Funds is restricted. The adviser must
then, in some instances, select alternative investments that would not have been
its first preference. By investing in the Fund, shareholders would bear not only
the Fund's total operating expenses, but the operating expenses of the
underlying funds as well.
The 1940 Act also provides that, when the Fund invests in shares of an
underlying fund, the underlying fund will be obligated to redeem shares held by
the Fund only in an amount up to 1% of the underlying fund's outstanding
securities during any period of less than 30 days. Therefore, if the Fund owns
more than 1% of an underlying fund's outstanding securities, the portion of the
investment exceeding 1% may be considered illiquid and, when added together with
other such illiquid securities, cannot exceed 15% of the Fund's net assets.
These limitations are not fundamental investment policies and may be changed by
the Board of Trustees without shareholder approval.
Under certain circumstances, an underlying fund may decide to make a redemption
payment by the Fund wholly or partly by an in-kind distribution of securities
from its portfolio, in lieu of cash, in conformity with the rules of the SEC. In
such cases, the Fund may hold portfolio securities distributed by an underlying
fund until the adviser determines that it is appropriate to dispose of such
securities.
Investment decisions by the investment advisers of the underlying funds are made
independently of each other and of the Fund and the adviser. Therefore, the
investment adviser of one underlying fund may be purchasing shares of the same
issuer whose shares are being sold by the investment adviser of another such
Fund. The result of this would be an indirect expense to the Fund without
accomplishing any investment purpose.
The Fund may purchase shares of both load and no-load underlying funds
(including those with a contingent deferred sales charge). However, in most
cases, the Fund anticipates purchasing Fund shares without a sales load or
qualifying for a reduction or waiver of any sales load because of the amount it
intends to invest in the underlying fund.
Although the Fund will normally invest in open-end management investment
companies, it also may invest in closed-end management investment companies
and/or unit investment trusts. Unlike open-end funds that offer and sell their
shares at net asset value plus any applicable sales charge, the shares of
closed-end funds and unit investment trusts may trade at a market value that
represents a premium, discount or spread to net asset value.
Under the 1940 Act, a mutual fund must sell its shares at the price (including
sales load, if any) described in its prospectus, and current rules under the
1940 Act do not permit negotiation of sales charges. Therefore, the Fund
currently is not able to negotiate the level of the sales charges at which it
will purchase shares of load funds. In some cases, the sales load may be as
great as 8.5% of the public offering price (or 9.29% of the net amount
invested). Nevertheless, when appropriate, the Fund will purchase such shares
pursuant to
(a) letters of intent, permitting it to obtain reduced or no sales
charges by aggregating its intended purchases over time
(generally 13 months from the initial purchase under the letter);
(b) rights of accumulation, permitting it to obtain reduced or no sales charges
as it purchases additional shares of an underlying fund; and
(c) the right to obtain reduced or no sales charges by aggregating
its purchases of several funds within a family of mutual funds.
As an operational policy, the Fund invests substantially all of its assets in
international funds. To the extent that the Fund's assets are invested in
underlying funds, its investment experience will correspond directly with that
of its proportionate investment in those Funds. This strategy also involves
certain additional expenses and certain tax results that would not be present in
a direct investment in mutual funds. Federal law imposes certain limits on the
purchases of mutual fund shares by the Fund. The Fund may purchase shares of
no-load funds available without a transaction fee and shares of mutual funds
that charge sales loads and/or pay their own distribution expenses. Each
underlying fund provides a prospectus and other disclosure documents to the
Fund. These documents are also available to Fund shareholders directly from the
underlying fund.
The adviser will attempt to identify and select a varied portfolio of
international equity funds which represents the greatest long-term capital
growth potential based on the investment adviser's analysis of many factors. The
selection of international equity funds may include international equity funds
that invest primarily in emerging markets or focus their investments on
geographic regions (provided they invest in at least three countries other than
the United States). Underlying funds may also concentrate their investments in
single industry.
If an underlying fund maintains its assets abroad, its board of directors must
consider at least annually whether maintaining the underlying fund's assets with
custodians in foreign countries is consistent with the best interests of the
underlying fund and its shareholders. The underlying fund's board of directors
also must consider the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories. However, in the
absence of willful misfeasance, bad faith or gross negligence, any losses
resulting from the holding of an underlying fund's portfolio securities in
foreign countries and/or with foreign custodians or securities depositories will
be at the risk of shareholders, unless the losses are insured. No assurance can
be given that the underlying fund's board of directors' appraisal of the risks
will always be correct or that such exchange control restrictions or political
acts of foreign governments might not occur.
Securities that are acquired by an underlying fund outside the United States and
that are publicly traded in the United States on a foreign securities exchange
or in a foreign securities market are not considered by the underlying fund to
be illiquid assets provided that:
(i) the underlying fund acquires and holds the securities with the intention of
reselling the securities in the foreign trading market,
(ii) the underlying fund reasonably believes it can readily dispose of the
securities in the foreign trading market or for cash in the United States, or
(iii) foreign market and current market quotations are readily available.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries. Investments in foreign securities where
delivery takes place outside the United States will have to be made in
compliance with any applicable U.S. and foreign currency restrictions and tax
laws (including laws imposing withholding taxes on any dividend or interest
income) and laws limiting the amount and types of foreign investments. Changes
of government administrations or economic or monetary policies in the United
States or abroad, or changed circumstances regarding convertibility or exchange
rates, could result in investment losses for the underlying fund.
The following is a description of the securities in which the underlying funds
may invest. Although many of the underlying funds may have the same or similar
investment policies as the Fund, they are not required to do so.
SECURITIES OF FOREIGN ISSUERS
An underlying fund may invest up to 100% of its total assets in the
equity securities of foreign issuers, including international stocks.
Foreign companies around the world (excluding the United States) issue
international stocks. Investing in non-U.S. securities carries
substantial risks in addition to those associated with domestic
investments.
An underlying fund may also invest in equity or debt securities of
foreign issuers traded on the New York or American Stock Exchanges or
in the over-the-counter market in the form of sponsored or unsponsored
American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), and European Depositary Receipts ("EDRs") (collectively,
"Depositary Receipts").
The Fund's investment approach of investing, through underlying funds,
in foreign securities is based on the premise that investing in
non-U.S. securities provides three potential benefits over investing
solely in U.S. securities:
1. the opportunity to invest in foreign issuers believed to have
superior growth potential;
2. the opportunity to invest in foreign countries with economic
policies or business cycles different from those of the U.S.; and
3. the opportunity to reduce portfolio volatility to the extent that
securities markets inside and outside the U.S. do not move in harmony.
The underlying funds in which the Fund invests may also take advantage
of the unusual opportunities for higher returns available from
investing in developing or emerging market countries. Underlying funds
may invest without limit in emerging market countries. A developing or
emerging market country generally is considered to be in the initial
stages of industrialization. Furthermore, the adviser considers
emerging market countries to be all countries considered by the
International Bank for Reconstruction and Development (more commonly
known as the World Bank) and the International Finance Corporation, as
well as countries that are classified by the United Nations or
otherwise regarded by their authorities, as developing. Investments in
developing countries are more volatile and risky than investments in
developed countries.
To the extent that the Fund invests in underlying funds that invest
primarily in the securities of a single country, any political,
economic or regulatory developments affecting the value of the
securities in the underlying fund's portfolio will have a greater
impact on the total value of the portfolio than would be the case if
the portfolio were diversified among the securities of more countries.
The economies of foreign countries may differ from the U.S. economy in
such respects as growth of gross domestic product, rate of inflation,
currency depreciation, capital reinvestment, resource self-sufficiency
and balance of payments position. Further, the economies of developing
countries generally are heavily dependent on international trade and,
accordingly, have been, and may continue to be, adversely affected by
trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been,
and may continue to be, adversely affected by economic conditions in
the countries with which they trade.
Prior governmental approval for foreign investments may be required
under certain circumstances in some countries, or in issuers or
industries deemed sensitive to national interests, and the extent of
foreign investment in certain debt securities and domestic companies
may be subject to limitation. The charters of individual companies may
also impose foreign ownership to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval
in some countries. Delays in, or a refusal to grant, any required
governmental registration or approval for such repatriation could
adversely affect an underlying fund. Any investment subject to such
repatriation controls will be considered illiquid if it appears
reasonably likely that this process will take more than seven days.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political
changes, governmental regulation, social instability or diplomatic
developments (including war) which could affect adversely the economies
of such countries or the value of the investments in those countries.
Brokerage commissions, custodial services and other costs relating to
foreign investment may be more expensive than in the United States.
Foreign markets may have different clearance and settlement procedures
and in certain markets there have been times when settlements have been
unable to keep pace with the volume of securities transactions, making
it difficult to conduct such transactions. The inability of an
underlying fund to make intended security purchases due to settlement
problems could cause an underlying fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to
settlement problems could result either in losses due to subsequent
declines in value of the portfolio security or, if an underlying fund
has entered into a contract to sell the security, could result in
possible liability to the purchaser.
Other differences between foreign and U.S. companies include:
|X| less publicly available information about foreign companies;
|X| the lack of uniform accounting, auditing and financial reporting
standards and practices or regulatory requirements comparable to those
applicable to U.S. companies;
|X| less readily available market quotations on foreign companies;
|X| differences in government regulation and supervision of foreign
stock exchanges, brokers, listed companies, and banks;
|X| differences in legal systems which may affect the ability to
enforce contractual obligations or obtain court judgments;
|X| the limited size of many foreign securities markets and limited
trading volume in issuers compared to the volume of trading in
U.S. securities, which could cause prices to be erratic for
reasons apart from factors that affect the quality of securities;
|X| the likelihood that foreign securities may be less liquid or more
volatile;
|X| unreliable mail service between countries;
|X| political or financial changes which adversely affect investments
in some countries;
|X| the possibility that certain markets may require payment for
securities before delivery; and
|X| religious and ethnic instability.
In the past, U.S. government policies have discouraged or restricted
certain investments abroad by investors. Investors are advised that
when such policies are instituted, the Fund will abide by them, and the
Fund anticipates compliance by the underlying funds.
DEPOSITARY RECEIPTS
ADRs are receipts typically issued by an American bank or trust company
that evidences ownership of underlying securities issued by a foreign
issuer. ADRs may not necessarily be denominated in the same currency as
the securities into which they may be converted. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets.
Foreign banks or trust companies typically issue EDRs and GDRs,
although U.S. banks or trust companies also may issue them, and
evidence ownership of underlying securities issued by either a foreign
or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets
outside the United States. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into
which they may be converted.
Depositary Receipts may be available for investment through "sponsored"
or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the security underlying the receipt and a
depositary, whereas an unsponsored facility may be established by a
depositary without participation by the issuer of the receipt's
underlying security. Holders of an unsponsored Depositary Receipt
generally bear all the costs of the unsponsored facility. The
depositary of an unsponsored facility frequently is under no obligation
to distribute shareholder communications received from the issuer of
the deposited security or to pass through to the holders of the
receipts voting rights with respect to the deposited securities.
Ownership of unsponsored Depositary Receipts may not entitle the
underlying funds to financial or other reports from the issuer of the
underlying security, to which they would be entitled as the owner of
sponsored Depositary Receipts.
EMERGING MARKETS
Generally included in emerging markets are all countries in the world
except Australia, Canada, Japan, New Zealand, the United States and
most western European countries. The risks of investing in developing
or emerging markets are similar to, but greater than, the risks of
investing in the securities of developed international markets since
emerging or developing markets tend to have economic structures that
are less diverse and mature, and political systems that are less
stable, than developed countries.
In certain emerging market countries, there is less government
supervision and regulation of business and industry practices, stock
exchanges, brokers and listed companies than in the United States. The
economies of emerging market countries may be predominantly based on a
few industries and may be highly vulnerable to change in local or
global trade conditions. The securities markets of many of these
countries also may be smaller, less liquid and subject to greater price
volatility than those in the United States. Some emerging market
countries also may have fixed or managed currencies which are not
free-floating against the U.S. dollar. Further, certain emerging market
country currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluation in the currencies in which portfolio securities
are denominated may have an adverse impact on the underlying funds.
Finally, many emerging market countries have experienced substantial,
and in some periods, extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had, and may
continue to have, negative effects on the economies for individual
emerging market countries. Moreover, the economies of individual
emerging market countries may differ favorably or unfavorably from the
U.S. economy in such respects as the rate of growth of domestic
product, inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency transactions may be used by underlying funds to obtain
the necessary currencies to settle securities transactions. Currency
transactions may be conducted either on a spot or cash basis at
prevailing rates or through forward foreign currency exchange
contracts.
Foreign currency transactions also may be used to protect assets
against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of
assets that are denominated in foreign currencies, such as foreign
securities or Funds deposited in foreign banks, as measured in U.S.
dollars. Although foreign currency exchanges may be used to protect
against a decline in the value of one or more currencies, such efforts
may also limit any potential gain that might result from a relative
increase in the value of such currencies and might, in certain cases,
result in losses. Further, an underlying fund may be affected either
unfavorably or favorably by fluctuations in the relative rates of
exchange between the currencies of different nations. Cross-hedging
transactions involve the risk of imperfect correlation between changes
in the values of the currencies to which such transactions relate and
changes in the value of the currency or other asset or liability that
is the subject of the hedge.
In order to hedge against foreign currency exchange rate risks, an
underlying fund may enter into forward foreign currency exchange
contracts and foreign currency futures contracts, as well as purchase
put or call options on foreign currencies, as described below. The
underlying fund may also conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market.
An underlying fund may enter into forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the
underlying fund from adverse changes in the relationship between the
U.S. dollar and foreign currencies. A forward contract is an obligation
to purchase or sell a specific currency for an agreed price at a future
date, which is individually negotiated and privately traded by currency
traders and their customers. An underlying fund may enter into a
forward contract, for example, when it enters into a contract for the
purchase or sale of a security denominated in a foreign currency in
order to "lock in" the U.S. dollar price of the security. In addition,
for example, when the underlying fund believes that a foreign currency
may suffer a substantial decline against the U.S. dollar, it may enter
into a forward contract to sell an amount of that foreign currency
approximating the value of some or all of the underlying fund's
portfolio securities denominated in such foreign currency, or when the
underlying fund believes that the U.S. dollar may suffer a substantial
decline against a foreign currency, it may enter into a forward
contract to buy that foreign currency for a fixed dollar amount.
This second investment practice is generally referred to as
"cross-hedging." Because in connection with the underlying fund's
forward foreign currency transactions an amount of the underlying
fund's assets equal to the amount of the purchase will be held aside or
segregated to be used to pay for the commitment, the underlying fund
will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or
to limit any potential risk. The segregated account will be marked to
market on a daily basis. While these contracts are not presently
regulated by the Commodities Futures Trading Commission ("CFTC"), the
CFTC may in the future assert authority to regulate forward contracts.
In such event, the underlying fund's ability to utilize forward
contracts in the manner set forth above may be restricted. Forward
contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for the underlying fund than if it had not engaged in such
contracts.
An underlying fund may purchase and write put and call options on
foreign currencies for the purpose of protecting against declines in
the dollar value of foreign portfolio securities and against increases
in the dollar cost of foreign securities to be acquired. As is the case
with other kinds of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount
of the premium received, and the underlying fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against fluctuation in exchange
rates, although, in the event of rate movements adverse to the
underlying fund's position, the underlying fund may forfeit the entire
amount of the premium plus related transaction costs. Options on
foreign currencies to be written or purchased by the underlying fund
will be traded on U.S. and foreign exchanges or over-the-counter.
An underlying fund may enter into exchange-traded contracts for the
purchase or sale for future delivery of foreign currencies ("foreign
currency futures"). This investment technique will be used only to
hedge against anticipated future changes in exchange rates which
otherwise might adversely affect the value of the underlying fund's
portfolio securities or adversely affect the prices of securities that
the underlying fund intends to purchase at a later date. The successful
use of foreign currency futures will usually depend on the ability of
the underlying fund's investment adviser to forecast currency exchange
rate movements correctly. Should exchange rates move in an unexpected
manner, the underlying fund may not achieve the anticipated benefits of
foreign currency futures or may realize losses.
FORWARD COMMITMENTS
Forward commitments are contracts to purchase securities for a fixed
price at a date beyond customary settlement time. An underlying fund
may enter into these contracts if liquid securities in amounts
sufficient to meet the purchase price are segregated on the underlying
fund's records at the trade date and maintained until the transaction
has been settled. Risk is involved if the value of the security
declines before settlement. Although an underlying fund may enter into
forward commitments with the intention of acquiring the security, it
may dispose of the commitment prior to settlement and realize a
short-term profit or loss.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN
CURRENCIES
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a
specific price and on a future date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time
an underlying fund enters into a forward contract, the underlying fund
assets with a value equal to the underlying fund's obligation under the
forward contract are segregated on the underlying fund's records and
are maintained until the contract has been settled. An underlying fund
will not enter into a forward contract with a term of more than one
year. An underlying fund will generally enter into a forward contract
to provide the proper currency to settle a securities transaction at
the time the transaction occurs ("trade date"). The period between the
trade date and settlement date will vary between 24 hours and 30 days,
depending upon local custom.
An underlying fund may also protect against the decline of a particular
foreign currency by entering into a forward contract to sell an amount
of that currency approximating the value of all or a portion of the
assets denominated in that currency ("hedging"). The success of this
type of short-term hedging strategy is highly uncertain due to the
difficulties of predicting short-term currency market movements and of
precisely matching forward contract amounts and the constantly changing
value of the securities involved. The adviser believes, however, that
it is important that an underlying fund be able to enter into forward
contracts when the best interests of the underlying fund will be
served.
An underlying fund may purchase and write put and call options on
foreign currencies for the purpose of protecting against declines in
the U.S. dollar value of foreign currency-denominated portfolio
securities and against increases in the U.S. dollar cost of such
securities to be acquired. As in the case of other kinds of options,
however, the writing of an option on a foreign currency constitutes
only a partial hedge, up to the amount of the premium received, and the
underlying fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on a foreign currency may constitute an
effective hedge against fluctuations in exchange rates although, in the
event of rate movements adverse to the underlying fund's position, the
underlying fund may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies to be written
or purchased by the underlying fund are traded on U.S. and foreign
exchanges or over-the-counter.
CURRENCY RISKS
Because an underlying fund may purchase securities denominated in
currencies other than the U.S. dollar, changes in foreign currency
exchange rates could affect such underlying fund's net asset value, the
value of interest earned, gains and losses realized on the sale of
securities, and net investment income and capital gain, if any, to be
distributed to shareholders by such underlying fund. If the value of a
foreign currency rises against the U.S. dollar, the value of an
underlying fund's assets denominated in that currency will increase;
correspondingly, if the value of a foreign currency declines against
the U.S. dollar, the value of underlying fund assets denominated in
that currency will decrease.
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental
interpretation, speculation and other economic and political
conditions. Although the underlying funds value their assets daily in
U.S. dollars, the underlying funds will not convert their holdings of
foreign currencies to U.S. dollars daily. When an underlying fund
converts its holdings to another currency, it may incur conversion
costs. Foreign exchange dealers may realize a profit on the difference
between the price at which they buy and sell currencies.
SWAP AGREEMENTS
As one way of managing its exposure to different types of investments,
the underlying funds may enter into interest rate swaps, currency swaps
and other types of swap agreements such as caps, collars and floors.
Depending on how they are used, swap agreements may increase or
decrease the overall volatility of an underlying fund's investments,
its share price and yield.
Swap agreements are sophisticated instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As
a result, swaps can be highly volatile and may have a considerable
impact on an underlying fund's performance. Swap agreements are subject
to risks related to the counterparty's ability to perform, and may
decline in value if the counterparty's creditworthiness deteriorates.
An underlying fund may also suffer losses if it is unable to terminate
outstanding swap agreements to reduce its exposure through offsetting
transactions. When an underlying fund enters into a swap agreement,
assets of the underlying fund equal to the value of the swap agreement
will be segregated by the underlying fund.
Among the hedging strategies into which an underlying fund may enter
are interest rate, currency and index swaps and the purchase or sale of
related caps, floors and collars. The underlying fund expects to enter
into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against
currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the underlying fund
anticipates purchasing at a later date. The underlying fund intends to
use these transactions as hedges and not as speculative investments and
will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the
underlying fund may be obligated to pay. Interest rate swaps involve
the exchange by the underlying fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to
exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap
is an agreement to swap cash flows on a notional amount based on
changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal
amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A
collar is a combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates or values.
An underlying fund will usually enter into swaps on a net basis, i.e.,
the two payment streams are netted out in a cash settlement on the
payment date or dates specified in the instrument, with the underlying
fund receiving or paying, as the case may be, only the net amount of
the two payments. Inasmuch as these swaps, caps, floors, and collars
are entered into for good faith hedging purposes, the underlying fund's
investment adviser and the underlying fund believe such obligations do
not constitute senior securities under the 1940 Act, and, accordingly,
will not treat them as being subject to its borrowing restrictions.
There is no minimal acceptable rating for a swap, cap, floor or collar
to be purchased or held in an underlying fund's portfolio. If there is
a default by the counterparty, the underlying fund may have contractual
remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and
agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than swaps.
HIGH YIELD SECURITIES
The underlying funds may invest 35% or more of their respective assets
in debt securities which are not considered investment grade bonds
(commonly referred to as "junk bonds") by an NRSRO, such as Moody's
Investor's Service, Inc. or Standard & Poor's. There is no minimal
acceptable rating for a security to be purchased or held in the
underlying funds, and the underlying funds may, from time to time,
purchase or hold securities in the lowest rating category. Debt
obligations that are not determined to be investment grade are
high-yield, high-risk bonds, typically subject to greater market
fluctuations and greater risk of loss of income and principal due to an
issuer's default. To a greater extent than investment grade bonds,
lower rated bonds tend to reflect short-term corporate, economic, and
market developments, as well as investor perceptions of the issuer's
credit quality. In addition, lower rated bonds may be more difficult to
dispose of or to value than higher rated, lower-yielding bonds.
(Underlying funds that invest 35% or more of their respective assets in
junk bonds are not considered international equity funds).
