Securities Act File No. 33-34080
Investment Company Act File No. 811-6076
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. ___ / /
Post-Effective Amendment No. 26 /x/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 26 /x/
(Check appropriate box or boxes)
THE INFINITY MUTUAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (614) 470-8000
George O. Martinez, Esq.
3435 Stelzer Road
Columbus, Ohio 43219
(Name and Address of Agent for Service)
copy to:
Stuart H. Coleman, Esq.
Stroock & Stroock & Lavan
7 Hanover Square
New York, New York 10004-2696
It is proposed that this filing will become effective (check
appropriate box)
X immediately upon filing pursuant to paragraph (b)
on (date) pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)(i)
____ on (date) pursuant to paragraph (a)(i)
____ 75 days after filing pursuant to paragraph (a)(ii)
____ on (date) pursuant to paragraph (a)(ii) 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.
Registrant has registered an indefinite number of its shares of Common Stock
under the Securities Act of 1933 pursuant to Section 24(f) of the Investment
Company Act of 1940. Registrant's Rule 24f-2 Notice for its fiscal year ended
December 31, 1995 was filed on February 28, 1996.
THE INFINITY MUTUAL FUNDS, INC.
Alpha Government Securities Portfolio
Cross-Reference Sheet Pursuant to Rule 495(a)
Items in
Part A of
Form N-1A Caption Page
1 Cover Page Cover
2 Synopsis 2
3 Condensed Financial Information 3
4 General Description of Registrant 4, 16
5 Management of the Fund 8
5(a) Management's Discussion of Fund Performance *
6 Capital Stock and Other Securities 16
7 Purchase of Securities Being Offered 11
8 Redemption or Repurchase 14
9 Pending Legal Proceedings *
Items in
Part B of
Form N-1A
10 Cover Page B-1
11 Table of Contents B-1
12 General Information and History *
13 Investment Objectives and Policies B-2
14 Management of the Fund B-6
15 Control Persons and Principal Holders
of Securities B-8, B-17
16 Investment Advisory and Other Services B-8
17 Brokerage Allocation B-16
18 Capital Stock and Other Securities B-17
19 Purchase, Redemption and Pricing of
Securities Being Offered B-12
20 Tax Status *
21 Underwriters *
22 Calculations of Performance Data B-15
23 Financial Statements B-19
- - ------------
*Omitted since answer is negative or inapplicable.
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
BEA Short Duration Portfolio
Cross-Reference Sheet Pursuant to Rule 495(a)
Items in
Part A of
Form N-1A Caption Page
1 Cover Page Cover
2 Synopsis 2
3 Condensed Financial Information 3
4 General Description of Registrant 5, 20
5 Management of the Fund 10
5(a) Management's Discussion of Fund Performance *
6 Capital Stock and Other Securities 20
7 Purchase of Securities Being Offered 14
8 Redemption or Repurchase 16
9 Pending Legal Proceedings *
Items in
Part B of
Form N-1A
10 Cover Page B-1
11 Table of Contents B-1
12 General Information and History *
13 Investment Objectives and Policies B-2
14 Management of the Fund B-14
15 Control Persons and Principal Holders of Securities B-17, B-28
16 Investment Advisory and Other Services B-17
17 Brokerage Allocation B-27
18 Capital Stock and Other Securities B-28
19 Purchase, Redemption and Pricing of Securities Being Offered B-21
20 Tax Status *
21 Underwriters *
22 Calculations of Performance Data B-24
23 Financial Statements B-36
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*Omitted since answer is negative or inapplicable.
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
Correspondent Cash Reserves Money Market Portfolio
Cross-Reference Sheet Pursuant to Rule 495(a)
Items in Retail Institutional
Part A of Shares Shares
Form N-1A Caption Page Page
1 Cover Page Cover Cover
2 Synopsis 2 3
3 Condensed Financial Information 3 4
4 General Description of Registrant 4, 20 5, 22
5 Management of the Fund 12 15
5(a) Management's Discussion of Fund Performance * *
6 Capital Stock and Other Securities 20 22
7 Purchase of Securities Being Offered 15 18
8 Redemption or Repurchase 16 19
9 Pending Legal Proceedings * *
Items in
Part B of
Form N-1A
10 Cover Page B-1
11 Table of Contents B-1
12 General Information and History *
13 Investment Objectives and Policies B-2
14 Management of the Fund B-10
15 Control Persons and Principal Holders
of Securities B-12, B-19
16 Investment Advisory and Other Services B-12
17 Brokerage Allocation B-19
18 Capital Stock and Other Securities B-19
19 Purchase, Redemption and Pricing of
Securities Being Offered B-16
20 Tax Status *
21 Underwriters *
22 Calculations of Performance Data B-18
23 Financial Statements B-25
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*Omitted since answer is negative or inapplicable.