VARIABLE RATE DEMAND NOTES
The underlying funds may purchase variable rate demand notes. Variable
rate demand notes are long-term debt instruments that have variable or
floating interest rates and provide an underlying fund with the right
to tender the security for repurchase at its stated principal amount
plus accrued interest. Such securities typically bear interest at a
rate that is intended to cause the securities to trade at par. The
interest rate may float or be adjusted at regular intervals (ranging
from daily to annually), and is normally based on a published interest
rate or interest rate index. Many variable rate demand notes allow an
underlying fund to demand the repurchase of the security on not more
than seven days' prior notice. Other notes only permit an underlying
fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. The underlying funds treat
variable rate demand notes as maturing on the later of the date of the
next interest rate adjustment or the date on which the underlying fund
may next tender the security for repurchase.
CREDIT FACILITIES
An underlying fund may purchase demand notes, which are borrowing
arrangements between a corporation and an institutional lender (such as
an underlying fund) payable upon demand by either party. The notice
period for demand typically ranges from one to seven days, and the
party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the
lender agrees to make loans up to a maximum amount upon demand by the
borrower during a specified term. As the borrower repays the loan, an
amount equal to the repayment may be borrowed again during the term of
the facility. An underlying fund generally acquires a participation
interest in a revolving credit facility from a bank or other financial
institution. The terms of the participation require the underlying fund
to make a pro rata share of all loans extended to the borrower and
entitles the underlying fund to a pro rata share of all payments made
by the borrower. Demand notes and revolving credit facilities usually
provide for floating or variable rates of interest.
DIVERSIFICATION
With respect to 75% of the value of total assets, the Fund will not
invest more than 5% in securities of any one issuer, other than cash,
cash items, or securities issued or guaranteed by the government of the
United States or its agencies or instrumentalities and repurchase
agreements collateralized by U.S. government securities and securities
of other investment companies, or acquire more than 10% of the
outstanding voting securities of any one issuer (for which purposes all
indebtedness of an issuer shall be deemed a single class and all
preferred stock of an issuer shall be deemed a single class, except
that futures or option contracts and securities of mutual funds shall
not be subject to this restriction).
NON-DIVERSIFICATION
Some of the underlying funds in which the Fund invests may be
non-diversified investment companies. As such, there is no 1940 Act
limit on the percentage of assets that can be invested in any single
issuer. An investment in such underlying funds, therefore, will entail
greater risks than would exist in diversified investment companies
because the higher percentage of investments among fewer issuers may
result in greater fluctuation in the total market value of the
underlying fund's portfolio. Any economic, political, or regulatory
developments affecting the value of the securities of such issuer held
by the underlying fund will have a greater impact on the total value of
the underlying fund's portfolio than would be the case if the Fund were
diversified among more issuers.
However, it is anticipated that the underlying funds will comply with
Subchapter M of the Internal Revenue Code. This requires that at the
end of each quarter of the taxable year, the aggregate value of all
investments in any one issuer (except U.S. government obligations,
cash, cash items and other investment companies) which exceed 5% of an
underlying fund's total assets shall not exceed 50% of the value of its
total assets, and, with respect to the remaining assets, no more than
25% of an underlying fund's assets shall be invested in a single
issuer.
INDUSTRY CONCENTRATION
Underlying funds may concentrate their investments in one industry.
Because the scope of investment alternatives within an industry is
limited, the value of the shares of such an underlying fund may be
subject to greater market fluctuation than an investment in a Fund that
invests in a broader range of securities.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain
contracts (including futures, forward, option and swap contracts) that
"derive" their value from changes in the value of an underlying
security, currency, commodity or index. Certain types of securities
that incorporate the performance characteristics of these contracts are
also referred to as "derivatives." The term has also been applied to
securities "derived" from the cash flows from underlying securities,
mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase
the volatility of an investment portfolio's total performance. While
the response of certain derivative contracts and securities to market
changes may differ from traditional investments, such as stock and
bonds, derivatives do not necessarily present greater market risks than
traditional investments.
THE FUNDS' INVESTMENT LIMITATIONS
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THE FOLLOWING IS A LIST OF THE FUNDS' 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 BENEFICIAL INTEREST 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 BENEFICIAL
INTEREST OF THE FUND.
1. SELLING SHORT
None of the Funds, except the STRATEGIC INCOME FUND will sell any
securities short. The STRATEGIC INCOME FUND will not sell securities short
unless: (1) it owns, or has a right to acquire, an equal amount of such
securities or (2) if it does not own the securities, it has segregated an
amount of its other assets equal to the lesser of the market value of the
securities sold short or the amount required to acquire such securities.
While in a short position, the STRATEGIC INCOME FUND will retain the
securities, rights, or segregated assets.
The underlying funds of the INTERNATIONAL EQUITY FUND may engage in short
selling transactions.
2. BUYING ON MARGIN
None of the Funds will purchase any securities on margin, but they may
obtain such short-term credits as may be necessary for clearance of
purchases and sales of portfolio securities. Regarding the STRATEGIC
INCOME FUND, U.S. GOVERNMENT INCOME FUND, INSURED TAX-FREE BOND FUND,
GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND, and CAPITAL APPRECIATION
FUND, the deposit or payment by the Funds of initial or variation margin
in connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
3. ISSUING SENIOR SECURITIES
None of the Funds will issue senior securities, except that each Fund may
borrow money directly or through reverse repurchase agreements in amounts
up to one-third of the value of its total assets, including the amount
borrowed. The STELLAR FUND will not issue senior securities, except as
permitted by its investment objective and policies. The CAPITAL
APPRECIATION FUND, SCIENCE & TECHNOLOGY FUND and GROWTH EQUITY FUND will
issue senior securities to the extent that the Funds may enter into
futures contracts. The INSURED TAX-FREE BOND FUND will not issue senior
securities except for when-issued and delayed-delivery transactions and
futures contracts, each of which might be considered senior securities. In
addition, the INSURED TAX-FREE BOND FUND reserves the right to purchase
municipal securities, which it has the right or obligation to sell to a
third party (including the issuer of a participation interest).
4. BORROWING MONEY
Except as described in their respective prospectuses, none of the Funds,
except the STRATEGIC INCOME FUND and INSURED TAX-FREE BOND FUND, will
borrow money or engage in reverse repurchase agreements for investment
leverage. However, each Fund may borrow money up to one-third of its value
of their 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. A Fund will not purchase any
securities while borrowings and reverse repurchase agreements in excess of
5% of its total assets are outstanding. During the period any reverse
repurchase agreements are outstanding, the Funds will restrict the
purchase of portfolio securities to money market instruments maturing on
or before the expiration date of the reverse repurchase agreements, but
only to the extent necessary to assure completion of the reverse
repurchase agreements. The underlying funds of the INTERNATIONAL EQUITY
FUND may borrow money.
The STRATEGIC INCOME FUND may borrow money directly or through reverse
repurchase agreements in amounts up to one-third of the value of its total
assets, including the amount borrowed, either
(a) as a temporary, extraordinary, or emergency measure or to
facilitate management of the STRATEGIC INCOME FUND by enabling
the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or
disadvantageous, or
(b) for investment purposes.
The STRATEGIC INCOME FUND will not purchase any securities for the purpose
stated under clause (i) above while any borrowings in excess of 5% of its
total assets are outstanding.
5. PLEDGING ASSETS
The Funds will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, they may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% (15% for the
TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE MONEY MARKET FUND) of the
value of total assets at the time of the pledge.
Regarding the STRATEGIC INCOME FUND, GROWTH EQUITY FUND and CAPITAL
APPRECIATION FUND, the following will not be deemed to be pledges of the
Funds' 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.
Regarding the U.S. GOVERNMENT INCOME FUND and INSURED TAX-FREE BOND FUND,
margin deposits for the purchase and sale of futures contracts and related
options and segregation or collateral arrangements made in connection with
options activities or the purchase of securities on a when-issued basis
are not deemed to be a pledge.
6. DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of their respective
total assets, the TAX-FREE MONEY MARKET FUND, STRATEGIC INCOME FUND, U.S.
GOVERNMENT INCOME FUND, GROWTH EQUITY FUND, STELLAR FUND, CAPITAL
APPRECIATION Fund and INTERNATIONAL EQUITY FUND will not purchase
securities issued by any one issuer (other than cash, cash items, or
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, and repurchase agreements collateralized by such
securities and securities of other investment companies) if, as a result,
more than 5% of the value of their respective total assets would be
invested in the securities of that issuer. The Funds will not acquire more
than 10% of the outstanding voting securities of any one issuer.
The RELATIVE VALUE FUND and the STELLAR FUND will not invest more than 5%
of their respective total assets in the securities of any one issuer,
except in cash or cash investments, securities guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements
collateralized by such securities. In addition, the STELLAR FUND will not
purchase more than 10% of any class of voting securities of any one
issuer.
7. CONCENTRATION OF INVESTMENTS
The STRATEGIC INCOME FUND, GROWTH EQUITY FUND, RELATIVE VALUE FUND,
STELLAR FUND, CAPITAL APPRECIATION FUND and INTERNATIONAL EQUITY FUND will
not invest 25% or more of the value of their respective total assets in
any one industry (other than investment companies and securities issued by
the U.S. government, its agencies or instrumentalities).
The INSURED TAX-FREE BOND FUND will not purchase securities if, as a
result of such purchase, 25% or more of the value of its total assets
would be invested in any one industry, industrial development bonds or
other securities, the interest upon which is paid from revenues of similar
types of projects. However, the Fund may invest as temporary investments
more than 25% of the value of its assets in cash or certain money market
instruments, securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, or instruments secured by these money
market instruments, such as repurchase agreements. The Fund does not
intend to purchase securities (other than securities guaranteed by the
U.S. government or its agencies or direct obligations of the U.S.
government) if, as a result of such purchases, 25% or more of the value of
its total assets would be invested in a governmental subdivision in any
one state, territory or possession of the United States.
The SCIENCE & TECHNOLOGY FUND will not invest 25% or more of the value of
its respective total assets in any one industry, except in the science and
technology areas as set forth under the "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.
8. UNDERWRITING
The Funds will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
9. INVESTING IN REAL ESTATE
The Funds will not purchase or sell real estate, including limited
partnership interests. However, they may invest in the securities of
companies whose business involves the purchase or sale of real estate or
in securities that are secured by real estate or interests in real estate.
10. INVESTING IN COMMODITIES
The Funds will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However the STRATEGIC INCOME FUND, U.S.
GOVERNMENT INCOME FUND, INSURED TAX-FREE BOND FUND, GROWTH EQUITY FUND,
CAPITAL APPRECIATION FUND, SCIENCE & TECHNOLOGY FUND, and INTERNATIONAL
EQUITY FUND may engage in transactions involving futures contracts or
options on futures contracts.
11. INVESTING IN MINERALS
The INSURED TAX-FREE BOND FUND, RELATIVE VALUE FUND and STELLAR FUND will
not purchase or sell oil, gas, or other mineral exploration or development
programs or leases, except that INSURED TAX-FREE BOND FUND may purchase
and sell futures contracts. The STELLAR FUND may purchase or sell certain
precious metal securities described in the prospectus.
12. LENDING CASH OR SECURITIES
The TREASURY FUND will not lend any of its assets, except that it may
purchase or hold U.S. Treasury obligations, including repurchase
agreements.
The TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE MONEY MARKET FUND will
not lend any of their assets, except portfolio securities. This shall not
prevent the Funds from purchasing or holding bonds, debentures, notes,
certificates of indebtedness or other debt securities, entering into
repurchase agreements or engaging in other transactions where permitted by
their investment objectives, policies, and limitations or the Declaration
of Trust.
The STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, GROWTH EQUITY
FUND, CAPITAL APPRECIATION FUND and INTERNATIONAL EQUITY FUND will not
lend any of their respective assets, except portfolio securities up to
one-third of the value of their respective total assets. This shall not
prevent the Funds from purchasing or holding U.S. government obligations,
money market instruments, variable rate demand notes, bonds, debentures,
notes, certificates of indebtedness, or other debt securities, entering
into repurchase agreements, or engaging in other transactions where
permitted by a Fund's investment objectives, policies, and limitations or
the Trust's Declaration of Trust.
The INSURED TAX-FREE BOND FUND will not lend any of its assets. This shall
not prevent the Fund from acquiring publicly or non-publicly issued
municipal securities or temporary investments, entering into repurchase
agreements, or engaging in other transactions in accordance with its
investment objective, policies, and limitations or the Declaration of
Trust.
The RELATIVE VALUE FUND and STELLAR FUND will not lend any of their
assets, except that they may purchase or hold corporate or government
bonds, debentures, notes, certificates of indebtedness or other debt
securities permitted by they investment objective and policies.
13. INVESTING IN RESTRICTED SECURITIES
The INSURED TAX-FREE BOND FUND will not invest more than 15% of the value
of its net assets in securities subject to restrictions on resale under
the Securities Act of 1933.
The TAX-FREE MONEY MARKET FUND, OHIO TAX-FREE MONEY MARKET FUND, RELATIVE
VALUE FUND and STELLAR FUND will not invest more than 10% of the value of
their net assets in securities subject to restrictions on resale under the
Securities Act of 1933 except for certain other restricted securities
which meet the criteria for liquidity as established by the Trustees. The
RELATIVE VALUE FUND and STELLAR FUND may invest in commercial paper issued
under Section 4(2) of the Securities Act of 1933.
14. DEALING IN PUTS AND CALLS
The INSURED TAX-FREE BOND FUND, RELATIVE VALUE FUND and STELLAR FUND will
not purchase or sell puts, calls, spreads or any combination of them
except as permitted by its investment policies. However, the INSURED
TAX-FREE BOND FUND may purchase put options on municipal securities in an
amount up to 5% of its total assets and may purchase municipal securities
accompanied by agreements of sellers to repurchase them at the Fund's
option.
15. PURCHASING SECURITIES TO EXERCISE CONTROL
The RELATIVE VALUE FUND and STELLAR FUND will not purchase securities of a
company for the purpose of exercising control or management. However, each
Fund may acquire up to 10% of the voting securities of an issuer and may
exercise its voting power in the Funds' best interest. From time to time,
the Funds, together with other investment companies advised by affiliates
or subsidiaries of Firstar Bank, N.A., may together buy and hold
substantial amounts of a company's voting stock. All such stock may be
voted together. In some cases, the Funds and the other investment
companies may collectively be considered to be in control of the company
in which they have invested. Officers or affiliates of the Funds may
possibly become directors of companies in which the Funds hold stock.
16. INVESTING IN NEW ISSUERS
The RELATIVE VALUE FUND and STELLAR FUND will not invest more than 5% of
the value of their total assets in securities of issuers with records of
less than three years of continuous operations, including the operation of
any predecessor.
17. INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The RELATIVE VALUE FUND and STELLAR FUND will not purchase or retain the
securities of any issuer if the officers and Trustees of the Trust or the
adviser together own more than 5% of the issuer's securities.
18. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The RELATIVE VALUE FUND and STELLAR FUND may purchase securities of other
investment companies.
The STELLAR FUND will limit its investment in other investment companies
to:
|X| no more than 3% of the total outstanding voting stock of any investment
company,
|X| no more than 5% of their total assets in any one investment company, and
|X| no more than 10% of their total assets in investment companies in general.
The Fund will not purchase or acquire any security issued by a registered
closed-end investment company if immediately after the purchase or
acquisition 10% or more of the voting securities of the closed-end
investment company would be owned by the Fund and other investment
companies having the same adviser and companies controlled by these
investment companies. The Fund will purchase securities of closed-end
investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in these securities would be subject
to duplicate expenses.
The RELATIVE VALUE FUND will not purchase securities of other investment
companies, except:
|X| by purchase in the open market involving only customary brokerage
commissions; or
|X| as part of a merger, consolidation, reorganization, or other acquisition.
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 STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, GROWTH EQUITY
FUND, SCIENCE & TECHNOLOGY FUND, RELATIVE VALUE FUND, STELLAR FUND,
CAPITAL APPRECIATION and INTERNATIONAL EQUITY FUND will not invest more
than 15% of the value of their respective net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice, non-negotiable fixed time deposits with
maturities over seven days, over-the-counter options and certain
restricted securities not determined by the Trustees to be liquid.
The INSURED TAX-FREE BOND FUND will not invest more than 15% of the value
of its net assets in securities which are not readily marketable or which
are otherwise considered illiquid, including repurchase agreements
providing for settlement in more than seven days after notice, certain
restricted securities not determined by the Trustees to be liquid, and
participation interests and variable rate municipal securities without a
demand feature or with a demand feature of longer than seven days and
which the Fund's investment adviser believes cannot be sold within seven
days.
The TREASURY FUND, TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE MONEY
MARKET FUND will not invest more than 10% of the value of their respective
net assets in illiquid securities, including certain restricted securities
not determined to be liquid under criteria established by the Trustees and
repurchase agreements providing for settlement in more than seven days
after notice.
Under criteria established by the Board of Trustees, certain restricted
securities are considered to be liquid. The Funds will limit their
purchases of illiquid securities to 15% of their respective net assets
which, include restricted securities not determined by the Trustees to be
liquid, non-negotiable time deposits, over-the-counter options, and
repurchase agreements providing for settlement in more than 7 days after
notice.
2. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The TREASURY FUND, TAX-FREE MONEY MARKET FUND, OHIO TAX-FREE MONEY MARKET
FUND, STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, INSURED TAX-FREE
BOND FUND, GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND and CAPITAL
APPRECIATION FUND will limit their investment in other investment
companies to:
|X| no more than 3% of the total outstanding voting stock of any investment
company,
|X| no more than 5% of their respective total assets in any one investment
company,
|X| no more than 10% of their respective total assets in investment companies
in general.
The TREASURY FUND, TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE MONEY
MARKET FUND will limit their investments in the securities of other
investment companies to those of money market funds having investment
objectives and policies similar to their own.
The STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, GROWTH EQUITY FUND
and CAPITAL APPRECIATION FUND will purchase securities of investment
companies only in open-market transactions involving customary broker's
commissions. The U.S. GOVERNMENT INCOME FUND will invest in other
investment companies primarily for the purpose of investing its short-term
cash on a temporary basis. The adviser will waive its investment advisory
fee on assets invested in securities of open-end investment companies.
The INSURED TAX-FREE BOND FUND will limit its investments in the
securities of other investment companies to those having investment
objectives and policies similar to its own.
The INSURED TAX-FREE BOND FUND, TAX-FREE MONEY MARKET FUND and OHIO
TAX-FREE MONEY MARKET FUND will not purchase or acquire any security
issued by a registered closed-end investment company if, immediately after
the purchase or acquisition, 10% or more of the voting securities of the
closed-end investment company would be owned by the Fund and other
investment companies having the same adviser and companies controlled by
these investment companies. The Funds will purchase securities of
closed-end investment companies only in open-market transactions involving
customary broker's commissions. The adviser will waive its investment
advisory fee on assets of the Fund invested in securities of open-end
investment companies.
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 Funds.
3. PURCHASING SECURITIES TO EXERCISE CONTROL
The STRATEGIC INCOME FUND, GROWTH EQUITY FUND, SCIENCE & TECHNOLOGY FUND
and CAPITAL APPRECIATION FUND will not purchase securities of a company
for the purpose of exercising control or management.
4. WRITING COVERED CALL OPTIONS
The STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, GROWTH EQUITY
FUND, SCIENCE & TECHNOLOGY FUND and CAPITAL APPRECIATION FUND will not
write call options on securities unless the securities are held in the
specific Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.
5. FOREIGN SECURITIES
The RELATIVE VALUE FUND will not invest more than 10% of its total assets
in securities of foreign issuers. The U.S. GOVERNMENT INCOME FUND will not
invest more than 5% of its total assets in securities of foreign issuers.
6. CONCENTRATION OF INVESTMENTS
The TAX-FREE MONEY MARKET FUND will not purchase securities if, as a
result of such purchase, more than 25% of the value of the Fund's assets
would be invested in any one industry. However, the Fund may invest more
than 25% of the value of its assets in cash or cash items, securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements.
The TAX-FREE MONEY MARKET FUND does not intend to purchase securities that
would increase the percentage of its assets invested in the securities of
governmental subdivisions located in any one state, territory or U.S.
possession to more than 25%. However, the Fund may invest more than 25% of
the value of its assets in tax-exempt project notes guaranteed by the U.S.
government, regardless of the location of the issuing municipality.
If the value of Fund assets invested in the securities of a governmental
subdivision changes because of changing values, the Fund will not be
required to make any reduction in its holdings.
The OHIO TAX-FREE MONEY MARKET FUND will not purchase securities if, as a
result of such purchase, more than 25% of the value of the Fund's assets
would be invested in any one industry, industrial development bonds or
other securities, the interest upon which is paid from revenues of similar
types of projects. However, the Fund may invest more than 25% of the value
of its assets in debt obligations issued by or on behalf of Ohio and its
political subdivisions and financing authorities, cash or cash items,
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements.
The OHIO TAX-FREE MONEY MARKET FUND may invest more than 25% of the value
of its assets in tax-exempt project notes guaranteed by the U.S.
government, regardless of the location of the issuing municipality. If the
value of Fund assets invested in the securities of a governmental
subdivision changes because of changing values, the Fund will not be
required to make any reduction in its holdings.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Funds do not expect to borrow money or pledge securities in excess of 5% of
the value of their respective total assets in the coming fiscal year.
For purposes of their policies and limitations, the consider certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."
As a matter of operating policy, which may be changed without shareholder
approval, the U.S. GOVERNMENT INCOME FUND, GROWTH EQUITY FUND and CAPITAL
APPRECIATION FUND will limit the margin deposits on futures contract and options
entered into by a Fund to 5% of its net assets.
As operating policies of the STRATEGIC INCOME FUND which may be changed without
shareholder approval:
(a) no securities will be sold short if, after effect is given to any
such short sale, the total market value of all securities sold
short would exceed 25% of the value of the Fund's net assets;
(b) the Fund may not sell short the securities of any single issuer
listed on a national securities exchange to the extent of more
than 5% of the value of the Fund's net assets;
(c) the Fund may not sell short the securities of any class of an issuer to
the extent, at the time of the transaction, of more than 5% of the
outstanding securities of that class; and
(d) the Fund at no time will have more than 15% of the value of its net
assets in deposits on short sales against the box.