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
ValueStar Portfolios
Cross-Reference Sheet Pursuant to Rule 495(a)
<TABLE>
<CAPTION>
Items in
Part A of
Form N-1A Caption
Capital Growth, Investment
Grade Bond, Short-
Intermediate Duration Prime Money Market
Bond and Tennessee Tax and U.S. Treasury
Exempt Bond Portfolios Money Market Portfolios
Investor Investor
Shares Shares
<S> <C> <C> <C>
1 Cover Page 1 1
2 Synopsis 3 3
3 Condensed Financial Information 5 4
4 General Description of Registrant 7 6
5 Management of the Fund 14 11
5(a) Management's Discussion of Fund's Performance * *
6 Capital Stock and Other Securities 29 22
7 Purchase of Securities Being Offered 17 14
8 Redemption or Repurchase 20 16
9 Pending Legal Proceedings * *
Items in
Part B of
Form N-1A
10 Cover Page B-1 B-1
11 Table of Contents B-1 B-1
12 General Information and History * *
13 Investment Objectives and Policies B-2 B-2
14 Management of the Fund B-17 B-9
15 Control Persons and Principal Holders B-20, B-32 B-12, B-20
of Securities
16 Investment Advisory and Other Services B-20 B-12
17 Brokerage Allocation B-31 B-19
18 Capital Stock and Other Securities B-32 B-20
19 Purchase, Redemption and Pricing of B-23 B-15
Securities Being Offered
20 Tax Status B-29 *
21 Underwriters * *
22 Calculations of Performance Data B-27 B-18
23 Financial Statements B-41 B-25
Items in
Part C of
Form N-1A All Portfolios
24 Financial Statements and Exhibits C-1
25 Persons Controlled by or Under Common
Control with Registrant C-5
26 Number of Holders of Securities C-5
27 Indemnification C-5
28 Business and Other Connections of C-6
Investment Adviser
29 Principal Underwriters C-10
30 Location of Accounts and Records C-10
31 Management Services C-11
32 Undertakings C-11
</TABLE>
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*Omitted since answer is negative or inapplicable.
<PAGE>
PROSPECTUS
May 1, 1996
LOGO
THE INFINITY MUTUAL FUNDS, INC.
Alpha Government Securities Portfolio
- - --------------------------------------------------------------------------------
The Infinity Mutual Funds, Inc. (the "Fund") is an open-end, management
investment company, known as a series fund. By this Prospectus, shares of the
Fund's Alpha Government Securities Portfolio (the "Portfolio") are being
offered.
The Portfolio is a diversified, money market mutual fund that seeks to
provide investors with as high a level of current income as is consistent with
the preservation of capital and the maintenance of liquidity. The Portfolio
invests only in short-term securities issued or guaranteed as to principal and
interest by the U.S. Government, its agencies or instrumentalities and
repurchase agreements in respect thereof.
The Portfolio's shares are offered only to clients of certain financial
institutions which have entered into service agreements with the Fund. You can
invest, reinvest or redeem shares of the Portfolio at any time without charge or
penalty.
BEA Associates (the "Adviser") serves as the Portfolio's investment adviser.
Concord Holding Corporation (the "Administrator") serves as the Portfolio's
administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned subsidiary
of the Administrator, serves as the distributor of the Portfolio's shares.
An investment in the Portfolio is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that the Portfolio will be able to
maintain a stable net asset value of $1.00 per share.
------------------------
This Prospectus sets forth concisely information about the Fund and the
Portfolio that an investor should know before investing. It should be read and
retained for future reference.
The Statement of Additional Information, dated May 1, 1996, which may be
revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, write to the Fund at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, contact your sales representative or call
1-800-442-3809.
Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other governmental
agency. Portfolio shares involve certain investment risks, including the
possible loss of principal.
TABLE OF CONTENTS
Page
-----------
Expense Summary....................................... 2
Financial Highlights.................................. 3
Yield Information..................................... 4
Description of the Portfolio.......................... 4
Management of the Portfolio........................... 9
How to Buy Shares..................................... 12
How to Redeem Shares.................................. 14
Dividends, Distributions and Taxes.................... 15
General Information................................... 17
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Expense Summary
(as a percentage of average daily net assets)
Management Fees..................................... .10%
Other Expenses (net of fee waivers)................. .66%
Total Operating Expenses (net of fee waivers)....... .76%
Example: 1 Year $ 8
You would pay the following expenses on a $1,000 investment, 3 Years $24
assuming (1) 5% annual return and (2) redemption at the 5 Years $42
end of each time period: 10 Years $94
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. Moreover, while the example assumes a 5% annual
return, the Portfolio's actual performance will vary and may result in an actual
return greater or less than 5%.