TEMPORARY INVESTMENTS
- --------------------------------------------------------------------------------
From time to time, the TAX-FREE MONEY MARKET FUND, OHIO TAX-FREE MONEY
MARKET FUND, INSURED TAX-FREE BOND FUND, GROWTH EQUITY FUND, SCIENCE &
TECHNOLOGY FUND, RELATIVE VALUE FUND, CAPITAL APPRECIATION FUND and
INTERNATIONAL EQUITY FUND may invest in temporary investments.
The TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE MONEY MARKET FUND may
invest in high-quality temporary investments for temporary defensive
purposes. Occasionally, such as when suitable municipal securities are not
available, the Funds may invest a portion of their assets in cash. Any
portion of the Funds' assets maintained in cash reduces the amount of
assets in Municipal Securities and thereby reduce the Funds' yield. This
policy may result in high portfolio turnover. Since the cost of these
transactions is small, high turnover is not expected to adversely affect
net asset value or yield. The adviser does not anticipate that portfolio
turnover will result in adverse tax consequences to the Funds.
These temporary investments include:
|X| obligations issued by or on behalf of municipal or corporate issuers
having the same quality and maturity characteristics as Municipal
Securities purchased by the Funds;
|X| marketable obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities; instruments issued by banks or other
depository institutions which have capital, surplus, and undivided profits
in excess of $100,000,000 at the time of investment;
|X| repurchase agreements; and
|X| prime commercial paper rated A-1 by S&P, Prime-1 by Moody's, or F-1 by
Fitch, and other short-term credit instruments.
The INSURED TAX-FREE BOND FUND may invest in temporary investments from
time to time:
|X| as a reaction to market conditions;
|X| while waiting to invest proceeds of sales of shares or portfolio
securities, although generally such proceeds from sales of shares will
be invested in municipal securities as quickly as possible;
|X| in anticipation of redemption requests; or
|X| for temporary defensive purposes, in which case the Fund may invest
more than 20% of the value of its net assets in cash or certain money
market instruments, U.S. Treasury bills or securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities,
or repurchase agreements (see above descriptions).
The RELATIVE VALUE FUND may invest in temporary investments from time to
time for defensive purposes. The Fund may invest in securities issued
and/or guaranteed as to payment of principal and interest by the U.S.
government, its agencies or instrumentalities, repurchase agreements and
short-term money market instruments such as:
|X| instruments of domestic and foreign banks and savings associations if
they have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is
federally insured; or
|X| commercial paper rated A-1 by S&P, Prime-1 by Moody's, or F-1 by Fitch.
For temporary defensive purposes (up to 100% of total assets) and to
maintain liquidity (up to 35% of total assets), the GROWTH EQUITY FUND,
CAPITAL APPRECIATION FUND and INTERNATIONAL EQUITY FUND may invest in U.S.
and foreign short-term money market instruments including:
|X| 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;
|X| 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;
|X| obligations of the U.S. government or its agencies or
instrumentalities;
|X| repurchase agreements; and
|X| 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.
PORTFOLIO TURNOVER RATES
- --------------------------------------------------------------------------------
Although the following Funds (the Bond Funds and Stock Funds) do not intend to
invest for short-term profits, securities in the Funds' portfolios will be sold
whenever the adviser believes it is appropriate to do so in light of the Funds'
specific investment objectives. The adviser disregards the length of time a
particular security may have been held by the Funds. Generally, a high portfolio
turnover rate results in increased transaction costs and higher taxes paid by
the Funds' shareholders. In addition a high rate of portfolio turnover may
result in the realization of a larger amount of capital gains which, when
distributed to the Fund's shareholders, are taxable to them. (Regarding the
INTERNATIONAL EQUITY FUND, there is no limit on the underlying funds' portfolio
turnover rates.) The table below shows the turnover rates for the Funds for the
past two fiscal years.
<TABLE>
<CAPTION>
Fiscal Year Ended
FUND NOVEMBER 30, 1999 NOVEMBER 30, 1998
- --------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Insured Tax-Free Bond Fund 15% 14%
- --------------------------------------------- ---------------------- ----------------------
U.S. Government Income Fund 122% 88%
- --------------------------------------------- ---------------------- ----------------------
Strategic Income Fund 73% 146%
- ---------------------------------------------- ---------------------- ----------------------
Stellar Fund 39% 77%
- --------------------------------------------- ---------------------- ----------------------
Relative Value Fund 11% 26%
- --------------------------------------------- ---------------------- ----------------------
Growth Equity Fund 28% 48%
- --------------------------------------------- ---------------------- ----------------------
Science & Technology Fund 16%1 N/A
- --------------------------------------------- ---------------------- ----------------------
Capital Appreciation Fund 92% 94%
- --------------------------------------------- ---------------------- ----------------------
International Equity Fund 34% 3%2
- --------------------------------------------- ---------------------- ----------------------
</TABLE>
1 The portfolio turnover rate is for the period from August 9, 1999 (date of
initial public investment) to November 30, 1999.
2 The portfolio turnover rate is for the period from December 3, 1997 (date of
initial public investment) to November 30, 1998.
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>
<CAPTION>
- ------------------------------ ---------------------- --------------------- --------------------------------------------
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) 61 Trustee, Member of Retired; President and Chief Executive
c/o Firstar Corporation Audit Committee 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. 41 Trustee, Member of Physician, Ohio Valley Orthopaedic and
c/o Firstar Corporation Audit Committee 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 solution based brand identity 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 is the largest operator of super markets
Cincinnati, Ohio 45202 and convenient stores in the United States.
- ------------------------------ ---------------------- --------------------- --------------------------------------------
William H. Zimmer, III 46 Trustee, Member of Executive Vice President & Chief Financial
c/o Firstar Corporation Audit Committee 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 Senior 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 Assistant Vice President, Firstar Mutual
Firstar Mutual Fund Fund Services, LLC, 1990 to present.
Services, LLC
615 E. Michigan Street
Milwaukee, WI 53202
- ------------------------------ ---------------------- --------------------- --------------------------------------------
Elaine E. Richards 31 Secretary Assistant Vice President, Firstar Mutual
Firstar Mutual Fund 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.
- ------------------------------ ---------------------- --------------------- --------------------------------------------
Cheryl L. King 38 Assist. Treasurer Compliance Officer, Firstar Mutual Fund
Firstar Mutual Fund Services, LLC, October 1998 to present;
Services, LLC Financial Analyst, Sunstone Financial
615 E. Michigan Street Group, Inc., Milwaukee, Wisconsin, 1996 to
Milwaukee, WI 53202 1998; Accountant, Nicholas Company, Inc.,
Milwaukee, Wisconsin, 1981 to 1996.
- ------------------------------ ---------------------- --------------------- --------------------------------------------
</TABLE>
(1) Before Mr. Conlan retired as President and Chief Executive Officer from the
Student Loan Funding Corporation, the Trustees considered him to be 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 Funds' 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
Effective for the fiscal year ending November 30, 2000, for their service as
Trustees, the independent Trustees receive a $4,000 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>
<CAPTION>
- ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
NAME AND POSITION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON FROM TRUST AND FUND
FROM TRUST PART OF TRUST EXPENSES RETIREMENT COMPLEX PAID TO
TRUSTEES
- ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
Thomas L. Conlan, Jr. $3,125 None None $3,125
Trustee
Dr. Alfred Gottschalk $11,875 None None $11,875
Trustee
Dr. Robert J. Hill $11,875 None None $11,875
Trustee
Dawn M. Hornback $11,875 None None $11,875
Trustee
Lawrence M. Turner $11,875 None None $11,875
Trustee
William H. Zimmer, III $11,875 None None $11,875
Trustee
- ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
</TABLE>
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
Funds. The following persons will not have to pay a sales charge on class A
shares:
o Employees and retired employees of Firstar Bank, N.A. or its affiliates and
members of the families (including parents, grandparents, siblings,
spouses, children, and in-laws) of such employees or retired employees;
o Firstar trust customers of Firstar Corporation and its subsidiaries; and o
non-trust customers of financial advisers.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------
CONTROL PERSON
The following table provides the name and address of any person who owns of
record or beneficially 5% or more of the outstanding shares of the class or
series indicated as of February 29, 2000 (a "principal shareholder"). A control
person is one who owns beneficially or through controlled companies more than
25% of the voting securities of a company or acknowledges the existence of
control. Firstar Bank, N.A. may be deemed to be a "control" person because it
owns more that 25% of the voting securities for many of the classes of Funds
listed below.
<TABLE>
<CAPTION>
- ------------------------------------------------- ------------------------------------ ----------------
PERCENTAGE
FUND/CLASS NAME OF SHAREHOLDER OWNED
- ------------------------------------------------- ------------------------------------ ----------------
<S> <C> <C>
Treasury Fund - C Shares Firstar Bank, N.A., Cincinnati, OH 69.29%
Treasury Fund - C Shares National Financial Services Corp. 30.19%
Treasury Fund - Y Shares Firstar Bank, N.A., Cincinnati, OH 99.62%
Tax-Free Money Market Fund Firstar Bank, N.A., Cincinnati, OH 93.01%
Tax-Free Money Market Fund National Financial Services Corp. 6.85%
Ohio Tax-Free Money Market Fund Firstar Bank, N.A., Cincinnati, OH 99.64%
Insured Tax-Free Bond Fund Band Co. A Partnership 93.01%
U.S. Government Income Fund - A Shares Band Co. A Partnership 61.07%
U.S. Government Income Fund - A Shares Muggs Co. c/o Firstar Trust Co. 30.63%
U.S. Government Income Fund - B Shares Kathleen M. Hyland IRA Rollover 20.44%
U.S. Government Income Fund - B Shares Donna J. Fox 6.67%
U.S. Government Income Fund - B Shares Inez H. Groh 5.89%
U.S. Government Income Fund - B Shares Gregg W. Pittenger IRA 5.32%
Strategic Income Fund Band Co. A Partnership 65.05%
Stellar Fund - Y Shares Muggs Co. c/o Firstar Trust Co. 84.16%
Stellar Fund - Y Shares Band Co. A Partnership 13.89%
Relative Value Fund - A Shares Strafe & Co., for the benefit of 17.87%
Southern Ohio Medical Center
Pension Fund, Westerville, OH
Relative Value Fund - Y Shares Muggs Co. c/o Firstar Trust Co. 63.06%
Relative Value Fund - Y Shares Band Co. A Partnership 24.14%
Relative Value Fund - Y Shares Roland Co. Mercantile Bank NA 6.22%
Growth Equity Fund - Y Shares Band Co. A Partnership 38.13%
Growth Equity Fund - Y Shares Muggs Co. c/o Firstar Trust Co. 50.99%
Growth Equity Fund - Y Shares Roland Co. Mercantile Bank NA 6.17%
Capital Appreciation Fund Muggs Co. c/o Firstar Trust Co. 70.44%
Capital Appreciation Fund Band Co. A Partnership 24.66%
International Equity Fund Muggs Co. c/o Firstar Trust Co. 60.68%
International Equity Fund Band Co. A Partnership 30.27%
International Equity Fund Roland Co. Mercantile Bank NA 5.26%
Science & Technology Fund - Y Shares Band Co. A Partnership 18.90%
Science & Technology Fund - Y Shares Muggs Co. c/o Firstar Trust Co. 73.29%
</TABLE>
MANAGEMENT OWNERSHIP
As of March 1, 2000, the officers and Trustees of the Trust own less than 1% of
the outstanding shares of any of the Funds.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
Firstar Investment Research & Management LLC (FIRMCO), a wholly-owned subsidiary
of Firstar Corporation, is the investment advisor for the Funds. FIRMCO is
located at 777 E. Wisconsin Avenue, Milwaukee, Wisconsin 53202.
Prior to April 1, 2000, the Funds were managed by the Capital Management
Division of Firstar Bank, N.A. As part of an internal restructuring of the
investment advisory function within the Firstar Corporation family, the
investment management resources of the Capital Management Division of Firstar
Bank, N.A. have been consolidated with those of FIRMCO. This consolidation,
which has not affected the management of the Funds, followed the merger in March
2000 of FIRMCO and Mississippi Valley Advisors (MVA), the former investment arm
of Mercantile Bancorporation Inc., which is the result of the Firstar/Mercantile
merger in September 1999. The combining of the investment management resources
of these three firms forms one of the strongest investment management firms in
the country. The new FIRMCO gives Firstar Corporation the ability to offer a
full complement of mutual funds in the core, value and growth equity styles, as
well as an array of fixed-income options.
FIRMCO now manages the Firstar Funds, Firstar Stellar Funds and Mercantile
Funds. Additionally, FIRMCO has expertise within the national market as an
equity and fixed-income manager for larger institutional clients, including
foundations, endowments and pension funds. FIRMCO's enhanced bond market
approach is critically acclaimed on a national level, having most recently
beaten its benchmark for the 14th consecutive year. Since the merging of the
three groups, Firstar Corporation and its affiliates (sometimes collectively
referred to herein as "Firstar") have approximately $60 billion in assets under
management on behalf of trust and investment clients.
Firstar Corporation, the parent company of FIRMCO, is a regional bank holding
company with approximately $73 billion in total assets. Firstar has nearly 1,200
full-service banking offices and more than 2,200 ATM locations in Ohio,
Wisconsin, Missouri, Kentucky, Illinois, Indiana, Iowa, Minnesota, Tennessee,
Arkansas, Kansas, Arizona and Florida. Firstar offers a comprehensive line of
consumer and commercial banking products and services, personal and commercial
trust, investment management, insurance, securities brokerage, mortgage, credit
card, cash management, international banking and other financial services.
Firstar Corporation is the parent company of all Mercantile Banks in Missouri,
Kansas, Arkansas, Iowa, Illinois and Kentucky and all Firstar Banks. Firstar was
founded in 1853.
ADVISORY FEES
For its advisory services, Firstar Bank, N.A. receives an annual investment
advisory fee from each Fund as described in the prospectus. For the fiscal years
(or period, as the case may be) ended November 30, 1997, 1998 and 1999 the
adviser earned and was paid the following amounts, unless some portion of the
fee was waived as indicated.
<TABLE>
<CAPTION>
- ----------------------------------------- --------------------------------------------------------------------------
Advisory fees earned (Advisory fees waived)
- ----------------------------------------- ------------------------ ------------------------ ------------------------
1997 1998 1999
- ----------------------------------------- ------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Treasury Fund $4,990,143 $6,734,607 $9,863,583
Tax-Free Money Market Fund $761,469 (138,499) $676,387 (122,979) $803,871 (146,158)
Ohio Tax-Free Money Market Fund N/A $195,781 (142,326)[1] $307,088 (192,918)
Strategic Income Fund $1,343,811 $1,865,171 $1,783,691
U.S. Government Income Fund $819,582 $806,064 $956,781
Insured Tax-Free Bond Fund $825,962 (275,321)[2] $1,065,733 (355,244) $1,187,196 (335,685)
Growth Equity Fund $946,601 $1,269,745 $1,781,768
Relative Value Fund $2,220,214 $3,061,795 $3,788,262
Science & Technology Fund N/A N/A $67,931[3]
Stellar Fund $1,114,195 $1,057,960 $926,655
Capital Appreciation Fund $774,928 $767,140 $780,590
International Equity Fund N/A $313,728[4] $409,174
</TABLE>
1 For the period from December 2, 1997 (date of initial public investment) to
November 30, 1998.
2.For the period from December 30, 1996 (date of initial public investment) to
November 30, 1997.
3 For the period from August 9, 1999 (date of initial public investment) to
November 30, 1999.
4.For the period from December 3, 1997 (date of initial public investment) to
November 30, 1998.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
The adviser is responsible for making decisions to buy and sell securities for
the Funds and for placing the Funds' 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 Funds do not necessarily pay the lowest available
commission. Brokerage will not be allocated based on the sale of the Funds'
shares.
During the fiscal years (or period, as the case may be) ended November 30, 1997,
1998 and 1999, the Funds paid the following total brokerage commissions.
<TABLE>
<CAPTION>
- ----------------------------------------- -------------- -------------- --------------
1997 1998 1999
- ----------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Treasury Fund $0 $0 $0
Tax-Free Money Market Fund $0 $0 $0
Ohio Tax-Free Money Market Fund N/A $0[1] $0
Strategic Income Fund $406,396 $395,862 $334,889
U.S. Government Income Fund $0 $400 $3,987
Insured Tax-Free Bond Fund $0 $0[2] $0
Growth Equity Fund $274,875 $286,979 $305,414
Relative Value Fund $218,211 $315,245 $219,478
Science & Technology Fund N/A N/A $21,635[3]
Stellar Fund $145,306 $396,057 $106,376
Capital Appreciation Fund $742,452 $262,127 $281,403
International Equity Fund N/A $50,105[4] $70,829
- ----------------------------------------- -------------- -------------- --------------
</TABLE>
1 For the period from December 2, 1997 (date of initial public investment) to
November 30, 1998.
2.For the period from December 30, 1996 (date of initial public investment) to
November 30, 1997.
3 For the period from August 9, 1999 (date of initial public investment) to
November 30, 1999.
4.For the period from December 3, 1997 (date of initial public investment) to
November 30, 1998.
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 purchases 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 broker 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 Funds. The adviser believes
that the research information received in this manner provides the Funds with
benefits by supplementing the research otherwise available to the Funds. Such
higher commissions will not be paid by the Funds 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 Funds as to which it exercises investment discretion;
(b) such payment is made in compliance with the provisions of Section 28(c) and
to other applicable state and federal laws; and
(c) in the opinion of the adviser, the total commissions paid by the Funds will
be reasonable in relation to the benefits to the Funds over the long term.
Although investment decisions for the Funds are made independently from those of
the other accounts managed by the adviser, investments of the type the Funds may
make may also be made by those other accounts. When the Funds 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 Funds or the size of the position obtained or disposed of by the Funds. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Funds.
Under certain circumstances, a sales charge incurred by the INTERNATIONAL EQUITY
FUND in acquiring shares of an underlying fund may not be taken into account in
determining the gain or loss on the disposition of the shares acquired. If
shares are disposed of within 90 days from the date they were purchased and if
shares of a new underlying fund are subsequently acquired without imposition of
a sales charge or imposition of a reduced sales charge pursuant to a right
granted to the Fund to acquire shares without payment of a sales charge or with
the payment of a reduced charge, then the sales charge paid upon the purchase of
the initial shares will be treated as paid in connection with the acquisition of
the new underlying fund's shares rather than the initial shares.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
As of October 1, 1998, Firstar Mutual Fund Services, LLC, 615 East Michigan
Street, Milwaukee, Wisconsin 53202, a subsidiary of Firstar Bank, N.A.,
("FMFS"), provides administrative personnel and services to the Funds. FMFS
provides services such as legal compliance and accounting services. FMFS
provides these services at an annual rate of 0.11% of the average daily net
assets of each Fund. Prior to October 1, 1998, Federated Administrative Services
provided administrative services to the Funds at an annual rate of 0.12% of each
Fund's average daily net assets.
Edgewood Services, Inc. as sub-administrator to the Funds. For its services,
Edgewood is paid a fee by the Fund's administrator and is NOT paid by the Funds.
Over the last three fiscal years the Trust on behalf of the Funds paid the
following amount in administrative fees:
<TABLE>
<CAPTION>
- ----------------------------------------- ------------------- ------------------ ------------------ ------------------
Fees Paid to: Federated Federated Firstar Firstar
- ----------------------------------------- ------------------- ------------------ ------------------ ------------------
Fiscal year ended 12/1/97 - 10/1/98 - Fiscal year
1997 9/30/98 11/30/98 ended 1999
- ----------------------------------------- ------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Treasury Fund $922,287 $1,270,147 $290,973 $2,169,989
Tax-Free Money Market Fund $128,243 $117,566 $24,790 $160,774
Ohio Tax-Free Money Market Fund N/A $41,217[1] $5,715[1] $61,418
$(18,871)[1]
Strategic Income Fund $130,615 $190,885 $20,661 $206,533
U.S. Government Income Fund $126,436 $128,867 $27,751 $175,409
Insured Tax-Free Bond Fund $101,260[2] $136,827 $20,007 $174,122
Growth Equity Fund $116,489 $164,319 $33,540 $261,326
Relative Value Fund $273,396 $398,051 $82,764 $555,786
Science & Technology Fund N/A N/A N/A $8,303[3]
Stellar Fund $108,560 $110,278 $19,658 $107,297
Capital Appreciation Fund $72,536 $79,934 $14,310 $90,384
International Equity Fund N/A $46,194[4] $8,836[4] $60,018
- ----------------------------------------- ------------------- ------------------ ------------------ ------------------
</TABLE>
1 For the period from December 2, 1997 (date of initial public investment) to
November 30, 1998.
2 For the period from December 30, 1996 (date of initial public investment) to
November 30, 1997.
3 For the period from August 9, 1999 (date of initial public investment) to
November 30, 1999.
4 For the period from December 3, 1997 (date of initial public investment) to
November 30, 1998.
FUND ACCOUNTING AND DIVIDEND PAYING AGENT SERVICES
- --------------------------------------------------------------------------------
FMFS provides fund accounting personnel and services to the Funds pursuant to a
Fund Accounting Service Agreement. Under the Fund Accounting Servicing
Agreement, FMFS provides portfolio accounting services, expense accrual and
payment services, fund valuation and financial reporting services, tax
accounting services and compliance control services. FMFS receives a fund
accounting fee, for all of the Funds combined, which is billed on a monthly
basis. FMFS acts as the Funds' dividend paying agent.
CUSTODIAN
- --------------------------------------------------------------------------------
Firstar Bank, N.A., 425 Walnut Street, Cincinnati, OH 45202, is custodian for
the cash and securities of the Funds. Under the Custodian Agreement, Firstar
Bank, N.A. holds the Funds' 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 Funds' prospectuses, the Trust on behalf of the Funds 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
Funds to achieve economic viability. The Plan is a compensation type of Plan
that provides the Trust the ability to use assets of the Funds 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 Funds' shares subject to the Plan. Such activities may
include:
|X| the advertising and marketing of shares of the Funds;
|X| preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and
|X| implementing and operating the Plan.
The distributor may pay fees to brokers and others for such services. As of
April 1, 1999, Edgewood Services, Inc., Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779, became the distributor for the Funds. From October 1,
1998 to March 31, 1999, B.C. Ziegler and Company, 215 North Main Street, West
Bend, Wisconsin 53095, served as the Funds' distributor. Prior to that,
Federated Securities Corporation, Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779, provided distribution services to the Funds.
In compensation for the services provided pursuant to this Plan, Edgewood
Services, Inc. is be paid a monthly fee computed at the annual rate of up to
0.25% (up to 0.75% for some class B shares) of the average aggregate net asset
value of shares of the Funds held during the month. 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. The following classes of the following Funds are
currently accruing or paying Rule 12b-1 fees in the amounts shown:
- --------------------------------- ----------- ----------------------------------
FUND CLASS FEE
(as a percentage of average net
assets)
- --------------------------------- ----------- ----------------------------------
Treasury Fund Class C 0.15%
Growth Equity Fund Class A 0.25%
Class B 0.25%
Relative Value Fund Class A 0.25%
Class B 0.25%
Stellar Fund Class A 0.25%
Class B 0.75%
Science & Technology Fund Class A 0.25%
Class B 0.75%
Capital Appreciation Fund Class B 0.75%
International Equity Fund Class B 0.75%
- --------------------------------- ----------- ----------------------------------
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
Funds to have monies available for the direct distribution activities of the
distributor in promoting the sale of the Funds' shares. Furthermore, having
money available will avoid any uncertainties as to whether other payments by the
Funds constitute distribution expenses on behalf of the Funds. 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 Funds' 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 FIRMCO, in its capacity as the Funds' investment adviser,
and Edgewood Services Inc., in its capacity as distributor of the Funds' shares,
no "interested person" of the Funds, as defined in the 1940 Act, and no trustee
of the Funds 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 Funds are described in the prospectuses. 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 Funds are informed of the ex-dividend date.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Funds' portfolio securities are determined as
follows:
1. FOR EQUITY SECURITIES: according to the last sale price on a national
securities exchange, if applicable.
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.
Regarding the INTERNATIONAL EQUITY FUND, the underlying funds in which the Fund
invests may value securities in their portfolios for which market quotations are
readily available at their current market value (generally the last reported
sales price) and all other securities and assets at fair value pursuant to
methods established in good faith by the board of directors/trustees of the
underlying fund.
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
Funds value 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 prospectuses, shares of the
Funds are sold at their net asset value plus a sales charge, on days the New
York Stock Exchange is open for business. The procedure for purchasing shares of
the Funds is explained in the prospectuses.
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 prospectuses for
more information.
CLASS A SHARES - REDUCING THE SALES CHARGE
Class A shares of the Funds are sold at their net asset value plus a sales
charge as described in the prospectuses. Shareholders can reduce the sales
charge on purchases of Class A shares by:
|X| purchasing larger quantities of shares or putting a number of purchases
together to obtain the discounts
|X| signing a 13-month LETTER OF INTENT
|X| using the reinvestment privilege
|X| making concurrent purchases
LARGE PURCHASES AND QUANTITY DISCOUNTS As indicated in the prospectuses, the
more shares a shareholder purchases, the smaller the sales charge per
share. If a shareholder purchases Class A shares on the same day as his
or her spouse or children under 21 purchase shares, his or her
purchases will be combined in calculating the sales charges.
Also, if shareholders later purchase additional shares of a Fund, the
purchases will be added together with the amount already invested in
the Fund. For example, if a shareholder already owns shares of the
STELLAR FUND with a value at the current net asset value ("NAV") of
$40,000. Later, the shareholder purchases $10,000 more at the current
NAV. The sales charge on the additional purchase would be 4.50%, not
5.50% as shown in the prospectuses. When making additional purchases,
shareholders should inform the Funds IN WRITING that they already own
shares of the Fund at the time of purchasing more shares.
SIGNING A LETTER OF INTENT If investors intend to purchase at least $50,000 of
Class A shares over the next 13 months, they should consider signing a
LETTER OF INTENT to reduce the sales charge. A letter of intent
includes a provision allowing the Funds to adjust the sales charge
depending on the amount you actually purchase within the 13-month
period. It also allows the custodian to hold the maximum sales charge
(5.50% or 1.50% as the case may be) in shares in escrow until the
purchases are completed. The shares held in escrow in the investor's
account will be released when the letter of intent is fulfilled or when
the 13-month period is over, whichever comes first. If the investor did
not purchase the amount stated in the letter of intent, the Fund will
redeem the appropriate number of escrowed shares to cover the
difference in the sales charge.
The letter of intent does not obligate the investor to purchase shares,
but simply allows the investor to take advantage of the lower sales
charge applicable to the total amount intended to buy. When the
investor establishes a letter of intent, the balances in any of the
Funds' accounts (except the money market accounts) will be aggregated
to provide a purchase credit towards fulfillment of the letter of
intent. The investor's prior trade prices will not be adjusted,
however.
REINVESTMENT PRIVILEGE If Class A shares of any of the Funds have been redeemed,
the investor has a one-time right, within 30 days, to reinvest the
redemption proceeds at the next-determined net asset value without any
sales charge. Shareholders should inform the Funds, IN WRITING, that
they are reinvesting so that they will not be overcharged.
CONCURRENT PURCHASES Another way to reduce the sales charge is to combine
purchases made at the same time in two or more of the Funds that apply
sales charges. For example, if an investor invests $30,000 in Class A
shares of one of the Funds, and $70,000 in Class A shares of another
Fund, the sales charge would be lower. Investors should inform the
Funds IN WRITING about the concurrent purchases so that they will not
be overcharged.
CLASS B SHARES - ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
Class B shares of the Funds are sold at their net asset value plus a contingent
defined sales charges as described in the prospectuses. No CDSC will be charged
for redemptions made under the following circumstances:
|X| redemptions made following death or disability (as defined by the IRS)
|X| redemptions made as minimum required distributions under an IRA or other
retirement plan to a shareholder who is 70 1/2years old or older
|X| involuntary redemptions made in shareholder accounts that do not have the
required minimum balance
DEATH OR DISABILITY To receive the CDSC exemption with respect to death or
disability, Firstar Bank, N.A. or the distributor must be notified IN
WRITING at the time of the redemption that the shareholder, or his or
her executor, requests the exemption.
IRA OR OTHER RETIREMENT PLAN The exemption from the CDSC for Individual
Retirement Accounts of other retirement plans does not extend to
account transfers, rollovers, and other redemptions made for purposes
of reinvestment.
INVOLUNTARY REDEMPTIONS Firstar Stellar Funds reserves the right to redeem
shares of accounts with low balances (balances below $1,000).
Shareholders will not be charged a CDSC for this type of involuntary
redemption. See the prospectuses for more information on accounts with
low balances.
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 received
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:
|X| 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
Fund at net asset value.
|X| Holders of Class B shares of any Firstar Stellar Fund may exchange such
shares for Class B or C shares of any other Firstar Stellar Fund at net
asset value.
|X| Holders of Class A shares of any Firstar Stellar Fund may exchange such
shares for Class A or C shares of any other Firstar Stellar Fund 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.
<TABLE>
<CAPTION>
A to A Exchange A to C Exchange B to B Exchange / B to C Exchange
- --------------------------------------- ---------------------------------------- ---------------------------------------
<S> <C> <C>
When you exchange Class A shares of a When you exchange Class A shares of When you exchange Class B shares of a
Fund for Class A shares of another a Fund for Class C shares of another Fund for Class B or C shares of
Fund, you will have to pay the Fund, the Class A shares retain another Fund, no sales charges are
difference between the Fund's sales their charge to be exercised in assessed at the time of the
charge you already paid and the sales further exchanges. exchange. However, if you redeem
charge of the Fund into which you are If you later re-exchange the C shares within 5 years of the original
entering. shares that you obtained from the purchase, a CDSC will be imposed
A-C exchange, you would exchange at
according to the original purchase the
NAV PLUS the difference between date.
the sales charge initially paid and the
sales charge of the Fund into which you
are entering.
</TABLE>
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.
As noted in the Prospectuses, shares of the Firstar Stellar Funds may
be exchanged with shares of corresponding classes of the other Firstar fund
families--Firstar Funds and the Mercantile Mutual Funds, Inc. The specific funds
for each family are listed below:
<TABLE>
<CAPTION>
FIRSTAR FUNDS MERCANTILE MUTUAL FUNDS, INC.
- ------------- -----------------------------
<S> <C>
Money Market Fund Treasury Money Market Portfolio
Institutional Money Market Fund Money Market Portfolio
U.S. Treasury Money Market Fund Tax-Exempt Money Market Portfolio
U.S. Government Money Market Fund Conning Money Market Portfolio
Tax-Exempt Money Market Fund U.S. Government Securities Portfolio
Short-Term Bond Market Fund Intermediate Corporate Bond Portfolio
Intermediate Bond Market Fund Bond Index Portfolio
Bond IMMDEX(TM)Fund Government & Corporate Bond Portfolio
Tax-Exempt Intermediate Bond Fund Short-Intermediate Municipal Portfolio
Balanced Income Fund Missouri Tax-Exempt Bond Portfolio
Balanced Growth Fund National Municipal Bond Portfolio
Growth and Income Fund Balanced Portfolio
Equity Index Fund Equity Income Portfolio
Growth Fund Equity Index Portfolio
Special Growth Fund Growth & Income Equity Portfolio
MidCap Index Fund Growth Equity Portfolio
Emerging Growth Fund Small Cap Equity Portfolio
MicroCap Fund Small Cap Equity Index Portfolio
Core International Equity Fund International Equity Portfolio
International Equity Fund
</TABLE>
Prior to March 1, 2000, Mississippi Valley Advisors Inc. served as the
adviser to Mercantile Mutual Funds, Inc. On March 1, 2000, MVA merged into
FIRMCO.
EXCHANGING SECURITIES FOR FUND SHARES
The Funds may accept securities in exchange for shares. The Funds 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 Funds' 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 Funds
and are responsible for promptly transmitting orders. The organizations may
charge their customers for services relating to their investment in the Funds.
If you are a customer of a shareholder service organization, carefully read your
account agreement together with the Funds' prospectuses with regard to services
provided, fees charged and any restrictions imposed.
Firstar Bank, N.A. has a shareholder services plan that permits the payment of
fees to Firstar Bank, N.A. 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:
|X| establish and maintain shareholder accounts and records;
|X| process purchase and redemption transactions and automatic investments of
client account cash balances;
|X| answer routine client inquiries; and
|X| assist clients in changing dividend options, account designations and
addresses.
FREQUENT INVESTOR PROGRAM
The Frequent Investor Program is a program that allows investors to win a free
round-trip airline ticket. If investors earn 50,000 points, they win a
round-trip airline ticket to any of the 50 states on any U.S. carrier. The
following rules regarding the Frequent Investor Program apply to investments
made through September 17, 1999. After that date, the Frequent Investor Program
will be terminated and investors will not be able to accrue any more points
towards a free round-trip airline ticket. If you have accrued at least 50,000
points by September 17, 1999, you will have until June 30, 2000 to redeem your
points for air travel.
The terms and conditions regarding the program are as follows:
|_| Investors must purchase Class A or B shares of any of the Firstar Stellar
Funds.
|_| Investors will earn one point for every dollar invested (gross of
sales charges) in Class A or B shares after August 12, 1996.
|_| The program does not apply to shares obtained without a sales charge
or a CDSC. It also does not apply to shares acquired through
reinvested dividends or capital gain distributions.
|_| The program does not apply to Class A or B shares acquired by exchange.
|_| Investors may redeem shares at any time without losing points.
|_| Investors may earn up to 100,000 points (2 airline tickets) in any 12-month
period.
|_| All unused points will expire one year from the latest purchase of shares of
$100 or more.
|_| Points are not transferable.
Regarding the airline tickets:
|_| The ticket will be for a non-refundable coach seat.
|_| The price of the ticket may not exceed $500 (including taxes and
destination charges), however, investors may choose to pay any overage.
|_| All travel must be within the 50 United States.
|_| Interim stopovers may not exceed four hours.
|_| Tickets will be mailed to the investor's account address, although
overnight shipping is available at the investor's expense.
|_| There are no "blackout" dates.
|_| Investors must purchase their tickets 21 days in advance, and a Saturday
night stay is required.
|_| Tickets may be purchased in any individual's name.
CONVERSION TO FEDERAL FUNDS
It is the Funds' 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 funds or be converted into federal funds. Firstar Bank, N.A. acts as the
shareholder's agent in depositing checks and converting them to federal funds.
REDEEMING SHARES
- --------------------------------------------------------------------------------
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 Funds 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 3011
Milwaukee, Wisconsin 53201-3011
The written letter of instructions must include:
|X| the shareholder(s)' name,
|X| the Fund name,
|X| the account number,
|X| the share or dollar amount to be redeemed, and
|X| 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:
|X| a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the FDIC;
|X| a member of the New York, Boston, American, Midwest, or Pacific Stock
Exchange;
|X| a savings bank or savings association whose deposits are insured by the
SAIF, which is administered by the FDIC;
or
|X| any other "eligible guarantor institution" as defined in the Securities
Exchange Act of 1934.
The Funds do 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
- --------------------------------------------------------------------------------
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 Funds 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 out its income to shareholders each year, so that the
Funds themselves generally will be relieved of federal income and excise taxes.
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 Funds would be taxable and non-deductible by the
Trust. This would increase the cost of investing in the Funds for shareholders
and would make it more economical for shareholders to invest directly in
securities held by the Funds instead of investing indirectly in such securities
through the Funds.
INTERNATIONAL EQUITY FUND
These requirements may restrict the degree to which the INTERNATIONAL EQUITY
FUND may engage in short-term trading and certain hedging transactions and may
limit the range of the Fund's investments.
If permitted by its investment policies, the underlying fund's transactions in
futures contracts, forward contracts, foreign currency transactions, options and
certain other investment and hedging activities are subject to special tax
rules. In a given case, these rules may accelerate income to the underlying
fund, defer its losses, cause adjustments in the holding periods of the
underlying fund's assets, convert short-term capital losses into long-term
capital losses or otherwise affect the character of the underlying fund's
income. These rules could therefore affect the amount, timing and character of
distributions to the Fund's shareholders.
Any dividends declared by the Fund in October, November or December to
shareholders of record during those months and paid during the following January
are treated, for tax purposes, as if they were received by each shareholder on
December 31 of the year in which they were declared.
An underlying fund may inadvertently invest in non-U.S. corporations, which are
treated as Passive Foreign Investment Companies ("PFICs") or could become a PFIC
under the Code. This could result in adverse tax consequences upon the
disposition of, or the receipt of "excess distributions" with respect to, such
equity investments. To the extent an underlying fund does invest in PFICs, it
may elect to treat the PFIC as a "qualified electing fund" or mark-to-market its
investments in PFICs annually. In either case, the underlying fund may be
required to distribute amounts in excess of its realized income and gains. To
the extent that the underlying fund itself is required to pay a tax on income or
gain from investment in PFICs, the payment of this tax would reduce the
INTERNATIONAL EQUITY FUND'S economic return.
FOREIGN TAXES
Investment income on certain foreign securities in which the STRATEGIC INCOME
FUND, GROWTH EQUITY FUND, RELATIVE VALUE FUND, CAPITAL APPRECIATION FUND and
INTERNATIONAL EQUITY FUND may invest may be subject to foreign withholding or
other taxes that could reduce the return on these securities. Tax treaties
between the United States and foreign countries, however, may reduce or
eliminate the amount of foreign taxes to which the Funds would be subject.
SHAREHOLDERS' TAX STATUS
Regarding the STRATEGIC INCOME FUND, U.S. GOVERNMENT INCOME FUND, GROWTH EQUITY
FUND, RELATIVE VALUE FUND, SCIENCE & TECHNOLOGY FUND, STELLAR FUND, CAPITAL
APPRECIATION FUND and INTERNATIONAL EQUITY FUND, shareholders are subject to
federal income tax on dividends and capital gains received as cash or additional
shares. The dividends received deduction for corporations will apply to ordinary
income distributions to the extent the distribution represents amounts that
would qualify for the dividends received deduction if the Funds were a regular
corporation and to the extent designated by the Funds as so qualifying. These
dividends and any short-term capital gains are taxable as ordinary income.
Regarding the INSURED TAX-FREE BOND FUND, no portion of any income dividend paid
by the Fund is eligible for the dividends received deduction available to
corporations.
Regarding the TREASURY FUND, shareholders are subject to federal income tax on
dividends received as cash or additional shares. No portion of any income
dividend paid by the Fund is eligible for the dividends received deduction
available to corporations. These dividends and any short-term capital gains are
taxable as ordinary income.
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.
Capital gains experienced by the TREASURY FUND, TAX-FREE MONEY MARKET FUND and
OHIO TAX-FREE MONEY MARKET FUND could result in an increase in dividends.
Capital losses could result in a decrease in dividends. If, for some
extraordinary reason, a Fund realizes net long-term capital gains, it will
distribute them at least once every 12 months.
Regarding the INSURED TAX-FREE BOND FUND, capital gains or losses may be
realized by the Fund on the sale of portfolio securities. Sales would generally
be made because of:
|X| the availability of higher relative yields;
|X| differentials in market values;
|X| new investment opportunities;
|X| changes in creditworthiness of an issuer; or
|X| an attempt to preserve gains or limit losses.
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.
UNDERWRITERS
- --------------------------------------------------------------------------------
DISTRIBUTION OF SECURITIES
As of April 1, 1999, the Funds' current principal distributor is Edgewood
Services, Inc. Prior to Edgewood Services, Inc. serving as distributor to the
Funds, B.C. Ziegler and Company served as the principal distributor from October
1, 1998 to March 31, 1999. Prior to B.C. Ziegler and Company serving as
distributor to the Fund, Federated Securities Corp. served as distributor. The
amounts paid by the Funds to the various entities over the last three fiscal
years are shown on the tables below.
- ---------------------------------- ---------------------------
4/1/99 - 11/30/99
- ---------------------------------- ---------------------------
Fees Paid to Edgewood Total Amount
commission retained
- ---------------------------------- ------------- -------------
Treasury Fund $668,817 0
Tax-Free Money Market Fund 0 0
Ohio Tax-Free Money Market Fund 0 0
Strategic Income Fund 0 0
U.S. Government Income Fund 0 0
Insured Tax-Free Bond Fund 0 0
Growth Equity Fund $139,610 0
Relative Value Fund $114,067 0
Science & Technology Fund $292[3] 0[3]
Stellar Fund $73,503 0
Capital Appreciation Fund 0 0
International Equity Fund 0 0
<TABLE>
<CAPTION>
- ----------------------------------------- -------------------------------- ---------------------------------
10/1/98 - 11/30/98 12/1/98 - 3/31/99
- ----------------------------------------- -------------------------------- ---------------------------------
Fees Paid to B.C. Ziegler Total Amount Total Amount
commissions retained commissions retained
- ----------------------------------------- ---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Treasury Fund $125,705 0 $251,336 0
Tax-Free Money Market Fund 0 0 0 0
Ohio Tax-Free Money Market Fund 0[1] 0[1] 0 0
Strategic Income Fund 0 0 0 0
U.S. Government Income Fund 0 0 0 0
Insured Tax-Free Bond Fund 0 0 0 0
Growth Equity Fund $25,638 0 $60,292 0
Relative Value Fund $19,784 0 $51,015 0
Stellar Fund $18,956 0 $38,276 0
Capital Appreciation Fund 0 0 0 0
International Equity Fund 0[4] 0[4] 0 0
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------- --------------------------- ---------------------------
Fiscal Year 1997 12/1/97 - 9/30/98
- ---------------------------------- --------------------------- ---------------------------
Fees Paid to Federated Total Amount Total Amount
commission retained commission retained
- ---------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Treasury Fund $202,834 0 $539,210 0
Tax-Free Money Market Fund 0 0 0 0
Ohio Tax-Free Money Market Fund 0 0 0[1] 0[1]
Strategic Income Fund 0 0 0 0
U.S. Government Income Fund 0 0 0 0
Insured Tax-Free Bond Fund 0[2] 0[2] 0 0
Growth Equity Fund $25,307 0 $118,011 0
Relative Value Fund $22,038 0 $95,392 0
Stellar Fund $126,341 0 $104,226 0
Capital Appreciation Fund 0 0 0 0
International Equity Fund 0 0 0[4] 0[4]
</TABLE>
1 For the period from December 2, 1997 (date of initial public investment) to
November 30, 1998.
2 For the period from December 30, 1996 (date of initial public investment) to
November 30, 1997.
3 For the period from August 9, 1999 (date of initial public investment) to
November 30, 1999.
4 For the period from December 3, 1997 (date of initial public investment) to
November 30, 1998.
CALCULATION OF PERFORMANCE DATA
- --------------------------------------------------------------------------------
The Funds' performance or return may be shown in the form of various performance
figures. The Funds' performance figures are based upon historical results and
are not necessarily representative of future performance. Factors affecting the
Funds' performance include general market conditions, generating expenses, the
imposition of sales charges and investment management.
YIELD -- MONEY MARKET FUNDS
Yields for the money market funds are calculated daily based upon the seven days
ending on the day of the calculation, called the "base period."' This yield is
computed by:
o determining the net change in the value of a hypothetical account with
a balance of one share at the beginning of the base period, with the
net change excluding capital changes but including the value of any
additional shares purchased with dividends earned from the original one
share and all dividends declared on the original and any purchased
shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Funds, the performance will be reduced for those shareholders paying those fees.
The yields for the 7-day period ended November 30, 1999 were as follows:
- ----------------------------------------------- ----------- -------------
YIELDS FOR 7-DAY PERIOD ENDING 11/30/99 C SHARES Y SHARES
- ----------------------------------------------- ----------- -------------
Treasury Fund 4.52% 4.67%
Tax-Free Money Market Fund 2.89% --
Ohio Tax-Free Money Market Fund 3.06% --
- ----------------------------------------------- ----------- -------------
EFFECTIVE YIELD -- MONEY MARKET FUNDS
The effective yield for the money market funds is computed by compounding the
unannualized base period return by:
|X| adding 1 to the base period return;
|X| raising the sum to the 365/7th power; and
|X| subtracting 1 from the result.