The purpose of the foregoing table is to assist you in understanding the
costs and expenses borne by the Portfolio, the payment of which will reduce
investors' annual return. The expenses noted above, without fee waivers, would
be: Other Expenses -- 1.01% and Total Operating Expenses -- 1.11%. Financial
institutions also may charge their customers fees in connection with the
operation of the "sweep" program which are for services unrelated to those
provided pursuant to Shareholder Services Agreements. For a further description
of the various costs and expenses incurred in the Portfolio's operation, see
"Management of the Portfolio."
Financial Highlights
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net assets
and other supplemental data for each period indicated. The information in the
table has been audited by KPMG Peat Marwick LLP, the Portfolio's independent
auditors, whose report thereon appears in the Statement of Additional
Information. Further financial data and related notes are included in the
Statement of Additional Information, available upon request.
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------- Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1992 1991 1990*
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 0.9994 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
------------ ------------ ------------ ------------ ------------ ------------
Income from investment
operations:
Net investment income....... 0.0484 0.0362 0.0270 0.0333 0.0540 0.0201
Net realized (loss) gain on
securities transactions....... 0.0001 (0.0037) -- 0.0001 -- --
------------ ------------ ------------ ------------ ------------ ------------
Total income from investment
operations.................... 0.0485 0.0325 0.0270 0.0334 0.0540 0.0201
------------ ------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Dividends from net
investment income............. (0.0484) (0.0362) (0.0270) (0.0333) (0.0540) (0.0201)
Distributions from net
realized gains on
securities transactions....... -- -- -- (0.0001) -- --
------------ ------------ ------------ ------------ ------------ ------------
Total dividends and
distributions................. (0.0484) (0.0362) (0.0270) (0.0334) (0.0540) (0.0201)
------------ ------------ ------------ ------------ ------------ ------------
Increase due to voluntary
capital contribution from
affiliates.................... -- 0.0031 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net change in net asset
value......................... 0.0001 (0.0006) 0.0000 0.0000 0.0000 0.0000
------------ ------------ ------------ ------------ ------------ ------------
Net asset value, end of
period........................ $ 0.9995 $ 0.9994 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Total Return.................. 4.95% 3.65% 2.73% 3.39% 5.54% 2.02%+
Ratios/Supplemental Data:
Net assets, end of period
(000s)........................ $ 54,881 $ 43,104 $ 39,069 $ 43,124 $ 62,489 $ 62,557
Ratio of expenses to average
net assets**.................. 0.76% 0.60% 0.56% 0.60% 0.57% 0.69%++
Ratio of net investment
income to average net
assets**...................... 4.83% 3.61% 2.70% 3.40% 5.39% 7.11%++
- - ---------------
* For the period September 20, 1990 (commencement of operations) through
December 31, 1990.
** Net of fee waivers which had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.35% and 0.46% for the years ended December 31, 1995
and 1994, respectively, and by 0.50% for each of the other years or periods
presented.
+ Not annualized.
++ Annualized.
</TABLE>
Yield Information
From time to time, the Portfolio will advertise its yield and effective
yield. Both yield figures are based on historical earnings and are not intended
to indicate future performance. It can be expected that these yields will
fluctuate substantially. The yield of the Portfolio refers to the income
generated by an investment in the Portfolio over a seven-day period (which
period will be stated in the advertisement). This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Portfolio is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Yield information is useful in reviewing the Portfolio's performance, but
because yields will fluctuate, such information under certain conditions may not
provide a basis for comparison with domestic bank deposits, other investments
which pay a fixed yield for a stated period of time, or other investment
companies which may use a different method of computing yield.
Comparative performance information may be used from time to time in
advertising or marketing the Portfolio's shares, including data from Lipper
Analytical Services, Inc., Bank Rate Monitor, N. Palm Beach, Fla. 33408,
IBC/Donoghue's Money Fund Report, Morningstar, Inc., other industry publications
and national financial publications, including Money, Forbes, Barron's, The Wall
Street Journal and The New York Times, or local or regional publications.
Description of the Portfolio
Investment Objective
The Portfolio seeks to provide investors with as high a level of current
income as is consistent with the preservation of capital and the maintenance of
liquidity. The Portfolio's investment objective cannot be changed without
approval by the holders of a majority (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of the Portfolio's outstanding voting
shares. There can be no assurance that the Portfolio's investment objective will
be achieved. Securities in which the Portfolio invests may not earn as high a
level of current income as long-term or lower quality securities which generally
have less liquidity, greater market risk and more fluctuation in market value.
Management Policies
The Portfolio invests only in short-term securities issued or guaranteed as
to principal and interest by the U.S. Government, its agencies or
instrumentalities and may enter into repurchase agreements and reverse
repurchase agreements with respect to such securities. The Portfolio also may
lend securities from its portfolio as described below.
The Portfolio seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Fund uses the amortized cost of method
of valuing the Portfolio's securities pursuant to Rule 2a-7 under the 1940 Act.
In accordance with Rule 2a-7, the Portfolio is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities. The Board of Directors has delegated to the
Adviser the day-to-day operations of the Portfolio; however, the Board of
Directors retains ultimate responsibility for compliance with Rule 2a-7 under
the 1940 Act. For further information regarding the amortized cost method of
valuing securities, see "Determination of Net Asset Value" in the Portfolio's
Statement of Additional Information. There can be no assurance that the
Portfolio will be able to maintain a stable net asset value of $1.00 per share.
Portfolio Securities
U.S. Government Obligations. The Portfolio may invest in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities. Such
securities include U.S. Treasury securities, such as bills, notes, bonds and
certificates of indebtedness, which differ only in their interest rates,
maturities and times of issuance, and issues of U.S. Government agencies and
instrumentalities established under the authority of an act of Congress. Some
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued by
the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Interest may
fluctuate based on generally recognized reference rates or the relationship of
rates. While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Portfolio
will invest in such securities only when it is satisfied that the credit risk
with respect to the issuer is minimal.
Repurchase Agreements. The Portfolio may enter into repurchase agreements.
Repurchase agreements involve the acquisition by the Portfolio of an underlying
debt instrument, subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the instrument at a fixed price usually not more than one
week after its purchase. Certain costs may be incurred in connection with the
sale of the securities if the seller does not repurchase them in accordance with
the repurchase agreement. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the securities, realization on the securities by
the Portfolio may be delayed or limited.
Investment Practices
Portfolio Lending. From time to time, the Portfolio may lend securities
from its portfolio to brokers, dealers and other financial institutions needing
to borrow securities to complete certain transactions. Such loans may not exceed
33 1/3% of the Portfolio's total assets. In connection with such loans, the
Portfolio will receive collateral consisting of cash or U.S. Government
securities. Such collateral will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. The
Portfolio can increase its income through the investment of such collateral. The
Portfolio continues to be entitled to the interest or other distributions
payable on the loaned security and receives interest on the amount of the loan.
Such loans will be terminable at any time upon specified notice. The Portfolio
might experience risk of loss if the institution with which it has engaged in a
portfolio loan transaction breaches its agreement with the Portfolio.
Reverse Repurchase Agreements. The Portfolio, to a limited extent, may
borrow for investment purposes. This borrowing, which is known as leveraging,
will be on a secured basis through the entering into reverse repurchase
agreements with banks, brokers or dealers. Reverse repurchase agreements involve
the transfer by the Portfolio of an underlying debt instrument in return for
cash proceeds based on a percentage of the value of the security. The Portfolio
retains the right to receive interest and principal payments on the security.
The Portfolio will use the proceeds of reverse repurchase agreements only to
make investments which generally either mature or have a demand feature to
resell to the issuer at a date simultaneous with or prior to the expiration of
the reverse repurchase agreement. At an agreed upon future date, the Portfolio
repurchases the security at principal plus accrued interest. In certain types of
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based on the prevailing overnight repurchase rate. As a
result of these transactions, the Portfolio may be exposed to greater potential
fluctuations in the value of its assets. Interest costs on the money borrowed
may exceed the return received on the securities purchased. The Fund's Directors
have considered the risks to the Portfolio and its shareholders which may result
from the entry into reverse repurchase agreements and have determined that the
entry into such agreements is consistent with the Portfolio's investment
objective and management policies.
When-Issued Securities. The Portfolio may purchase U.S. Government
securities on a when-issued or forward commitment basis, which means that
delivery and payment for such securities ordinarily take place within 45 days
after the date of the commitment to purchase. The payment obligation and the
interest rate that will be received on the securities are fixed at the time the
buyer enters into the commitment. The Portfolio will make commitments to
purchase such securities only with the intention of actually acquiring the
securities, but the Portfolio may sell these securities before the settlement
date if it is deemed advisable. The Portfolio will not accrue income in respect
of a security purchased on a when-issued or forward commitment basis prior to
its stated delivery date.