The effective yields for the 7-day period ended November 30, 1999 were as
follows:
- ------------------------------------------------------ ----------- -------------
EFFECTIVE YIELDS FOR 7-DAY PERIOD ENDING 11/30/99 C SHARES Y SHARES
- ------------------------------------------------------ ----------- -------------
Treasury Fund 4.62% 4.78%
Tax-Free Money Market Fund 2.93% --
Ohio Tax-Free Money Market Fund 3.11% --
- ------------------------------------------------------ ----------- -------------
YIELD -- BOND FUND AND STOCK FUNDS
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]
---
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.
The Funds' yields for the 30-day period ended November 30, 1999 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------- -------------------- ------------------- ------------------
Yields for 30-day period ended 11/30/99 Class A Shares Class B Shares Class Y Shares
- ----------------------------------------- -------------------- ------------------- ------------------
<S> <C> <C> <C>
Strategic Income Fund -- 6.89% --
U.S. Government Income Fund 5.87% 5.87% --
Insured Tax-Free Bond Fund 4.29% -- --
Relative Value Fund 0.48% 0.48% 0.73%
Stellar Fund 2.23% -- 2.48%
</TABLE>
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. Sales
loads are reflected in the returns.
<TABLE>
<CAPTION>
- --------------------------------------------------------- ------------ ---------- ------------ --------------------
AVERAGE ANNUAL TOTAL RETURNS ENDED 11/30/99 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
(INCEPTION DATE)
- --------------------------------------------------------- ------------ ---------- ------------ --------------------
<S> <C> <C> <C> <C>
Treasury Fund C Shares 4.02% 4.72% 4.62% 4.85%
Y Shares 4.18% -- -- 4.62%
Tax-Free Money Market Fund C Shares 2.50% 2.92% -- 2.76%
Ohio Tax-Free Money Market Fund C Shares 2.67% -- -- 2.76%
Strategic Income Fund A Shares (9.42)% -- -- 3.97%
B Shares N/A N/A N/A N/A
U.S. Government Income Fund A Shares (5.77)% 5.58% -- 4.60%
B Shares (6.99)% -- -- 0.24%
Insured Tax-Free Bond Fund A Shares (5.55)% -- -- 2.74%
B Shares N/A N/A N/A N/A
Growth Equity Fund A Shares N/A N/A N/A N/A
B Shares 20.26% -- -- 25.12%
Y Shares 25.61% -- -- 22.42%
Relative Value Fund A Shares 6.84% 22.60% -- 15.69%
B Shares 6.84% -- -- 5.59%
Y Shares 12.20% -- -- 14.52%
Science and Technology Fund1 A Shares N/A N/A N/A N/A
B Shares N/A N/A N/A 39.20%
Y Shares N/A N/A N/A 45.60%
Stellar Fund A Shares 2.10% 10.28% -- 8.61%
B Shares N/A N/A N/A N/A
Y Shares 7.15% 11.59% -- 9.84%
Capital Appreciation Fund A Shares 0.16% 8.91% -- 8.41%
B Shares N/A N/A N/A N/A
International Equity Fund A Shares 26.49% -- -- 14.73%
B Shares N/A N/A N/A N/A
- --------------------------------------------------------- ------------ ---------- ------------ --------------------
</TABLE>
1 For the period from August 9, 1999 (date of initial public investment) to
November 30, 1999.
TAX EQUIVALENT YIELD
The tax-equivalent yield for the TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE
MONEY MARKET FUND is calculated similarly to the yield, but is adjusted to
reflect the taxable yield that the Funds would have had to earn to equal its
actual yield, assuming a 31% tax rate and assuming that income is 100%
tax-exempt. The INSURED TAX-FREE BOND FUND is calculated similarly to the yield,
but is adjusted to reflect the taxable yield that the Funds would have had to
earn to equal its actual yield, assuming a 39.60% tax rate and assuming that
income is 100% tax-exempt.
The Funds may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal securities in the Funds'
portfolio generally remains free from federal income tax,1 and is often free
from state and local taxes as well. As the tables below indicate, a "tax-free"
investment can be an attractive choice for investors, particularly in times of
narrow spreads between tax-free and taxable yields. The table below would be
used for the TAX-FREE MONEY MARKET FUND and INSURED TAX-FREE BOND FUND.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 2000
MULTISTATE MUNICIPAL FUND
FEDERAL INCOME TAX BRACKET:
- ------------------- ---------------- ------------------- --------------------- --------------------- ----------------
15.00% 28.00% 31.00% 36.00% 39.60%
- ------------------- ---------------- ------------------- --------------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
Joint Return $1 -- $43,050 $42,351--$104,050 $104,051--$158,550 $158,551--$283,150 Over $283,150
Single Return $1 -- $25,750 $25,751 -- $62,450 $62,451 -- $130,250 $130,251 --$283,150 Over $283,150
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt Yield Taxable Yield Equivalent
- ------------------- ---------------- ------------------- --------------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating
the taxable yield equivalent.
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of Fund shares.
*Some portion of the Funds' income may be subject to the federal alternative
minimum tax and state and local income taxes.
The following two tables would be used for the OHIO TAX-FREE MONEY MARKET FUND.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT
STATE OF OHIO
- -------------------------------------------------------------------------------------------------------------------------
FEDERAL TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE TAX BRACKET:
19.295% 33.012% 37.65% 43.228% 46.828%
- -------------------- --------------- ------------------- -------------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
Single Return $1--$25,750 $25,751-$62,450 $62,451-$130,250 $130,251-$283,150 Over $283,150
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt Yield Taxable Yield Equivalent
- -------------------- --------------- ------------------- -------------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
1.50% 1.85% 2.23% 2.40% 2.62% 2.80%
2.00% 2.47% 2.97% 3.21% 3.50% 3.73%
2.50% 3.09% 3.72% 4.01% 4.37% 4.66%
3.00% 3.71% 4.96% 4.81% 5.24% 5.60%
3.50% 4.32% 5.20% 5.61% 6.12% 6.53%
4.00% 4.94% 5.94% 6.41% 6.99% 7.46%
4.50% 5.56% 6.69% 7.21% 7.87% 8.40%
5.00% 6.18% 7.43% 8.02% 8.74% 9.33%
5.50% 6.79% 8.17% 8.82% 9.62% 10.26%
6.00% 7.41% 8.92% 9.62% 10.49% 11.19%
</TABLE>
Note: The maximum marginal tax rate for the highest dollar amount in each
bracket was used in calculating the taxable yield equivalent. Furthermore,
additional state and local taxes paid on comparable taxable investments were not
used to increase federal deductions. Because 2000 Ohio tax rates will not be
released until October, 2000, the above calculations use 1999 Ohio tax rates.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT
STATE OF OHIO
- -------------------------------------------------------------------------------------------------------------------------
FEDERAL TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE TAX BRACKET:
20.012% 34.650% 37.650% 43.228% 46.828%
- ------------------- ---------------- ------------------- ---------------------- ---------------------- -----------------
<S> <C> <C> <C> <C> <C>
Joint Return $1-$43,050 $43,051-104,050 $104,051-$158,550 $158,551-$283,150 Over $283,150
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt Yield Taxable Yield Equivalent
- ------------------- ---------------- ------------------- ---------------------- ---------------------- -----------------
<S> <C> <C> <C> <C> <C>
1.50% 1.88% 2.23% 2.40% 2.62% 2.80%
2.00% 2.50% 2.97% 3.21% 3.50% 3.73%
2.50% 3.12% 3.72% 4.01% 4.37% 4.66%
3.00% 3.75% 4.46% 4.81% 5.24% 5.60%
3.50% 4.38% 5.20% 5.61% 6.12% 6.53%
4.00% 5.00% 5.94% 6.41% 6.99% 7.46%
4.50% 5.63% 6.69% 7.21% 7.87% 8.40%
5.00% 6.25% 7.43% 8.02% 8.74% 9.33%
5.50% 6.88% 8.17% 8.82% 9.62% 10.26%
6.00% 7.50% 8.92% 9.62% 10.49% 11.19%
</TABLE>
Note: The maximum marginal tax rate for the highest dollar amount in each
bracket was used in calculating the taxable yield equivalent. Furthermore,
additional state and local taxes paid on comparable taxable investments were not
used to increase federal deductions. Because 2000 Ohio tax rates will not be
released until October, 2000, the above calculations use 1999 Ohio tax rates.
The charts above are for illustrative purposes only. It is not an indicator of
past or future performance of Fund shares.
Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of the Funds' 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 Funds' 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 Funds' 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 Funds use in advertising may include:
|X| 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.
|X| EUROPE, AUSTRALASIA, AND FAR EAST (EAFE) INDEX is a market capitalization
weighted foreign securities index, which is widely used to measure the
performance of European, Australian, New Zealand and Far Eastern stock
markets. The index covers approximately 1,020 companies drawn from 21
countries in the above regions. The index values its securities daily in
both U.S. dollars and local currency and calculates total returns monthly.
EAFE U.S. dollar total return is a net dividend figure less Luxembourg
withholding tax. The EAFE is monitored by Capital International, S.A., in
Geneva, Switzerland. This index could be used to compare the performance of
the INTERNATIONAL EQUITY FUND.
|X| RUSSELL MIDCAP INDEX measures the performance of the 800 smallest companies
in the Russell 1000 Index, which represent approximately 35% of the total
market capitalization of the Russell 1000 Index. This index could be used
to compare the performance of the CAPITAL APPRECIATION FUND.
|X| 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 STRATEGIC FUND, GROWTH EQUITY FUND,
RELATIVE VALUE FUND, SCIENCE & TECHNOLOGY FUND, STELLAR FUND and CAPITAL
APPRECIATION FUND.
|X| LEHMAN BROTHERS TEN-YEAR INSURED BOND INDEX is an unmanaged index that
reflects the total performance of the Insured Bond sector (includes all
bond insurers with Aaa/AAA ratings) of the Lehman Municipal Bond Index. The
maturities range between eight and twelve years. This index could be used
to compare the performance of the INSURED TAX-FREE BOND FUND.
|X| LEHMAN BROTHERS TEN-YEAR STATE GENERAL OBLIGATION BONDS is an index
comprised of the same issues noted above except that the maturities range
between nine and eleven years. Index figures are total returns calculated
for the same periods as listed above.
|X| 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.
|X| MONEY, a monthly magazine, regularly ranks money market funds in various
categories based on the latest available seven-day compound (effective)
yield. From time to time, the appropriate Fund will quote its Money ranking
in advertising and sales literature. This magazine could be used to compare
the performances of the TREASURY FUND, TAX-FREE MONEY MARKET FUND and OHIO
TAX-FREE MONEY MARKET FUND.
|X| SALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S. Treasury,
maturing in 30 days. This index could be used to compare the performance of
the TREASURY FUND.
|X| SALOMON BROTHERS SIX-MONTH PRIME MUNI NOTES is an index of selected
municipal notes, maturing in six months, whose yields are chosen as
representative of this market. Calculations are made weekly and monthly.
This index could be used to compare the performances of the TAX-FREE MONEY
MARKET FUND and OHIO TAX-FREE MONEY MARKET FUND.
|X| SALOMON BROTHERS ONE-MONTH TAX-EXEMPT COMMERCIAL PAPER is an index of
selected tax-exempt commercial paper issues, maturing in one month, whose
yields are chosen as representative of this particular market. Calculations
are made weekly and monthly. Ehrlich-Bober & Co., Inc., also tracks this
Salomon Brothers index. This index could be used to compare the
performances of the TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE MONEY
MARKET FUND.
|X| DONOGHUE'S MONEY FUND REPORT publishes annualized yields of money market
funds weekly. DONOGHUE'S MONEY MARKET INSIGHT publication reports monthly
and 12 month-to-date investment results for the same money funds. This
report could be used to compare the performances of the TREASURY FUND,
TAX-FREE MONEY MARKET FUND and OHIO TAX-FREE MONEY MARKET FUND.
|X| DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations as well as public utility and
transportation companies. The DJIA indicates daily changes in the average
price of stocks in any of its categories. It also reports total sales for
each group of industries. Because it represents the top corporations of
America, the DJIA's index movements are leading economic indicators for the
stock market as a whole. This index could be used to compare the
performances of the RELATIVE VALUE FUND and STELLAR FUND.
|X| MERRILL LYNCH 1-10 YEAR GOVERNMENT INDEX is an unmanaged index comprised of
U.S. government securities with maturities between 1 and 10 years. Index
returns are calculated as total returns for periods of one, three, six, and
twelve months as well as year-to-date. The index is produced by Merrill
Lynch, Pierce, Fenner & Smith, Inc. This index could be used to compare the
performance of the U.S. GOVERNMENT INCOME FUND.
|X| LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX is an unmanaged index composed
of all bonds that are investment grade rated Baa or higher by Moody's or
BBB or higher by S&P, if unrated by Moody's. Investments can not be made in
an index. This index could be used to compare the performances of the U.S.
GOVERNMENT INCOME FUND and STELLAR FUND.
|X| LEHMAN BROTHERS GOVERNMENT (LT) INDEX, for example, is an index composed of
bonds issued by the U.S. government or its agencies which have at least $1
million outstanding in principal and which have maturities of ten years or
longer. Index figures are total return figures calculated monthly. This
index could be used to compare the performance of the U.S. GOVERNMENT
INCOME FUND.
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 Funds' 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 invests, 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 Funds 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
- --------------------------------------------------------------------------------
Arthur Andersen LLP, 425 Walnut Street, Cincinnati, Ohio, 45202, serves as the
independent public accountants for the Funds. Their services include examination
of the Funds' financial statements and the performance of other related audit
and tax services.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Funds' audited financial statements are incorporated by reference to the
Funds' Annual Reports for the fiscal year ended November 30, 1999 as filed with
the Securities and Exchange Commission.
APPENDIX
- --------------------------------------------------------------------------------
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.
FIRSTAR STELLAR FUNDS
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) AMENDED AND RESTATED DECLARATION OF TRUST of the Registrant incorporated by
reference to Registrant's Post-Effective Amendment No. 47 to the
Registration Statement filed August 3, 1999.
(1) Amendment No. 1 to the Amended and Restated Declaration of
Trust is incorporated by reference to Registrant's
Post-Effective Amendment No. 48 to the Registration Statement
filed January 28, 2000.
(b) BY-LAWS filed February 3, 1989 is incorporated by reference to Registrant's
Initial Registration Statement.
(d) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS. See Article VIII and X of
the Amended and Restated Declaration of Trust.
(d) INVESTMENT ADVISORY CONTRACT between Registrant and Firstar Bank, N.A
through and including Exhibit G is incorporated by reference to
Registrant's Post-Effective Amendment No. 16 to the Registration Statement
filed November 20, 1992.
(1) EXHIBIT H TO INVESTMENT ADVISORY CONTRACT of the Registrant is
incorporated by reference to Registrant's Post-Effective Amendment
No. 23 to the Registration Statement filed May 13, 1994.
(2) EXHIBIT I TO INVESTMENT ADVISORY CONTRACT of the Registrant is
incorporated by reference to Registrant's Post-Effective Amendment
No. 24 to the Registration Statement filed September 15, 1994.
(3) EXHIBIT J TO INVESTMENT ADVISORY CONTRACT of the Registrant is
incorporated by reference to Registrant's Post-Effective Amendment
No. 25 to the Registration Statement Form N-1A filed January 26,
1995.
(4) EXHIBIT K TO INVESTMENT ADVISORY CONTRACT of the Registrant is
incorporated by reference to Registrant's Post-Effective Amendment
No. 33 to the Registration Statement filed March 25, 1997.
(5) EXHIBIT L TO INVESTMENT ADVISORY CONTRACT of the Registrant is
incorporated by reference to Registrant's Post-Effective Amendment
No. 37 to the Registration Statement filed November 24, 1997.
(6) EXHIBIT M TO INVESTMENT ADVISORY CONTRACT of the Registrant is
incorporated by reference to Registrant's Post-Effective Amendment
No. 37 to the Registration Statement filed November 24, 1997.
(7) EXHIBIT N TO INVESTMENT ADVISORY CONTRACT of the Registrant is
incorporated by reference to Registrant's Post-Effective Amendment
No. 37 to the Registration Statement filed November 24, 1997.
(8) EXHIBIT O TO INVESTMENT ADVISORY CONTRACT of the Registrant
incorporated by reference to Registrant's Post-Effective Amendment
No. 47 to the Registration Statement filed August 3, 1999.
(e) DISTRIBUTION AGREEMENT between Registrant and Edgewood Services, Inc. dated
as of April 1, 1999 with respect to Treasury Fund, Tax-Free Money Market
Fund, Ohio Tax-Free Money Market Fund, The Stellar Fund, Growth Equity
Fund, International Equity Fund, Market Capitalization Fund, Relative Value
Fund, Capital Appreciation Fund, Stellar Insured Tax-Free Bond Fund,
Strategic Income Fund, and U.S. Government Income Fund is incorporated by
reference to Registrant's Post-Effective Amendment No. 44 to the
Registration Statement filed April 1, 1999.
(1) EXHIBIT A TO DISTRIBUTION AGREEMENT of the Registrant is
incorporated by reference to Registrant's Post-Effective Amendment
No. 44 to the Registration Statement filed April 1, 1999.
(2) EXHIBIT B TO DISTRIBUTION AGREEMENT of the Registrant is
incorporated by reference to Registrant's Post-Effective Amendment
No. 44 to the Registration Statement filed April 1, 1999.
(3) EXHIBIT C TO DISTRIBUTION AGREEMENT of the Registrant incorporated
by reference to Registrant's Post-Effective Amendment No. 47 to
the Registration Statement filed August 3, 1999.
(4) EXHIBIT D TO DISTRIBUTION AGREEMENT of the Registrant incorporated
by reference to Registrant's Post-Effective Amendment No. 47 to
the Registration Statement filed August 3, 1999.
(f) BONUS OR PROFIT SHARING CONTRACTS. Not Applicable.
(g) CUSTODIAN CONTRACT between Registrant and Firstar Bank, N.A. dated
October 1, 1992 is incorporated by reference to Registrant's
Post-Effective Amendment No. 19 to the Registration Statement filed
July 2, 1993.
(1) FEE SCHEDULES OF CUSTODIAN CONTRACT of the Registrant is
incorporated by reference to Registrant's Post-Effective Amendment
No. 37 to the Registration Statement filed November 24, 1997.
(h) OTHER MATERIAL CONTRACTS
(1) SHAREHOLDER RECORDKEEPING AGREEMENT between Registrant and Firstar
Bank, N.A. dated as of January 26, 1998 is incorporated by
reference to Registrant's Post-Effective Amendment No. 41 to the
Registration Statement filed March 23, 1998.
(2) FUND ADMINISTRATION SERVICING AGREEMENT between Registrant and
Firstar Mutual Fund Services, LLC dated October 1, 1998 filed
January 29, 1999 is incorporated by reference to Registrant's
Post-Effective Amendment No. 42.
(3) AMENDED AND RESTATED SHAREHOLDER SERVICES PLAN is incorporated by
reference to Registrant's Post-Effective Amendment No. 48 filed
January 28, 2000.
(4) SHAREHOLDER SERVICES AGREEMENT between Firstar Stellar Funds and
Firstar Bank, N.A. dated as of March 1, 1999 is filed herewith.
(5) FUND ACCOUNTING SERVICING AGREEMENT between Registrant and Firstar
Mutual Fund Services, LLC dated October 1, 1998 filed January 29,
1999 is incorporated by reference to Registrant's Post-Effective
Amendment No. 42.
(i) LEGAL OPINION is filed herewith.
(j) OTHER OPINIONS.
(1) Consent of the independent accountants is filed herewith.
(k) OMITTED FINANCIAL STATEMENTS. Not applicable.
(l) INITIAL CAPITAL UNDERSTANDING is incorporated by reference to Registrant's
Pre-Effective Amendment No. 1 to the Registration Statement filed April 10,
1989.
(m) AMENDED AND RESTATED DISTRIBUTION PLAN AND FORM OF AGREEMENT is
incorporated by reference to Registrant's Post-Effective Amendment No. 44
to the Registration Statement filed April 1, 1999.
(1) EXHIBIT A TO THE AMENDED AND RESTATED DISTRIBUTION PLAN AND FORM
OF AGREEMENT is incorporated by reference to Registrant's
Post-Effective Amendment No. 48 filed January 28, 2000.
(2) EXHIBIT B TO THE AMENDED AND RESTATED DISTRIBUTION PLAN AND FORM
OF AGREEMENT is incorporated by reference to Registrant's
Post-Effective Amendment No. 48 filed January 28, 2000.
(n) AMENDED AND RESTATED MULTIPLE CLASS PLAN including Exhibit A is
incorporated by reference to Registrant's Post-Effective Amendment No. 48
filed January 28, 2000.
(o) POWER OF ATTORNEY is incorporated by reference to Registrant's
Post-Effective Amendment No. 42 filed January 29, 1999
(p) CODE OF ETHICS
(1) Registrant's Code of Ethics is incorporated by reference to
Registrant's Post-Effective Amendment No. 48 filed January 28, 2000.
(2) Adviser's Code of Ethics is filed herewith.
(3) Distributor's Code of Ethics is filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Trustees.
ITEM 25. INDEMNIFICATION
Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 1 to the Registration Statement
filed July 26, 1989.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER:
Firstar Investment Research and Management Company LLC,
("FIRMCO") investment adviser to all of the series of the
Registrant is a registered investment adviser under the
Investment Advisers Act of 1940.
To Registrant's knowledge, none of the directors or senior
executive officers of FIRMCO except those set forth below, is,
or has been at any time during Registrant's past two fiscal
years, engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain
directors and officers of FIRMCO also hold various positions
with, and engage in business for, their respective affiliates.
Set forth below are the names and principal businesses of the
directors and certain of the senior executive officers of
FIRMCO who are or have been engaged in any other business,
profession, vocation or employment of a substantial nature.