Illiquid Securities. The Portfolio will not invest more than 10% of the
value of its net assets in illiquid securities. The term "illiquid securities"
for this purpose means securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at which the
Portfolio has valued the securities and includes, among other instruments,
certain restricted securities. As to these securities, the Portfolio is subject
to a risk that should the Portfolio desire to sell them when a ready buyer is
not available at a price the Portfolio deems representative of their value, the
value of the Portfolio's net assets could be adversely affected.
Certain Fundamental Policies
The Portfolio may (i) borrow money, but only (a) from banks for temporary
or emergency (not leveraging) purposes, in an amount up to 15% of the value of
the Portfolio's total assets (including the amount borrowed) valued at the
lesser of cost or market, less liabilities (not including the amount borrowed)
at the time the borrowing is made (borrowings repaid within 60 days and not
renewed or extended are presumed to be for temporary purposes) (while borrowings
exceed 5% of the value of the Portfolio's total assets, the Portfolio will not
make any additional investments), and (b) in connection with the entry into
reverse repurchase agreements. At no time may total borrowings exceed 33 1/3% of
the value of the Portfolio's total assets; (ii) pledge, hypothecate, mortgage or
otherwise encumber its assets, but only (a) to secure borrowings for temporary
or emergency purposes and (b) in connection with the entry into reverse
repurchase agreements in an amount equal to the aggregate amount of its reverse
repurchase obligations, plus accrued interest in certain cases; and (iii)invest
up to 10% of its net assets in repurchase agreements providing for settlement in
more than seven days after notice and in securities that are illiquid. This
paragraph describes fundamental policies that cannot be changed without approval
by the holders of a majority (as defined in the 1940 Act) of the Portfolio's
outstanding voting shares. See "Investment Objective and Management Policies --
Investment Restrictions" in the Portfolio's Statement of Additional Information.
Investment Considerations
General. The Portfolio will attempt to increase yields by trading to take
advantage of short-term market variations. This policy is expected to result in
high portfolio turnover but should not adversely affect the Portfolio since it
usually will not pay brokerage commissions on purchases of U.S. Government
securities. The value of the portfolio securities held by the Portfolio will
vary inversely to changes in prevailing interest rates. Thus, if interest rates
have increased from the time a security was purchased, such security, if sold,
might be sold at a price less than its cost. Similarly, if interest rates have
declined from the time a security was purchased, such security, if sold, might
be sold at a price greater than its purchase cost. In either instance, if the
security was purchased at face value and held to maturity, no gain or loss will
be realized.
Simultaneous Investments. Investment decisions for the Portfolio are made
independently from those of the Fund's other portfolios and other investment
companies or accounts managed by the Adviser. However, if such other entities
desire to invest in, or dispose of, the same securities as the Portfolio,
available investments or opportunities for sales will be allocated equitably to
each of them. In some cases, this procedure may adversely affect the size of the
position obtained for or disposed of by the Portfolio or the price paid or
received by the Portfolio.
- - --------------------------------------------------------------------------------
Management of the Portfolio
Board of Directors
The business affairs of the Fund are managed under the general supervision
of its Board of Directors. The Portfolio's Statement of Additional Information
contains the name and general business experience of each Director.
Investment Adviser
BEA Associates, located at One Citicorp Center, 153 East 53rd Street, New
York, New York 10022, serves as the Portfolio's investment adviser. The Adviser
is a New York general partnership comprised of Credit Suisse Capital Corporation
("CSCC"), an indirect, wholly-owned subsidiary of Credit Suisse, and Basic
Appraisals, Inc. (which formerly was known as BEA Associates, Inc., the
Portfolio's predecessor sub-investment adviser). The Adviser is a registered
investment adviser which, together with its predecessor companies, has been in
the money management business for over 50 years and currently manages
approximately $ billion in assets. The Adviser manages global equity, balanced,
fixed-income and derivative securities accounts for other investment companies
and private individuals, corporate pension and profit-sharing plans, state
pension funds, union funds, endowments and charitable institutions.
The Adviser supervises and assists in the overall management of the
Portfolio's affairs under an Investment Advisory Agreement with the Fund,
subject to the overall authority of the Fund's Board of Directors in accordance
with Maryland law.
For the fiscal year ended December 31, 1995, the Portfolio paid the Adviser
a monthly fee at the annual rate of .10 of 1% of the value of the Portfolio's
average daily net assets.
Administrator
Concord Holding Corporation, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, serves as the Portfolio's administrator. The Administrator currently
provides administrative or sub-administrative services to other investment
companies with over $60 billion in assets. The Administrator is a wholly-owned
subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator
generally assists in all aspects of the Fund's operations, other than providing
investment advice, subject to the overall authority of the Fund's Board of
Directors in accordance with Maryland law. In connection therewith, the
Administrator provides the Fund with office facilities, personnel and certain
clerical and bookkeeping services (e.g., preparation of reports to shareholders
and the Securities and Exchange Commission and filing of Federal, state and
local income tax returns) that are not being furnished by The Bank of New York,
the Fund's Custodian.
Under the terms of the Administration Agreement, the Portfolio has agreed
to pay the Administrator a monthly fee based on the Portfolio's assets as shown
below:
Portfolio's Average
Annual Rate Daily Net Assets
- - --------------- ----------------------------------------------
.13% Less than $200 million
.12% $200 million to less than $300 million
.11% $300 million to less than $350 million
.10% $350 million and over
For the fiscal year ended December 31, 1995, the Portfolio paid the
Administrator a monthly fee at the effective annual rate of .08 of 1% of the
value of the Portfolio's average daily net assets pursuant to an undertaking by
the Administrator.
Shareholder Services Agreement
The Fund may enter into Shareholder Services Agreements with one or more
financial institutions (which may include banks), with respect to certain
services to be provided to the Portfolio's shareholders. Under a Shareholder
Services Agreement, the financial institution would agree to: develop and
monitor the investor programs that are offered from time to time in connection
with effecting transactions in Portfolio shares; provide dedicated walk-in and
telephone facilities to handle shareholder inquiries and investor needs; develop
and maintain specialized systems for the automatic investment of such
institution's client account balances; pay for the operation of arrangements
that facilitate same-day share purchases by such institution's clients; and
provide a facility to receive purchase and redemption orders and various other
services for the Portfolio's shareholders. To date, the Fund has entered into a
Shareholder Services Agreement with one financial institution.
For the services provided and expenses assumed pursuant to a Shareholder
Services Agreement, the Portfolio will agree to pay the financial institution a
monthly fee at the annual rate of .45 of 1% of the average daily value of the
Portfolio's shares owned by shareholders who are clients of the financial
institution. For the fiscal year ended December 31, 1995, the Portfolio paid the
financial institution a monthly fee at the effective annual rate of .13 of 1% of
the value of the Portfolio's average daily net assets pursuant to an undertaking
by the financial institution.
The Glass-Steagall Act and other applicable laws prohibit Federally
chartered or supervised banks and savings and loan associations from engaging in
certain aspects of the business of issuing, underwriting, selling and/or
distributing securities. Nevertheless, these financial institutions are
permitted to act as agents for their customers by making securities, such as
mutual fund securities, available to their customers. Accordingly, these
financial institutions will be engaged under a Shareholder Services Agreement
only to perform administrative and shareholder servicing functions. These
financial institutions are permitted to receive compensation for such services.
However, judicial or administrative decisions or interpretations of such laws,
as well as changes in either Federal or state statutes or regulations relating
to the permissible activities of these financial institutions or their
subsidiaries or affiliates, could prevent such an entity from continuing to
perform all or part of its activities pursuant to a Shareholder Services
Agreement. If such an entity were prohibited from so acting, its shareholder
clients would be permitted to remain Fund shareholders and alternative means for
continuing the services provided to such shareholders would be sought.
Distributor
Concord Financial Group, Inc., located at 125 West 55th Street, New York,
New York 10019, serves as the Fund's principal underwriter and distributor of
the Portfolio's shares. The Distributor, a wholly-owned subsidiary of the
Administrator, was organized to distribute shares of mutual funds to
institutional and retail investors. The Distributor currently distributes the
shares of other investment companies with over $80 billion in assets. The
Distributor is the Fund's sponsor.
The Distributor makes a continuous offering of the Portfolio's shares and
bears the costs and expenses of printing and distributing to prospective
investors copies of any prospectuses, statements of additional information and
annual and interim reports of the Portfolio (after such items have been prepared
and set in type by the Fund) which are used in connection with the offering of
shares, and the costs and expenses of preparing, printing and distributing any
other literature used by the Distributor in connection with the offering of the
Portfolio's shares for sale to the public.
Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286, is
the Fund's Custodian. BISYS Fund Services Ohio, Inc., an affiliate of the
Administrator located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, is the
Fund's Transfer and Dividend Disbursing Agent (the "Transfer Agent").
Expenses
All expenses incurred in the operation of the Fund are borne by the Fund,
except to the extent specifically assumed by others. The expenses borne by the
Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator, or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory, administration and
other shareholder services fees, charges of custodians, transfer and dividend
disbursing agents' fees, certain insurance premiums, industry association fees,
auditing and legal expenses, costs of maintaining corporate existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
calculating the net asset value of the Portfolio's shares, costs of
shareholders' reports and corporate meetings, costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders, and any extraordinary expenses.