<TABLE>
<CAPTION>
FIRSTAR INVESTMENT RESEARCH AND MANAGEMENT COMPANY
- ------------------------------- ---------------------------- --------------------------------- --------------------
NAME POSITION WITH FIRSTAR OTHER BUSINESS CONNECTIONS TYPE OF BUSINESS
INVESTMENT RESEARCH AND
MANAGEMENT COMPANY
- ------------------------------- ---------------------------- --------------------------------- --------------------
<S> <C> <C> <C>
Robert L. Webster Director Executive Bank Vice President, Bank
Firstar Bank, Milwaukee, N.A.
777 E. Wisconsin Avenue,
Milwaukee, WI 53202
Todd Krieg Director
Bruce Laning Director
Marian Zentmeyer Director, Chief Equity
Investment Officer
- ------------------------------- ---------------------------- --------------------------------- --------------------
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS:
(a) Edgewood Services, Inc. the Distributor for shares of the Registrant,
acts as principal underwriter for the following open-end investment
companies, including the Registrant:
o Deutsche Portfolios
o Deutsche Funds, Inc.
o Excelsior Funds
o Excelsior Funds, Inc. (formerly, UST Master Funds, Inc.),
o Excelsior Institutional Trust
o Excelsior Tax-Exempt Funds, Inc.
o FTI Funds
o FundManger Portfolios
o Great Plains Funds
o Old Westbury Funds, Inc.
o The Riverfront Funds
o Robertsons Stephens Investment Trust
o WesMark Funds
o WCT Funds
(b) To the best of Registrant's knowledge, the directors and executive
officers of Edgewood Services, Inc. are as follows:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION AND OFFICES WITH EDGEWOOD POSITIONS AND OFFICES WITH
BUSINESS ADDRESS SERVICES, INC. REGISTRANT
- --------------------------------------------- ---------------------------------------- ------------------------------
<S> <C> <C>
Lawrence Caracciolo Director, President None
- --------------------------------------------- ---------------------------------------- ------------------------------
Arthur L. Cherry Director None
- --------------------------------------------- ---------------------------------------- ------------------------------
J. Christopher Donahue Director None
- --------------------------------------------- ---------------------------------------- ------------------------------
Thomas P. Sholes Vice President None
- --------------------------------------------- ---------------------------------------- ------------------------------
Ernest L. Linane Assistant Vice President None
- --------------------------------------------- ---------------------------------------- ------------------------------
Christine T. Johnson Assistant Vice President None
- --------------------------------------------- ---------------------------------------- ------------------------------
Denis McAuley Treasurer None
- --------------------------------------------- ---------------------------------------- ------------------------------
Leslie K. Rose Secretary None
- --------------------------------------------- ---------------------------------------- ------------------------------
Amanda J. Reed Assistant Secretary None
- --------------------------------------------- -----------------------------------------------------------------------
</TABLE>
The address of each of the foregoing is 5800 Corporate Drive, Pittsburgh PA
15237-5829.
(c) None.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS:
All accounts and records required to be maintained by Section
31(a) of the Investment Company Act of 1940 and Rules 31a-1
through 31a-3 promulgated thereunder are maintained at the
following locations:
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------------------------------------
RECORDS RELATING TO: LOCATED AT:
- ---------------------------------------------------- --------------------------------------
<S> <C>
Registrant's fund accounting servicing agent, Firstar Mutual Funds Services, LLC
transfer agent and administrator 615 East Michigan Street
Milwaukee, Wisconsin 53202
Registrant's investment adviser FIRMCO
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Registrant's custodian Firstar Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
- ---------------------------------------------------- --------------------------------------
</TABLE>
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS:
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FIRSTAR STELLAR FUNDS, certifies
that it meets all of the requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereto duly authorized, in the City of Milwaukee
and State of Wisconsin, on the 31st day of March, 2000.
FIRSTAR STELLAR FUNDS
BY: /S/ ELAINE E. RICHARDS
Elaine E. Richards, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following persons in
the capacity and on the date indicated:
NAME TITLE DATE
- ---- ----- ----
*/S/ THOMAS L. CONLAN, JR. Trustee March 31, 2000
- -------------------------
Thomas L. Conlan, Jr.
*/S/ DR. ALFRED GOTTSCHALK Trustee March 31, 2000
- --------------------------
Dr. Alfred Gottschalk
*/S/ DR. ROBERT J. HILL Trustee March 31, 2000
- -----------------------
Dr. Robert J. Hill
*/S/ WILLIAM H. ZIMMER, III Trustee March 31, 2000
- ---------------------------
William H. Zimmer, III
*/S/ DAWN M. HORNBACK Trustee March 31, 2000
- ---------------------
Dawn M. Hornback
*/S/ LAWRENCE M. TURNER Trustee March 31, 2000
- -----------------------
Lawrence M. Turner
* By /S/ ELAINE E. RICHARDS
Elaine E. Richards
Attorney-in-fact
SQUIRE, SANDERS & DEMPSEY, L.L.P.
1700 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
(513) 361-1200
March 31, 2000
Firstar Stellar Funds
Firstar Mutual Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53201-3011
Re: Firstar Stellar Funds
1933 Act File No. 33-26915
1940 Act File No. 811-5762
Gentlemen:
At your request, we have examined the Post Effective Amendment No. 49
to the above-referenced Registration Statement (the "Registration Statement
Amendment"), relating to the registration of shares, without par value, of
Firstar Stellar Funds, a Massachusetts trust (the "Trust"), established and
designated as follows:
a. Firstar Stellar Insured Tax-Free Bond Fund (class B
Shares);
b. Firstar Stellar Strategic Income Fund (class A Shares);
c. Firstar Stellar Growth Equity Fund (class A Shares);
d. Firstar Stellar Science & Technology Fund (class A
Shares);
e. Firstar Stellar Fund (class B Shares); and
f. Firstar Stellar Capital Appreciation Fund (class B
Shares).
We are familiar with the proceedings taken and to be taken by the Trust in
connection with the authorization, issuance and sale of the Shares, and have
examined such documents and reviewed such questions of law and fact as we have
deemed necessary in order to express the following opinion.
Based on the foregoing, and subject to the proceedings referred to
above being duly taken and completed by you, it is our opinion that the Shares
will, upon issuance and sale thereof in the manner described in the Registration
Statement Amendment, be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement Amendment.
Very truly yours,
SQUIRE, SANDERS & DEMPSEY, L.L.P
/s/ Squire, Sanders & Dempsey, L.L.P.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made a part of this Form N-1A
Registration Statemen, Amendment No. 49, for Firstar Stellar Funds.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
March 28, 2000
FIRSTAR INVESTMENT RESEARCH & MANAGEMENT COMPANY, LLC
CODE OF ETHICS
This Code of Ethics has been adopted by Firstar Investment Research & Management
Company, LLC (FIRMCO) in compliance with section 204A and rule 204-2(a)(12) of
the Investment Advisers Act of 1940 (the "Act") as well as rule 17j-1 of the
Investment Company Act of 1940 (the "40 Act") to establish standards and
procedures to ensure persons having knowledge of the investments and investment
intentions of FIRMCO's clients uphold their fiduciary duties to the firm's
clients. This Code is also intended to establish procedures reasonably designed
to prevent the misuse of material, nonpublic information by FIRMCO or any person
associated with FIRMCO.
I. OBJECTIVE
No employee of FIRMCO shall use any information concerning investments or
investment intentions of our clients, or his or her ability to influence such
investment intentions, for personal gain or in a manner detrimental to the
interest of our clients. All investments and investment practices of FIRMCO
employees involving a possible conflict of interest should be avoided so as to
prevent any impairment of a person's ability to be disinterested in making
investment decisions on behalf of FIRMCO clients. No employee shall use material
inside information in connection with any decision or recommendation to purchase
or sell any security, and no employee shall engage in transactions which violate
federal or state securities laws. FIRMCO encourages its employees to utilize
FIRMCO advised common trust funds or mutual funds, other open-end mutual funds
or other exempt securities for the investment of personal assets.
II. DEFINITIONS (as used in this Code)
A. "Beneficial Ownership" means any interest by which an employee or any member
of his or her immediate family sharing the same household can directly or
indirectly derive a monetary benefit from the purchase or sale or ownership of
a security. As a general matter, "beneficial ownership" will be attributed to
an employee in all instances where the person (i) possesses the ability to
purchase or sell the security (or the ability to direct the disposition of the
security); (ii) possesses the voting power (including the power to vote or to
direct the voting) over such security; or (iii) receives any benefits
substantially equivalent to those of ownership.
Although the following is not an exhaustive list, a person generally would be
regarded to be the beneficial owner of the following:
1. securities held in the person's own name;
2. securities held with another in joint tenancy, as tenants in
common, or in other joint ownership arrangements;
3. securities held by a bank or broker as a nominee or custodian on
such person's behalf or pledged as collateral for a loan;
4. securities held by members of the person's immediate
family sharing the same household ("immediate family" means any child,
stepchild, grandchild, parent, stepparent, grandparent, spouse,
sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law or sister-in-law, including adoptive relationships);
5. securities held by a relative not residing in the person's home if
the person is a custodian, guardian, or otherwise has controlling
influence over the purchase, sale, or voting of such securities;
6. securities held by a trust for which the person serves as a trustee
and in which the person has a pecuniary interest (including pecuniary
interests by virtue of performance fees and by virtue of holdings by
the person's immediate family);
7. securities held by a trust in which the person is a beneficiary and
has or shares the power to make purchase or sale decisions;
8. securities held by a general partnership or limited partnership in
which the person is a general partner; and
9. securities owned by a corporation which is directly or indirectly
controlled by, or under common control with, such person.
Any uncertainty as to whether an employee beneficially owns a security should be
brought to the attention of the Compliance Officer.
B. "EMPLOYEE" means any officer, member of the Board of Managers or employee of
FIRMCO.
C. "PERSONAL ACCOUNT" means any and all accounts of which an employee is a
beneficial owner.
D. "PURCHASE OR SALE OF A SECURITY" includes, among other things, an option to
purchase or sell a security, and a purchase or sale of any security convertible
into or exchangeable for a covered security.
E. "EXEMPT SECURITY" means:
1. direct obligations of the Government of the United States;
2. bankers' acceptances, bank certificates of deposit, commercial
paper, and high quality short-term debt instruments (any instrument
that has a maturity at issuance of less than 366 days and that is
rated in one of the two highest rating categories by a nationally
recognized statistical rating organization), including repurchase
agreements;
3. shares of registered open-end investment companies; and
4. units of common trust funds;
5. Firstar Corporation Stock.
F. "Exempt Transactions" means that the restrictions of Sections IV and V shall
not apply to:
1. Securities acquired through stock dividends, automatic dividend
reinvestments, stock splits, reverse stock splits, mergers,
consolidations, spin-offs, or other similar corporate reorganizations
or distributions generally applicable to all holders of the same class
of securities;
2. Securities acquired upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its securities, to the extent
such rights were acquired from such issuer, and sales of such rights
so acquired.
G. "MATERIAL INSIDE INFORMATION" means confidential information of such a nature
that there is a substantial likelihood that a reasonable investor would consider
it important in deciding whether to buy, sell or hold securities.
III. STANDARDS OF CONDUCT
A. CONFLICTS OF INTEREST. In any matter involving both the personal accounts of
an employee and securities held or to be acquired by a FIRMCO client account
managed by such employee, the employee shall resolve any known or reasonably
anticipated conflict of interest in favor of the FIRMCO managed account. All
investments and investment practices involving a possible conflict of interest
shall be avoided to the extent practicable in order to prevent any impairment of
an employee's ability to be disinterested in connection with his or her services
for the FIRMCO managed accounts and to avoid the possible use for a personal
account of investment recommendations and other information generated on behalf
of FIRMCO managed accounts. Strict adherence to the provisions of this Code of
Ethics should assist the employee in avoiding such conflicts of interest.
B. DISCLOSURE OF MATERIAL POSITIONS OR RECENT TRADING. At no time may any
employee recommend or authorize the holding, purchase or sale of any security by
any FIRMCO managed account without first disclosing the existence of any
material (in relationship to personal financial circumstances) position (long or
short) in such security held by, or recent trading in such security by, any
personal account of such employee. This disclosure should be made to the
Compliance Officer.
C. REPORTS AND OTHER INFORMATION. Reports and all other information relating to
a particular security or to an industry prepared or acquired for use by FIRMCO
or any FIRMCO managed account are the property of FIRMCO and shall not go
outside the office without permission of the President or an officer designated
by her/him, and shall not be used for personal accounts of an employee under
any circumstances.
IV. PERSONAL TRADING RESTRICTIONS
A. BLACKOUT PERIODS. No employee may purchase or sell shares of any security in
which he or she has or thereby acquires a direct or indirect beneficial
ownership interest if:
1. FIRMCO's trading desk has a pending buy or sell order in that same
security;
2. FIRMCO's trading desk has executed a buy or sell order in that
security during that day;
3. The security has been purchased or sold in a FIRMCO account managed
by the employee within the last seven business days;
4. The security will be purchased or sold in a FIRMCO account managed
by the employee within the next seven business days; or
5. The employee, in connection with his/her job responsibilities, has
recommended an investment rating change in that security within the
last seven business days or is considering an investment rating change
within the next seven business days.
B. BLACKOUT EXEMPTIONS. Blackout periods do not apply to:
1. Exempt securities;
2. Exempt transactions; and
3. S&P 500 Securities as discussed in Section V.(D).
C. INITIAL PUBLIC OFFERINGS ("IPOS"). No employee may acquire any securities in
an initial public offering.
D. PRIVATE PLACEMENTS. No employee may acquire any securities in a private
placement from a publicly traded company. No employee may acquire any securities
in a private placement from a non-publicly traded company without prior approval
from the President after consultation with the Compliance Officer. In a request
for approval, the employee should document that there is no conflict with any
FIRMCO client account or the investment strategy of the firm. In determining
whether approval should be granted, the following should be considered and
documented:
1. Whether the investment opportunity should be reserved for FIRMCO
and its managed accounts; and
2. Whether the opportunity is being offered to an individual by virtue
of his/her position with FIRMCO.
In the event approval is granted, the employee must disclose the investment when
he/she plays a material role in FIRMCO's subsequent consideration of an
investment in the issuer. In such circumstances, FIRMCO's decision to purchase
securities of the issuer will be subject to an independent review by investment
personnel with no personal interest in the issuer.
E. SHORT-TERM TRADING PROFITS. In general, FIRMCO advocates long-term investing.
No employee may profit from the purchase and sale, or sale and repurchase, of
the same or equivalent securities within 60 calendar days if, at any time during
those 60 days, the securities were included on any FIRMCO model portfolio or
purchase list. All other short-term profits realized require the approval
of the Compliance Officer before the transaction that triggers the short-term
gain is executed. Any profits realized in violation of this policy should be
disgorged, as discussed in Section XII.(B).
F. SHORT SALES. No employee may short sell any security.
V. PRE-CLEARANCE FOR PERSONAL SECURITY TRANSACTIONS
A. GENERAL PRE-CLEARANCE PROVISIONS. All employees must obtain advance written
clearance using the form provided in Exhibit C from the President, Vice
President of Operations or Compliance Officer for every purchase, sale or gift
of any security in which he or she has or thereby acquires a direct or indirect
beneficial ownership interest in a personal account. Exhibit C may be obtained
on the Lotus Notes Policy Database.
B. PRE-CLEARANCE EXEMPTIONS. Advance clearance is not required for:
1. Exempt securities;
2. Exempt transactions;
3. Stock in closely held corporations, service corporations,
professional corporations, units in a LLC, partnership interests, or
similar family businesses;
4. Securities purchased through a matching program of an
employer-sponsored retirement plan by any member of the person's
immediate family sharing the same household;
5. Stock in highly leveraged institutions ("hedge funds");
6. Securities whose performance are directly tied to an index (for
example, SPDRS); and
7. Gifts received and employer sponsored stock purchase programs
described below (Sections V(F)(3) and (4)).
C. FACTORS CONSIDERED. Generally the following factors will be considered in
determining whether or not to clear a proposed transaction:
1. Whether the amount or nature of the transaction is likely to affect
the price or market for the security;
2. Whether the individual proposing the purchase or sale is likely to
benefit from purchases or sales being made or being considered by
FIRMCO for any of its clients;
3. Whether the transaction is likely to harm any FIRMCO client.
D. S&P 500 SECURITIES. Advance clearance will generally be provided for
purchases or sales of securities issued by any company included in the Standard
and Poor's 500 Stock Index and in an amount of 500 or fewer shares each day
(considered to be a DE MINIMIS trade) as long as (1) the nature of the
transaction is unlikely to affect the price or market for the security; (2) the
individual proposing the purchase or sale is unlikely to benefit from purchases
or sales being made or considered by FIRMCO for any of its clients; and (3) the
transaction is unlikely to harm any FIRMCO client.
E. APPROVAL WINDOW. Once approved, a trade authorization is effective for the
remainder of the trading day. Failing to execute the transaction will void the
pre-clearance approval, and a new request for pre-clearance must be submitted.
Gifts of shares of personal securities are provided three business days to
direct the gift.
F. OTHER PRE-CLEARANCE CONSIDERATIONS.
1. DENIED AUTHORIZATION. Advance clearance of a personal transaction
may be refused without specifying any reason for the refusal.
2. GIFTED SECURITIES. It is generally understood that the physical
transfer of gifted shares may occur several days after the employee
directs the broker to transfer the shares, for reasons beyond the
employee's control. Therefore, the employee must direct his/her broker
to transfer the shares within the three-day trading window provided by
the clearance. The employee should then monitor the physical transfer
of the security to ensure that it occurs in a timely manner, and the
employee shall notify the Compliance Officer of the specific date of
transfer if the actual physical transfer occurs outside of the
approved trading window.
3. GIFTS RECEIVED. Gifts received in a personal account do not require
advance clearance. However, the employee should disclose the receipt
of such gift to the Compliance Officer in connection with the
quarterly reporting requirements, as discussed in Section VI.
4. EMPLOYER SPONSORED STOCK PURCHASE PROGRAMS. Members of an
employee's immediate family sharing the same household may participate
in employer sponsored individual security purchase programs, either
through an employer sponsored retirement account or through a taxable
program. Such transactions do not require pre-clearance. However, the
employee is required to notify the Compliance Officer prior to initial
enrollment in such a program and to report purchases in the individual
security in connection with the quarterly reporting requirements, as
discussed in Section VI. In reporting information related to
participation in such programs, the employee may hide any information
on the account statement that does not relate to the individual
security.
VI. REPORTING REQUIREMENTS
A. QUARTERLY TRANSACTION REPORTS. Within ten calendar days after the end of
each calendar quarter, each employee shall make a written report to the
Compliance Officer of all transactions (including those which received advance
clearance) occurring in the quarter by which they acquired or disposed of a
beneficial ownership interest in any security. Employees are not required to
report transactions for exempt securities. The report must contain the following
information with respect to each reportable transaction:
1. Date and nature of transaction (i.e. purchase, sale, gift or other
acquisition or disposition);
2. Title, the interest rate and maturity date (if applicable), the
number of shares and the principal amount of the security involved;
3. Price at which it was effected;
4. Name of the broker, dealer or bank with or through whom the
transaction was effected; and
5. Date of the report.
The report also must contain the following information with respect to any
account established by the employee in which any non-exempt securities were held
during the quarter for the direct or indirect benefit of the employee:
1. Name of the broker, dealer or bank with whom the employee
established the account;
2. Date the account was established; and
3. Date of the report.
The report must be filed by all employees even if no reportable transactions
were made during the quarter. The report may be on the form attached hereto as
Exhibit A and may consist of broker statements that provide at least the same
information.
B. ANNUAL HOLDINGS REPORTS. Within 30 calendar days after the end of each
calendar year, each employee shall make a written report to the Compliance
Officer of all security holdings in which he or she has a direct or indirect
beneficial ownership interest. Employees are not required to report holdings of
exempt securities. The report must contain the following information:
1. Title, number of shares and principal amount of each covered
security in which the employee had any direct or indirect beneficial
ownership interest;
2. Name of any broker, dealer or bank with whom the employee maintains
an account in which any securities are held for the direct or indirect
benefit of the employee; and
3. Date of the report.
The report may be on the form attached hereto as Exhibit B.
C. INITIAL HOLDINGS REPORTS. Within ten calendar days after commencement of
employment with FIRMCO, each new employee shall make a written report to the
Compliance Officer of all security holdings in which he or she has a direct or
indirect beneficial ownership interest. New employees are not required to report
holdings of exempt securities. The report must contain the following
information:
1. Title, number of shares and principal amount of each covered
security in which the new employee had any direct or indirect
beneficial ownership interest when the person became an employee;
2. Name of any broker, dealer or bank with whom the new employee
maintained an account in which any securities were held for the direct
or indirect benefit of the new employee as of the date the person
became an employee; and
3. Date of the report.
The report may be on the form attached hereto as Exhibit B (New Employee
Version).
D. BROKERAGE ACCOUNTS. All employees are required to direct their
broker/dealer(s) to supply the Compliance Officer with duplicate copies of all
trade confirmations and periodic statements for every account in which he or she
has a direct or indirect beneficial ownership interest and in which non-exempt
securities are held.
E. CERTIFICATION OF COMPLIANCE. Each employee is required to reconfirm adherence
to this Code of Ethics on an annual basis within thirty days following year-end
(refer to Exhibit B).
VII. MATERIAL INSIDE INFORMATION
A. INSIDER TRADING. No employee may purchase or sell shares of any security,
either personally or on behalf of others (including private accounts managed by
the employee), while in possession of material, nonpublic information about the
security, or communicate material, nonpublic information to others in violation
of the law. This conduct is frequently referred to as "insider trading."
B. IDENTIFYING MATERIAL INSIDE INFORMATION. If you are unsure whether you are in
possession of material inside information, ask yourself the following questions:
1. Is the information material?
2. Is this information an investor would consider important in making
his or her investment decisions?
3. Is this information that could reasonably affect the market price
of the securities if generally disclosed?
4. Is the information non-public?
5. To whom has this information been provided?
6. Has the information effectively been communicated to the
marketplace? (For example, published in Reuters, THE WALL STREET
JOURNAL or other publications of general circulation?)