Expenses attributable to the Portfolio are charged against the assets of
the Portfolio; other expenses of the Fund are allocated among the Fund's
portfolios on the basis determined by the Board of Directors, including, but not
limited to, proportionately in relation to the net assets of each portfolio.
How to Buy Shares
General
Portfolio shares may be purchased only by clients of certain financial
institutions (which may include banks) and their affiliates that have entered
into a Shareholder Services Agreement with the Fund. You should consult your
financial institution to see if you are eligible to purchase Portfolio shares.
The Fund does not impose any sales load in connection with the purchase of
Portfolio shares. Stock certificates are issued only upon written request. No
certificates are issued for fractional shares. The Fund reserves the right to
reject any purchase order.
The minimum initial investment in the Portfolio is $1,000. Subsequent
investments must be at least $100. The Fund reserves the right to offer the
Portfolio's shares through certain "sweep" programs without regard to minimum
purchase requirements. When purchasing shares, be sure to indicate the name of
the Portfolio and the amount to be invested.
Shares are sold on a continuous basis at the net asset value per share next
determined after an order in proper form and Federal Funds (monies of member
banks within the Federal Reserve System which are held on deposit at a Federal
Reserve Bank) are received by the Transfer Agent. See "Terms of Purchase" below.
If you do not remit Federal Funds, your payment must be converted into Federal
Funds. This usually occurs within one business day of receipt of a bank wire or
within two business days of receipt of a check drawn on a member bank of the
Federal Reserve System. Checks drawn on banks which are not members of the
Federal Reserve System may take considerably longer to convert into Federal
Funds. Prior to receipt of Federal Funds, your money will not be invested.
Written Orders
You may send your initial or subsequent purchase order (which may be sent
by ordinary letter), along with your check or money order payable to "The
Infinity Mutual Funds, Inc., Alpha Government Securities Portfolio," to: The
Infinity Mutual Funds, Inc., Alpha Government Securities Portfolio, c/o BISYS
Fund Services, Inc., Department [L-1686], Columbus, Ohio 43260-[1686]. For
subsequent investments, your Fund account number should appear on the check or
money order. All payments should be made in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. A charge will be imposed if a check
used for investment in your account does not clear.
Wire Orders
[If you desire to purchase shares by wire, you should request your bank to
transmit immediately available funds by wire to The Bank of New York, DDA
#8900118830, for purchases of shares in your name. It is important that the wire
include your name, address and Taxpayer Identification Number, indicate whether
a new account is being established or a subsequent payment is being made to an
established account and indicate the name of the Fund and Portfolio.] [For wire
orders, you must call the Transfer Agent at 1-800-[852-0045]. If a subsequent
payment is being made, your Fund account number should be included. Information
on remitting funds in this manner may be obtained from your bank, which must be
a commercial bank that is either a member of the Federal Reserve System or has a
correspondent bank located in New York City.
Automatically Through "Sweep" Programs
You may be eligible for an automatic investment privilege through your
account with your financial institution, commonly called a "sweep," under which
amounts in excess of a certain minimum held in your account will be invested
automatically in shares of the Portfolio at predetermined intervals at the next
determined net asset value. If you desire to use this privilege, you should
consult your financial institution for details. It is your financial
institution's responsibility to transmit your order on a timely basis. The
"sweep" program may be modified or terminated at any time by the Fund.
Terms of Purchase
If your purchase order is received by the Transfer Agent by 12:00 noon,
Eastern time, on a business day (which, as used herein, shall include each day
that the New York Stock Exchange and the Fund's Custodian are open for
business), shares will be purchased as of 12:00 noon, Eastern time, on such
business day if payment is received in, or is converted into, Federal Funds by
4:00 p.m., Eastern time, by the Transfer Agent on that day. If your purchase
order is received after 12:00 noon, Eastern time, or if payment in Federal Funds
is not received by 4:00 p.m., Eastern time, shares will be purchased as of 12:00
noon, Eastern time, on the business day on which Federal Funds are available. If
you effect transactions in shares of the Portfolio through your financial
institution, it is your financial institution's responsibility to transmit
orders so that they will be received by the Transfer Agent in time to receive
the next determined net asset value as described above.
The Portfolio's net asset value per share is determined as of 12:00 noon,
Eastern time, on each business day. Net asset value per share is computed by
dividing the value of the Portfolio's net assets (i.e., the value of its assets
less liabilities) by the total number of its shares outstanding. See
"Determination of Net Asset Value" in the Portfolio's Statement of Additional
Information.