C. PROCEDURES. If upon consideration of the above you believe the information
may be material and non-public, you should promptly report it to the President,
Vice President of Operations or Compliance Officer. Upon determination by one or
all of them that the information is material inside information, the following
actions, as deemed necessary, will promptly be taken:
1. Halt all trading in the security or securities of the pertinent
issuer and all recommendations thereof;
2. Ascertain the validity and nonpublic nature of the information with
the issuer of the securities;
3. Request the issuer or other appropriate parties to disseminate the
information promptly to the public if the information is valid and
nonpublic;
4. In the event the information is not publicly disseminated and is of
a significant nature, notify legal counsel and request advice as to
what further steps should be taken before transactions or
recommendations in the securities are resumed.
D. RESTRICTED LIST. The security will be added to the firm's Restricted List, a
listing of those securities about which FIRMCO has material, nonpublic
information. FIRMCO employees are restricted from trading or recommending any
security included on the Restricted List. The list is maintained by the
Compliance Officer and access to the list is restricted to those individuals
required to review the list, at the discretion of the Compliance Officer. Those
individuals may include, but are not limited to the President, Vice President of
Operations, Director of Equity Research and Equity Traders.
VIII. SERVICE ON PUBLIC COMPANY BOARDS
FIRMCO employees must obtain the prior approval of the President to serve as a
director on the board of a publicly traded company. A determination by the
President that the board service would be consistent with the interests of the
firm and its clients should be noted in the approval. In any instance in which
board service is authorized, employees serving as directors must not participate
in making investment decisions regarding the purchase or sale of that company's
securities in FIRMCO managed accounts. In addition, the employee should make
appropriate disclosures on their conflict acknowledgment forms annually
thereafter.
IX. GIFTS
All employees are prohibited from receiving moneys in any form (other than their
FIRMCO compensation package) or receiving gifts, gratuities, hospitalities or
other things of more than $100 in face or retail value annually from any person
or entity that does business with or on behalf of FIRMCO or any of its clients.
Such prohibition shall not apply to seasonal gifts made generally available to
all employees at FIRMCO's offices or to meals and/or entertainment provided in
the ordinary course of business and consistent in cost with FIRMCO's standards
for employee expenditures.
X. EXTERNAL COMMUNICATION
Employees should not communicate information about Firstar Corporation to
outside entities. All questions or comments regarding Firstar should be directed
to the Chief Financial Officer of Firstar Corporation. All Firstar specific
press inquiries should be directed to Firstar's Head of Public Relations. All
FIRMCO specific press inquiries should be directed to FIRMCO's President or an
officer designated by her/him.
XI. CONFIDENTIALITY OF CLIENT TRANSACTIONS
All information concerning securities being considered for purchase or sale by
FIRMCO for any of its clients shall be kept confidential by all employees. It
shall be the responsibility of the Compliance Officer to report any inadequacy
found to FIRMCO's Board of Managers.
XII. SANCTIONS FOR VIOLATION OF THE CODE
A. PERSONAL TRADING VIOLATIONS. Upon discovering a violation of the Code,
FIRMCO's President and/or Board of Managers may impose such sanctions as deemed
appropriate, including a verbal or written warning, letter of censure,
suspension or termination of employment of the violator.
B. DISGORGEMENT. If a security is purchased in violation of FIRMCO's Code, the
Compliance Officer may, upon review of the facts and circumstances surrounding
the violation, require the employee to "break the trade" or reverse the
transaction immediately, regardless of whether a profit or loss occurs from the
transaction. The employee must disgorge any profits and assume any losses, even
if the transaction was done innocently and discovered afterward.
Any moneys accrued in the event of a personal trading violation shall not
benefit the employee or FIRMCO. Employees are required to remit the disgorged
profits to FIRMCO within five days of the reversing transaction (calculating
their personal capital gain resulting from the reversal, and retaining the
amount to pay the tax due on the gain.). A net payment in the form of a
cashier's check made payable to a charity of the employee's choice should be
given to FIRMCO for mailing. However, should FIRMCO managed accounts incur a
loss as a result of the personal trade, then full disgorgement regardless of
taxes due must be made to the accounts.
C. INSIDER TRADING VIOLATIONS. Trading securities while in possession of
material, nonpublic information or improperly communicating that information to
others may expose violators to stringent penalties. Criminal sanctions may
include a fine of up to $1,000,000 and/or ten years imprisonment. The SEC can
recover the profits gained or losses avoided through the violative trading,
impose a penalty of up to three times the illicit windfall, and issue an order
permanently barring the person or persons from the securities industry. Finally,
the violator may be sued by investors seeking to recover damages for insider
trading violations. In addition to the foregoing, any violation of FIRMCO's
policies with respect to insider trading can be expected to result in serious
sanctions by FIRMCO as set forth in Section A above, including dismissal of the
person or persons involved.
XIII. APPROVED EXCEPTIONS TO THE CODE
Exceptions to the Code may be extended in rare circumstances with the approval
of one of the following: Compliance Officer, Vice President of Operations, or
the President. Exceptions will only be granted in circumstances where strict
adherence to the Code results in unfavorable treatment to any FIRMCO client or
inequitable or unfair treatment to an employee with no harm to a FIRMCO client.
In no circumstances shall an exception be granted which is likely to harm any
FIRMCO client. All approved exceptions will be reported to the Board of Managers
in a timely manner.
XIV. REQUIRED BOARD REPORTING
All violations of the Code of Ethics shall be reported to the Board of Managers
in a timely manner with a summary of corrective action taken. If no corrective
action is deemed necessary, the report shall state the reason for no such
action. The Compliance Officer shall report any other transaction deemed
necessary for Board review.
XV. REQUIRED RECORDS
The Compliance Officer shall maintain and review the required records to
evidence compliance with this Code.
Approved by FIRMCO's Board of Directors, June 1994 Amended by FIRMCO's Board of
Managers, February 2000
Exhibit A
FIRSTAR INVESTMENT RESEARCH &
MANAGEMENT COMPANY, LLC
SECURITY TRANSACTION REPORT
FOR THE QUARTER ENDED _______
The following lists all transactions in securities in which I had any direct or
indirect beneficial ownership interest during the last calendar quarter. (IF NO
TRANSACTIONS TOOK PLACE, WRITE "NONE REPORTABLE.") Copies of quarterly brokerage
statements are acceptable forms of reporting. Please write "see attached" and
attach a copy of brokerage statement(s) which accurately reports securities
transactions. I have excluded all transactions in Exempt Securities as defined
within the FIRMCO Code of Ethics. This report has been signed, dated and
returned to the Compliance Officer no later than 10 days after the calendar
quarter end.
<TABLE>
<CAPTION>
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
PURCHASE, TITLE OF SECURITY BROKER, DEALER OR BANK
DATE SALE, OTHER AND NUMBER OF SHARES PRINCIPAL PRICE AMOUNT
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
<S> <C> <C> <C> <C> <C>
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
</TABLE>
Of the transactions identified above, if any, I have listed below the
transactions in securities that I have purchased/sold or considered
purchasing/selling in a FIRMCO managed account. IF NO SUCH TRANSACTIONS TOOK
PLACE, WRITE "NONE REPORTABLE."
<TABLE>
<CAPTION>
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
PURCHASE, TITLE OF SECURITY BROKER, DEALER OR BANK
DATE SALE, OTHER AND NUMBER OF SHARES PRINCIPAL PRICE AMOUNT
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
<S> <C> <C> <C> <C> <C>
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
- ---------------- ------------------ ---------------------- -------------- -------------- ------------------------
</TABLE>
All employees are required to direct their broker/dealer(s) to supply the
Compliance Officer with duplicate copies of all trade confirmations and periodic
statements for every account in which he or she has a direct or indirect
beneficial ownership interest and in which non-exempt securities are held. I
have identified below any account opened during the last calendar quarter which
requires reporting under the Code.
NAME OF BROKER, DEALER OR BANK ACCOUNT NUMBER DATE ESTABLISHED
Signature ____________________
Name _________________________
Date _________________________
Exhibit B
FIRSTAR INVESTMENT RESEARCH &
MANAGEMENT COMPANY, LLC
ANNUAL REPORTING
FOR THE YEAR ENDED ______
SECTION 1: CONFIRMATION OF COMPLIANCE
I have received a copy of the FIRMCO Code of Ethics as amended by the Board of
Managers in February 2000. I agree to comply with my responsibilities as
described within such Code.
SECTION 2: REPORT OF SECURITY HOLDINGS
The following lists all security holdings in which I have a direct or indirect
beneficial ownership interest as of the date indicated below. Copies of year-end
brokerage statements are acceptable forms of reporting.
I have excluded any holdings of Firstar Corporation stock, open-end mutual
funds, common trust funds, U.S. Treasury obligations, and other securities
defined as exempt within the Code of Ethics. (If I hold no reportable holdings I
have written "none reportable".)
NUMBER PRINCIPAL BROKER, DEALER
TITLE OF SECURITY OF SHARES AMOUNT OR BANK
SECTION 3: BROKERAGE STATEMENTS AND CONFIRMATIONS
FIRMCO's Code of Ethics requires all employees to direct their broker/dealer or
bank to supply the Compliance Officer with duplicate copies of all trade
confirmations and periodic statements for every account in which he or she has
or had a direct or indirect beneficial ownership interest.
FIRMCO currently receives duplicate statements and corresponding trade
confirmations for the following accounts:
In compliance with FIRMCO's Code of Ethics, the above listing of accounts is
accurate with the exceptions, if any, listed below. Accounts that solely hold
exempt securities as defined within the Code of Ethics may be excluded.
This report has been signed, dated and returned to the Compliance Officer no
later than 30 days after the calendar year end.
Signature ___________________
Name ________________________
Date ________________________
Exhibit B
FIRSTAR INVESTMENT RESEARCH &
MANAGEMENT COMPANY, LLC
ANNUAL REPORTING
(NEW EMPLOYEE VERSION)
SECTION 1: CONFIRMATION OF COMPLIANCE
I have received a copy of the FIRMCO Code of Ethics as amended by the Board of
Managers in February 2000. I agree to comply with my responsibilities as
described within such Code.
SECTION 2: REPORT OF SECURITY HOLDINGS
The following lists all security holdings in which I have a direct or indirect
beneficial ownership interest as of the date indicated below. Copies of
brokerage statements are acceptable forms of reporting.
I have excluded any holdings of Firstar Corporation stock, open-end mutual
funds, common trust funds, U.S. Treasury obligations, and other securities
defined as exempt within the Code of Ethics. (If I hold no reportable holdings I
have written "none reportable".)
NUMBER PRINCIPAL BROKER, DEALER
TITLE OF SECURITY OF SHARES AMOUNT OR BANK
SECTION 3: BROKERAGE STATEMENTS AND CONFIRMATIONS
FIRMCO's Code of Ethics requires all employees to direct their broker/dealer or
bank to supply the Compliance Officer with duplicate copies of all trade
confirmations and periodic statements for every account in which he or she has
or had a direct or indirect beneficial ownership interest.
The following lists the accounts for which I have directed my broker/dealer(s)
to provide FIRMCO with duplicate statements and corresponding trade
confirmations. Accounts which solely hold exempt securities as defined within
the Code of Ethics may be excluded.
This report has been signed, dated and returned to the Compliance Officer no
later than 10 days after my start date with FIRMCO.
Signature _________________
Name ______________________
Date ______________________
Exhibit C
FIRSTAR INVESTMENT RESEARCH & MANAGEMENT COMPANY, LLC
PERSONAL SECURITIES TRANSACTION PRE-CLEARANCE FORM
Employee Name:
<TABLE>
<CAPTION>
- ------------------- ---------------------------------------- --------------- ------------------ ----------------------
PURCHASE/ APPROXIMATE BROKER/DEALER
SALE/OTHER SECURITY QUANTITY PRICE BANK
- ------------------- ---------------------------------------- --------------- ------------------ ----------------------
<S> <C> <C> <C> <C>
- ------------------- ---------------------------------------- --------------- ------------------ ----------------------
- ------------------- ---------------------------------------- --------------- ------------------ ----------------------
- ------------------- ---------------------------------------- --------------- ------------------ ----------------------
- ------------------- ---------------------------------------- --------------- ------------------ ----------------------
- ------------------- ---------------------------------------- --------------- ------------------ ----------------------
- ------------------- ---------------------------------------- --------------- ------------------ ----------------------
</TABLE>
o Being traded by:
( ) Self ( ) Spouse ( ) Child ( ) Other - Please describe ___________
o I have research responsibility over this security:
( ) Yes ( ) No ( ) N/A
o This transaction triggers a short-term profit, as defined within the Code:
( ) Yes ( ) No
o Security has been purchased by me in FIRMCO managed accounts within the last
6 months:
( ) Yes ( ) No ( ) N/A
To the best of my knowledge, this proposed transaction does not violate the
provisions of the FIRMCO Code of Ethics.
TIME AND DATE
EMPLOYEE SIGNATURE: ____________________________ REQUESTED: _______________
FOR COMPLIANCE USE ONLY
- --------------------------------------------------------------------------------
S&P 500 security: ( ) Yes ( ) No
Security held in lead accounts: ( ) Yes ( ) No
Security traded in managed accounts of the employee within last 7 business days:
( ) Yes ( ) No
Comments:
Contact in Trading:
Contact in Portfolio Management/Research, if necessary:
Pending Trades: ( ) Yes ( ) No
Trades executed within the day: ( ) Yes ( ) No
COMPLIANCE COMPLETED/CHECKED BY: _______________________________________________
NOTIFICATION OF APPROVAL OR DENIAL
- --------------------------------------------------------------------------------
Date: _________________ Time Responded: __________________________
Approved: _______ Denied: _____ Approved Trading Window: ___________________
Comments: ______________________________________________________________________
Authorized/Denied By: __________________________________________________________
CODE OF ETHICS FOR ACCESS PERSONS
REVISED JANUARY 1, 2000
TABLE OF CONTENTS
SECTION PAGE
1.General Fiduciary Principles 2
2.Definitions 2
3.Exempt Transactions 4
4.Prohibited Transactions and Activities 4
5.Pre-clearance Requirement and Exempted 6
Transactions
6.Prohibition on the Receipt of Gifts 7
7.Reporting Requirements 8
Initial Reporting Requirements 8
Quarterly Reporting Requirements 9
Annual Reporting Requirements 9
Exemption for Disinterested Directors 10
8. Sanctions 10
Procedures for Prior Approval of Personal Securities Transactions by 11
Access Persons
o Preclearing Foreign Securities 12
Procedures for the Reporting and Review of Personal Transaction 17
Activity
CODE OF ETHICS REGARDING PERSONAL SECURITIES TRADING
Pursuant to rule 17j-1 under the Investment Company Act of 1940, this Code of
Ethics has been adopted on behalf of the Adviser, the Underwriters, and each
investment company that is both advised and distributed by an Adviser and an
Underwriter.*
- --------
* As the context requires, references herein to the singular include the plural
and masculine pronouns include the feminine.
GENERAL FIDUCIARY PRINCIPLES
a) Each Access Person:
i) must place the Funds' interests ahead of the Access Person's
personal interests;
ii) must avoid conflicts or apparent conflicts of interest with the
Funds; and
iii) must conduct his or her personal transactions in a manner which
neither interferes with Fund portfolio transactions nor otherwise
takes unfair or inappropriate advantage of the Access Person's
relationship to the Fund.
The failure to recommend or purchase a Covered Security for the
Fund may be considered a violation of this Code.
b) Every Access Person must adhere to these general fiduciary principles, as
well as comply with the specific provisions and Associated Procedures of this
Code. TECHNICAL COMPLIANCE WITH THE TERMS OF THIS CODE AND THE ASSOCIATED
PROCEDURES MAY NOT BE SUFFICIENT WHERE THE TRANSACTIONS UNDERTAKEN BY AN ACCESS
PERSON SHOW A PATTERN OF ABUSE OF THE ACCESS PERSON'S FIDUCIARY DUTY.
2. DEFINITIONS
a) The "1940 Act" means the Investment Company Act of 1940, as amended.
b) "Access Person" means any director, trustee, officer, managing general
partner, general partner, or Advisory Person of a Fund, of the Underwriter, and
of the Adviser and all family members permanently residing in the same
household. (If non-family members also reside in the household, the Access
Person must either declare that the Access Person has no influence on the
investment decisions of the other party or the Access Person must report the
party as an Access Person.).
c) "Adviser"means any registered investment adviser that is an affiliate
or subsidiary of Federated Investors, Inc.
d) "Advisory Person" means (i) any employee of the Underwriter, of the Adviser
or of any company in a control relationship to the Underwriter (which would
include any operating company that is an affiliate or a subsidiary of Federated
Investors, Inc.), who, in connection with the employee's regular functions or
duties, makes, participates in, or obtains information regarding the purchases
or sales of a Covered Security by the Fund, or whose functions relate to the
making of any recommendations with respect to such purchases or sales; and
(ii) any natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to the
purchase or sale of a
Covered Security.
e) "Associated Procedures" means those policies, procedures and/or statements
that have been adopted by the Underwriter, the Adviser or the Fund, and which
are designed to supplement this Code and its provisions.
f) "Beneficial ownership" will be attributed to an Access Person in all
instances where the Access Person (i) possesses the ability to purchase or sell
the Covered Securities (or the ability to direct the disposition of the Covered
Securities); (ii) possesses voting power (including the power to vote or to
direct the voting) over such Covered Securities; or (iii) receives any benefits
substantially equivalent to those of ownership. Beneficial ownership shall be
interpreted in the same manner as it would be in determining whether a person
is subject to the provisions of Section 16a-1(a)(2) of the Securities Exchange
Act of 1934, and the rules and regulations thereunder, except that the
determination of direct or indirect beneficial ownership shall apply to all
Covered Securities which an Access Person has or acquires.
g) "Control" shall have the same meaning as that set forth in Section 2(a)(9) of
the 1940 Act.
h) Except as provided in this definition, "Covered Security" shall include any
Security, including without limitation: equity and debt securities; derivative
securities, including options on and warrants to purchase equity or debt
securities; shares of closed-end investment companies; investments in unit
investment trusts; and Related Securities. "Related Securities" are instruments
and securities that are related to, but not the same as, a Covered Security. For
example, a Related Security may be convertible into a Covered Security, or give
its holder the right to purchase the Covered Security. For purposes of
reporting, "Covered Security" shall include futures, swaps and other derivative
contracts.
"Covered Security" shall not include: direct obligations of the
Government of the United States (regardless of their
maturities); bankers' acceptances; bank certificates of
deposit; commercial paper; high quality short-term debt
instruments, including repurchase agreements; and shares of
registered open-end investment companies.
i) "Disinterested director" means a director, trustee, or managing general
partner of the Fund who is not an "interested person" of the Fund within the
meaning of Section 2(a)(19) of the 1940 Act.
j) "Fund" means each investment company registered under the 1940 Act (and any
series or portfolios of such company) and any other account advised by an
Adviser.
k) "Initial Public Offering" means an offering of securities registered under
the Securities Act of 1933, the issuer of which, immediately before the
registration, was not subject to the reporting requirements of sections 13 or
15(d) of the Securities Exchange Act of 1934.
l) "Investment Personnel" include: Access Persons with direct responsibility
and authority to make investment decisions affecting the Fund (such as portfolio
managers and chief investment officers); Access Persons who provide information
and advice to such portfolio managers (such as securities analysts); and Access
Persons who assist in executing investment decisions for the Fund (such as
traders).
m) "Private Placement" or "limited offering" means an offering that is exempt
from registration under Section 4(2) or Section 4(6) of the Securities Act of
1933 or pursuant to rule 504, rule 505 or rule 506 under the Securities Act of
1933.
n) "Purchase or sale of a Covered Security" includes, INTER ALIA, the writing of
an option, future or other derivative contract to purchase or sell a Covered
Security.
o) "Security" shall have the meaning set forth in Section 2(a)(36) of the 1940
Act.
p) "Underwriter" means Federated Securities Corp. and Edgewood Services, Inc.
3. EXEMPT TRANSACTIONS
The prohibitions or requirements of Section 4 and Section 5 of this Code shall
not apply to:
a) Purchases or sale of the following Securities:
i) direct obligations of the Government of the United States
(regardless of their maturities). This exemption does not apply to
indirect obligations of the U.S. Government, including FNMAs, GNMAs or
FHLMCs.
ii) bankers' acceptances;
iii) bank certificates of deposit;
iv) commercial paper;
v) high quality short-term debt instruments, including repurchase
agreements; and
vi) shares of registered open-end investment companies.
b) Purchases or sales effected in any account over which the Access Person has
no direct or indirect influence or control.
4. PROHIBITED TRANSACTIONS AND ACTIVITIES
a) Every Access Person is prohibited from acquiring any Security distributed in
an initial public offering; however, subject to provisions of this Code and its
Associated Procedures, an Access Person may acquire the security in the
secondary market.
b) Every Access Person is prohibited from acquiring any Security in a private
placement or other limited offering, without the express prior approval of the
Compliance Department. In instances where an Investment Personnel, after
receiving prior approval, acquires a Security in a private placement, the
Investment Personnel has an affirmative obligation to disclose this investment
to the Chief Investment Officer (or his designee) if the Investment Personnel
participates in any subsequent consideration of any potential investment by the
Fund in the issuer of that Security. Following a purchase by an Investment
Personnel in an approved personal transaction, any purchase by the Fund of
Securities issued by the same company (other than secondary market purchases of
publicly traded Securities) will be subject to an independent review by the
Compliance Department.
c)Every Access Person is prohibited from executing a personal transaction in any
Covered Security on a day during which the Fund has a pending "buy" or "sell"
order for that Covered Security, until the Fund's orders are either executed or
withdrawn.
All Investment Personnel are prohibited from purchasing or selling
any Covered Security within seven (7) calendar days AFTER the
Fund purchases or sells the same Covered Security. Members of
an Investment Personnel group, as defined by the Compliance
Department, are prohibited from purchasing or selling any
Covered Security within seven (7) days BEFORE any Fund advised
by that group purchases or sells the same Covered Security.
d)Every Access Person is prohibited from profiting in the purchase and sale, or
sale and purchase, of the same (or equivalent) Covered Security within 60
calendar days. For purposes of this prohibition, each personal transaction in
the Covered Security will begin a new 60 calendar day period. As an
illustration, if an Access Person purchases 1000 shares of Omega Corporation
on June 1st, 500 shares on July 1st, and 250 shares on August 1st, the profit
from the sale of the 1000 shares purchased on June 1st is prohibited for any
transaction prior to October 1st (i.e., 60 calendar days following August 1st).
In circumstances where a personal transaction in a Covered Security within the
proscribed period is involuntary (for example, due to unforeseen corporate
activity, such as a merger), the Access Person must notify the Compliance
Department.
In circumstances where an Access Person can document personal
exigencies, the Chief Compliance Officer may grant an
exemption from the prohibition of profiting in the purchase
and sale, or sale and purchase, of the same (or equivalent)
Covered Security within 60 calendar days. Such an exemption is
wholly within the discretion of the Chief Compliance Officer,
and any request for such an exemption will be evaluated on the
basis of the facts of the particular situation.
e) All Investment Personnel are prohibited from serving on the boards of
directors of any issuer of a Covered Security, absent express prior
authorization from the Compliance Department. Authorization to serve on the
board of such a company may be granted in instances where Compliance Department
determines that such board service would be consistent with the interests of the
Investment Company and its shareholders. If prior approval to serve as a
director of a company is granted, Investment Personnel have an affirmative duty
to recuse themselves from participating in any deliberations by the Fund
regarding possible investments in the securities issued by the company on whose
board the Investment Personnel sit. (This shall not limit or restrict service on
the Board of Federated Investors, Inc.)
f) Every Access Person is prohibited from purchasing or selling, directly or
indirectly, any Covered Security in which he or she has, or by reason of such
transaction acquires, a direct or indirect beneficial ownership interest and
which he or she knows, or should have known, at the time of such purchase or
sale:
i) is being considered for purchase or sale by the Fund; or
ii) is being purchased or sold by the Fund.
g) Every Access Person is prohibited, in connection with the purchase or sale,
directly or indirectly, by the Access Person of a Security Held or to be
Acquired by the Fund:
i) from employing any device, scheme or artifice to defraud the Fund;
ii) from making any untrue statement of a material fact to the Fund or
omit to state a material fact necessary in order to make the statements
made to the Fund, in light of the circumstances under which they
are made, not misleading;
iii) from engaging in any act, practice or course of business that
operates or would operate as a fraud or deceit on the Fund; or
iv) from engaging in any manipulative practice with respect to the
Fund.
Examples of this would include causing the Fund to purchase a Covered
Security owned by the Access Person for the purpose of
supporting or driving up the price of the Covered Security,
and causing the Fund to refrain from selling a Covered
Security in an attempt to protect the value of the Access
Person's investment, such as an outstanding option. One test
which will be applied in determining whether this prohibition
has been violated will be to review the Covered Securities
transactions of Access Persons for patterns. However, it is
important to note that a violation could result from a single
transaction if the circumstances warranted a finding that the
provisions of Section 1 of this Code have been violated.
h) Notwithstanding the other restrictions of this Code to which Disinterested
directors are subject, subparagraphs (a) through (d) of this Section 4 shall not
apply to Disinterested directors.
5. PRE-CLEARANCE REQUIREMENT AND EXEMPTED TRANSACTIONS
a) Every Access Person is prohibited from executing a personal transaction in
any Covered Security (including transactions in pension or profit-sharing plans
in which the Access Person has a beneficial interest), without express prior
approval of the Compliance Department, in accordance with the Associated
Procedures governing pre-clearance. A purchase or sale of Covered Securities not
otherwise approved pursuant to the Associated Procedures may, upon request made
prior to the personal transaction, nevertheless receive the approval of the
Compliance Department if such purchase or sale would be: only remotely
potentially harmful to the Fund; very unlikely to affect a highly institutional
market; or clearly not related economically to the securities to be purchased,
sold or held by the Fund. Notwithstanding the receipt of express prior approval,
any purchases or sales by any Access Person undertaken in reliance on this
provision remain subject to the prohibitions enumerated in Section 4 of this
Code.
b) The pre-clearance requirement in Section 5(a) SHALL NOT apply to:
i) Purchases or sales which are non-volitional on the part of either
the Access Person or the Fund, subject to the provisions of Section 4
(g) of this Code.
ii) Purchases which are either made solely with the dividend proceeds
received in a dividend reinvestment plan; or part of an automatic
payroll deduction plan, whereby an employee purchases securities issued
by an employer.
iii) Purchases effected upon the exercise of rights issued by an issuer
PRO RATA to all holders of a class of its Covered Securities, to the
extent such rights were acquired from such issuer, and any sales of
such rights so acquired.
iv) Purchases and sales of a Security that represents an interest in
certain indices as determined by the Compliance Department.
v) Transactions in a Covered Security which involve the giving of gifts
or charitable donations.
vi) Purchases and sales of Covered Securities executed by a person
deemed to be an Access Person SOLELY by reason of his position as an
Officer and/or Director or Trustee of the Fund. This exemption does not
apply to those persons who are Officers and/or Directors of an
Underwriter or Adviser.
c) Notwithstanding the other restrictions of this Code to which Disinterested
directors are subject, Section 5 shall not apply to Disinterested directors.
6. PROHIBITION ON THE RECEIPT OF GIFTS
Every Access Person is prohibited from receiving any gift, favor,
preferential treatment, valuable consideration, or other thing of more
than a DE MINIMIS value in any year from any person or entity from, to
or through whom the Fund purchases or sells Securities, or an issuer of
Securities. For purposes of this Code, "DE MINIMIS value" is equal to
$100 or less. This prohibition shall not apply to:
i) salaries, wages, fees or other compensation paid, or expenses paid
or reimbursed, in the usual scope of an Access Person's employment
responsibilities for the Access Person's employer;
ii) the acceptance of meals, refreshments or entertainment of
reasonable value in the course of a meeting or other occasion, the
purpose of which is to hold bona fide business discussions;
iii) the acceptance of advertising or promotional material of nominal
value, such as pens, pencils, note pads, key chains, calendars and
similar items;
iv) the acceptance of gifts, meals, refreshments, or entertainment of
reasonable value that are related to commonly recognized events or
occasions, such as a promotion, new job, Christmas, or other recognized
holiday; or
v) the acceptance of awards, from an employer to an employee, for
recognition of service andaccomplishment.
7. REPORTING
Every Access Person is required to submit reports of transactions in Covered
Securities to the Compliance Department as indicated below. Any such
report may contain a statement that the report shall not be construed
as an admission by the person making such report that he or she has any
direct or indirect beneficial ownership in the Covered Security to
which the report relates.
INITIAL REPORTING REQUIREMENTS
a) Within 10 calendar days of commencement of employment as an Access Person,
the Access Person will provide a list including:
i) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
ii) the name of any broker, dealer or bank maintaining an account in
which any Security was held for the direct or indirect benefit of the
Access Person as of the date of employment as an Access Person; and
iii) the date the report is submitted to the Compliance Department.
b) Every Access Person is required to direct his broker to forward to the Chief
Compliance Officer (or his designee), on a timely basis, duplicate copies of
both confirmations of all personal transactions in Covered Securities effected
for any account in which such Access Person has any direct or indirect
beneficial ownership interest and periodic statements relating to any such
account.
QUARTERLY REPORTING REQUIREMENTS
c) Every Access Person shall report the information described in Section 7(d) of
this Code with respect to transactions in any Covered Security (other than those
personal transactions in Securities exempted under Section 3 of this Code) in
which such Access Person has, or by reason of such transaction acquires, any
direct or indirect beneficial ownership.
d) Every report shall be made not later than 10 calendar days after the end of
the calendar quarter in which the transaction to which the report relates was
effected, shall be dated and signed by the Access Person submitting the report,
and shall contain the following information:
i) the date of the transaction, the title and the number of shares,
the principal amount, the interest rate and maturity date, if
applicable of each Covered Security involved;
ii) the nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
iii) the price at which the transaction was effected;
iv) the name of the broker, dealer or bank through whom the transaction
was effected; and
v) if there were no personal transactions in any Covered Security
during the period, either a statement to that effect or the word "None"
(or some similar designation).
e) Every Access Person shall report any new account established with a broker,
dealer or bank in which any Security was transacted or held for the direct or
indirect benefit of the Access Person during the quarter. The report shall
include the name of the entity with whom the account was established and the
date on which it was established.
ANNUAL REPORTING REQUIREMENTS
f) Every Access Person, on an annual basis or upon request of the Compliance
Department, will be required to furnish a list including the following
information (which information must be current as of a date no more than 30 days
before the report is submitted) within 10 calendar days of the request:
i) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership;
ii) the name of any broker, dealer or bank maintaining an account in
which any Covered Security was held for the direct or indirect benefit
of the Access Person; and
iii) the date the report is submitted to the Compliance Department.
g) In addition, every Access Person is required, on an annual basis, to certify
that they have received, read, and understand the provisions of this Code and
its Associated Procedures, and that they recognize that they are subject to
its provisions. Such certification shall also include a statement that the
Access Person has complied with the requirements of this Code and its Associated
Procedures and that the Access Person has disclosed or reported all personal
transactions in Securities that are required to be disclosed or reported
pursuant to the requirements of this Code.
EXEMPTION FOR DISINTERESTED DIRECTORS
h) A Disinterested director is exempt from the "initial reporting requirements"
and "annual reporting requirements" contained in Section 7.
i) A Disinterested director shall be exempt from the "quarterly reporting
requirements" contained in Section 7, so long as at the time of the personal
transaction in the Covered Security, the Disinterested director neither knew,
nor, in the ordinary course of fulfilling his official duties as a director of
the Fund, should have known that during the 15-day period immediately preceding
or after the date of the transaction in the Covered Security by the
Disinterested director the Covered Security was purchased or sold by the Fund,
or considered for purchase or sale.
8. SANCTIONS
a) Upon discovering a violation of this Code or its Associated Procedures, the
Compliance Department may take such actions or impose such sanctions, if any, as
it deems appropriate, including, but not limited to:,
i) a letter of censure;
ii)suspension;
iii) a fine;
iv) the unwinding of trades;
v) the disgorging of profits; or
vi)the termination of the employment of the violator.
(In instances where the violation is committed by a member of
the Access Person's household, any sanction would be imposed
on the Access Person.)
b) The filing of any false, incomplete or untimely reports, as required by
Section 7 of this Code, may be considered a violation of this Code.
c) All material violations of this Code and any sanctions imposed with respect
thereto shall be reported to the Board of Directors of the Fund at least
annually.
PROCEDURES FOR PRIOR APPROVAL OF PERSONAL SECURITIES
TRANSACTIONS BY ACCESS PERSONS
PROCESS
PRECLEARANCE APPROVAL USING TRADECOMPLY
a) An Access Person (defined to include all members of the Access Person's
household) who wishes to effect a personal securities transaction, whether a
purchase, sale, or other disposition, must preclear the Covered Security in
TradeCOMPLY prior to engaging in the transaction. [Because TradeComply does not
include securities being contemplated for purchase by the Federated Global
Management portfolio managers, Access Persons executing transactions in foreign
securities must complete additional preclearance steps. See "Preclearing Foreign
Securities".]
b) When trading options, the Access Person must preclear the underlying security
before entering into the option contract.
c) Based on established criteria, TradeCOMPLY determines whether the
contemplated transaction should be permitted. The primary criteria applied is
whether the Covered Security is on the Federated Equity Watch List (which is
updated weekly in TradeCOMPLY) or Open Order lists, or whether the Covered
Security was traded by any of the Federated advised funds (fund trade
information is updated nightly in TradeCOMPLY).
d) Approval is either granted or denied immediately in TradeCOMPLY.
e) If approval is denied, the Access Person is given a specific reason for the
denial. The contemplated personal transaction in that Covered Security is
prohibited until prior approval is subsequently granted upon request in
TradeCOMPLY.
f) If approval is granted, the Access Person is free to effect the personal
transaction in that Covered Security DURING THAT TRADING DAY ONLY. In this
regard, open orders for more than one trading day (good till cancel) must be
approved daily in TradeCOMPLY to comply with the Code.
g) All trade requests and their dispositions are maintained in TradeCOMPLY and
reviewed by the Compliance Department in conjunction with other information
provided by Access Persons in accordance with the Code.
h) The Compliance Department reviews all exceptions generated on TradeComply
due to a fund trade occurring after preclearance approval has been granted. The
Compliance Department determines the appropriate action to be taken to resolve
each exception.
PRECLEARING FOREIGN SECURITIES
i) All access persons wishing to execute a personal trade in a foreign security
must first preclear the security in TradeComply. TradeComply will approve or
deny the preclearance request based on its knowledge of any fund activity in the
security as well as the access person's trading restrictions as defined by their
assigned compliance group. If the preclearance request in TradeComply is denied
(Red Light), then the personal trade may not be executed. If, however, the
preclearance request in TradeComply is approved (Green Light or Yellow Light),
then the access person MUST OBTAIN A SECOND PRECLEARANCE APPROVAL from the
Federated Global trading desk prior to executing the personal trade.
j) The Head Trader or Senior Vice President in the New York office will be
responsible for granting or denying approval to the SECOND preclearance request.
If approval is granted, then the personal trade may be executed by the access
person. If, however, approval is denied then the personal trade may not be
executed (even though the first approval was granted in TradeComply.)
k) If approval is granted, the following "Personal Transaction Notification"
form must be completed so that the Head Trader can maintain a record of all
preclearance requests.
l) The Head Trader sends a copy of any completed forms, whether approval was
granted or denied, to the Compliance Department.
If extraordinary circumstances exist, an appeal may be directed to the
Chief Compliance Officer Brian Bouda at (412) 288-8634. Appeals are
solely within the discretion of the Chief Compliance Officer.
TRANSACTIONS COVERED AND EXEMPTIONS
These procedures apply to Access Persons' personal transactions in
"Covered Security" as defined in Section 2 of the Code. A Covered Security
includes: equity and debt securities; options and warrants to purchase
equity or debt securities; shares of closed-end investment companies;
and investments in unit investment trusts.
These procedures do NOT apply to contemplated transactions in the following
instruments:
a) direct obligations of the Government of the United States (regardless of
their maturities). This exemption does not apply to indirect obligations of
the U.S. Government, including FNMAs, GNMAs or FHLMCs.);
b) bankers' acceptances;
c) bank certificates of deposit;
d) commercial paper;
e) high quality short-term debt instruments, including repurchase agreements;
and
f) shares of registered open-end investment companies;
In addition, these procedures do NOT apply to the following transactions:
g) Purchases or sales effected in any account over which the Access Person has
no direct or indirect influence or control;
h) Purchases or sales which are non-volitional on the part of either the Access
Person or the Fund, subject to the provisions of the Code;
i) Purchases which are either: made solely with the dividend proceeds received
in a dividend reinvestment plan; or part of an automatic payroll deduction plan,
whereby an employee purchases securities issued by an employer; and
j) Purchases effected upon the exercise of rights issued by an issuer PRO RATA
to all holders of a class of its Securities, to the extent such rights were
acquired from such issuer, and any sales of such rights so acquired.
k) Purchases and sales of a Security that represents an interest in certain
indices as determined by the Compliance Department.
l) Transactions in a Covered Security which involve the giving of gifts or
charitable donations.
m) Purchases and sales of Covered Securities executed by a person deemed to be
an Access Person SOLELY by reason of his position as an Officer and/or Director
or Trustee of the Fund. This exemption does not apply to those persons who are
Officers and/or Directors of an Underwriter or Adviser.
SANCTIONS
Failure to comply with the preclearance process may result in any of the
following sanctions being imposed as deemed appropriate by the
Compliance Department:
i) a letter of censure;
ii) suspension;
iii) a fine;
iv) the unwinding of trades;
v) the disgorging of profits; or
vi) the termination of the employment of the violator.
b) (In instances where the violation is committed by a member of the Access
Person's household, any sanction would be imposed on the Access Person.)
PERSONAL TRANSACTION NOTIFICATION
I, _____________ intend to buy/sell shares of __________________ for my personal
account or an account for which I have discretion. I am aware of no conflict
this transaction may pose with any mutual fund managed by Federated Investors or
Federated Global Research.
Signed by:______________________
Date: __________________________
Acknowledged by: _______________
(Head Trader or Sr. VP)
Date
Broker-Dealer Name
Address
RE: Your Name
Brokerage Account Number: 1234-5678
Dear Sir/Madam:
As a(n) [employee] [relative residing in the household of an
employee] of Federated Investors, I am subject to certain
requirements applicable to my personal securities
transactions, in accordance with the Codes of Ethics adopted
by the various investment companies, investment advisers and
broker/dealers affiliated with Federated Investors. These
requirements also assist Federated Investors in carrying out
its responsibilities under the Insider Trading and Security
Fraud Enforcement Act of 1988. Among these requirements is my
obligation to provide to Federated Investors duplicate
brokerage confirmations and account statements.
Therefore, I hereby request that you provide duplicate confirmations
and account statements with respect to securities in which I
have any beneficial ownership or interest, including
securities held in street name or in house, family, joint or
partnership accounts. These duplicate account memoranda should
occur with respect to all transactions including, but not
limited to, those involving options, warrants, shares of
closed end investment companies and futures contracts. Please
forward this information to:
Brian P. Bouda
Chief Compliance Officer
Federated Investors, Inc.
Federated Investors Tower
Pittsburgh, PA 15222-3779
Any questions concerning these matters can be directed to Lisa
Ling at (412) 288-6399. Your serious attention to this matter
is greatly appreciated.
Sincerely,
PROCEDURES FOR THE REPORTING AND REVIEW OF PERSONAL TRANSACTION ACTIVITY
INITIAL REPORTING PROCESS
1. A member of the Compliance Department meets with each new Access Person
and reviews the Code of Ethics, the Insider Trading Policy and the
procedures for preclearing personal securities transactions through
TradeCOMPLY.
2. The Access Person is required to complete the "Certification and
Acknowledgment Form" to acknowledge his/her understanding of the Code
of Ethics and return it to the designated Compliance Assistant within
10 calendar days.
3. In addition, the Access Person is required to complete the "Personal
Security Portfolio Form" which includes the following information:
a) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
b) the name and address of any broker, dealer or bank with whom
the Access Person maintained an account in which any Covered
Security was held for the direct or indirect benefit of the Access
Person as of the date of employment as an Access Person; and
c) the date the report is submitted to the Compliance Department
4. A separate form must be completed for the Access Person and all
household members as defined in Section 2(c) of the Code. The signed
form(s) must be returned to the Compliance Department within 10
calendar days.
5. A member of the Compliance Department inputs current portfolio holdings
information into TradeCOMPLY as "initial" holdings.
6. The Compliance Department notifies each broker, dealer or bank that
duplicate confirmations and statements for the Access Person and
household members, if applicable, must be sent to Brian P. Bouda, Chief
Compliance Officer, effective immediately.
QUARTERLY REPORTING PROCESS
1. On the first business day after each calendar quarter end, the
Compliance Assistant sends an e-mail to each Access Person giving
step-by-step instructions on how to complete the quarterly reporting
requirements using TradeCOMPLY.
2. Within 10 calendar days of the quarter end, the Access Person is
required to:
a) review for accuracy all Covered Security transactions recorded
during the previous calendar quarter in all personal and household
member accounts;
b) review all open account information, including names of brokers,
banks and dealers, addresses and account numbers;
c) notify the Compliance Department of any new accounts established
with brokers, banks or dealers during the quarter and the date the
account was established;
d) resolve any discrepancies with the Compliance Department;
e) record an electronic signature on TradeCOMPLY.
3. Covered Security transactions executed by any Access Person during the
calendar quarter are reviewed by Lisa Ling, Compliance Officer,
periodically throughout the quarter using the Compliance Monitor
function in TradeCOMPLY.
4. The Compliance Department issues memos to each Access Person if any
transactions he or she has executed during the quarter have been deemed
to be either exceptions to or violations of the Code's requirements.
5. Based on the activity and the responses to the memos, the Compliance
Department may impose any of the sanctions identified in Section 8.
ANNUAL REPORTING PROCESS
1. At least annually, the Compliance Department requires that each Access
Person read the Code and certify and acknowledge his/her understanding
of the Code and its requirements.
2. This re-certification is required to be completed within 10 calendar
days of the request. The Compliance Department monitors compliance with
this requirement through the electronic signatures on TradeCOMPLY.
3. At the same time, the Compliance Department provides each Access Person
with a current list of securities held in the Access Person's
account(s) on TradeComply.
4. Within 10 calendar days of the request, the Access Person is required
to:
a) review for accuracy all securities held in all personal and
household member accounts, including the title, number of shares and
principal amount of each Covered Security in which the Access Person
had any direct or indirect beneficial ownership;
b) review all open account information, including names of brokers,
banks and dealers, addresses and account numbers;
c) notify the Compliance Department of any new accounts established
with brokers, banks or dealers;
d) resolve any discrepancies with the Compliance Department;
e) record an electronic signature on TradeCOMPLY.
REPORTING TO THE BOARD OF DIRECTORS
1. Each quarter, the Compliance Department reports any violations of the
Code to the Board of Directors.
Violations of the Code include:
a) failure to preclear a transaction;
b) failure to complete the initial, quarterly or annual reporting
requirements timely, regardless of whether the Access Person executed
any transactions;
c) recognition of a profit on the sale of a security held less than 60
days;
d) failure to comply with the receipt of gifts requirements; and
e) any trends or patterns of personal securities trading which are
deemed by the Compliance Department to be violations of the Code.
2. The Compliance Department provides the Board with the name of the
Access Person; the type of violation; the details of the
transaction(s); and the types of sanctions imposed, if any.
RECORDKEEPING REQUIREMENTS
The Compliance Department maintains the following books and records in
TradeComply for a period no less than 6 calendar years:
a) a copy of the Code of Ethics;
b) a record of any violation of the Code of Ethics and any action taken as a
result of the violation;
c) a copy of each report made by an Access Person, including initial, quarterly
and annual reporting;
d) a record of all Access Persons (current and for the past five years);
e) a record of persons responsible for reviewing reports; and
f) a copy of any supporting documentation used in making decisions regarding
action taken by the Compliance
Department with respect to personal securities trading.