Federal regulations require that you provide a certified Taxpayer
Identification Number upon opening or reopening an account. See "Dividends,
Distributions and Taxes" for further information concerning this requirement.
How to Redeem Shares
General
You may request redemption of your shares at any time. Redemption requests
may be made as described below. When a request is received in proper form, the
Fund will redeem the shares at the next determined net asset value.
The Fund ordinarily will make payment for all shares redeemed within seven
days after receipt by the Transfer Agent of a redemption request in proper form,
except as provided by the rules of the Securities and Exchange Commission.
However, if an investor has purchased shares by check and subsequently submits a
redemption request by mail, the redemption proceeds will not be transmitted to
the investor until the check used for investment has cleared, which may take up
to seven business days. Where redemption is requested other than by mail, the
Fund will delay the redemption request for shares purchased by check for a
period of seven business days after their purchase. This procedure does not
apply to shares purchased by wire payment. During the period prior to the time
the redemption is effective, dividends on such shares will accrue and be
payable, and you will be entitled to exercise all other rights of beneficial
ownership.
The Fund reserves the right to redeem your account at its option upon not
less than 45 days' written notice if your account's net asset value is $500 or
less, for reasons other than market conditions, and remains so during the notice
period.
Procedures
Written Orders. If you do not hold share certificates, send your written
request for redemption, indicating that the shares are to be redeemed from the
Portfolio, with signature appropriately guaranteed, if required, and otherwise
in accordance with the requirements listed below, to: The Infinity Mutual Funds,
Inc., Alpha Government Securities Portfolio, c/o BISYS Fund Services, Inc.,
Department [L-1686], Columbus, Ohio 43260-[1686].
If you hold certificates for your shares, you must submit your duly
endorsed certificates with appropriate signature-guarantee of the signature(s)
on the certificate and all the requirements listed below, in addition to your
written instructions.
Automatically Through "Sweep" Programs. See page 13.
Redemption Requirements. Written redemption instructions, indicating the
name of the Portfolio, and duly endorsed stock certificates, if previously
issued, must be received by the Transfer Agent in proper form and signed exactly
as the shares are registered. Except as noted below, all signatures must be
guaranteed. The Fund's Transfer Agent has adopted standards and procedures
pursuant to which signature-guarantees in proper form generally will be accepted
from domestic banks, brokers, dealers, credit unions, national securities
exchanges registered securities associations, clearing agencies and savings
associations, as well as from participants in the New York Stock Exchange
Medallion Signature Program, the Securities Transfer Agents Medallion Program
("STAMP") and the Stock Exchanges Medallion Program. If the signature is
guaranteed by a broker or dealer, such broker or dealer must be a member of a
clearing corporation and maintain net capital of at least $100,000.
Signature-guarantees may not be provided by notaries public. The signature
guarantee requirement will be waived if the following conditions apply: (1) the
redemption check is payable to the shareholder(s) of record; and (2) the
redemption check is mailed to the shareholder(s) at the address of record or the
proceeds are either mailed or wired to a financial institution account
previously designated. Redemption requests by corporate and fiduciary
shareholders must be accompanied by appropriate documentation establishing the
authority of the person seeking to act on behalf of the account. You may obtain
from the Fund or the Transfer Agent, forms of resolutions and other
documentation which have been prepared in advance to assist compliance with the
Portfolio's procedures.
Dividends, Distributions and Taxes
The Portfolio declares dividends from net investment income on each day
that the Portfolio is open for business. Dividends usually are paid on the last
calendar day of each month, and are automatically reinvested in additional
shares at net asset value or, at your option, paid in cash. The Portfolio's
earnings for Saturdays, Sundays and holidays are declared as dividends on the
preceding business day. Shares begin accruing dividends on the day the purchase
order is received in proper form by the Transfer Agent, if received by 12:00
noon, New York time, on such day, and continue to earn dividends through the day
before a redemption order for such shares is processed by the Transfer Agent. If
you redeem all shares in your account at any time during the month, all
dividends to which you are entitled will be paid to you along with the proceeds
of the redemption.
Distributions from net realized securities gains, if any, are declared and
paid once a year, but the Portfolio may make distributions on a more frequent
basis to comply with the distribution requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), and in all events in a manner consistent with
the provisions of the 1940 Act. You may choose whether to receive distributions
in cash or to reinvest in additional shares at net asset value. All expenses are
accrued daily and deducted before declaration of dividends to investors.
If you elect to receive distributions in cash and your distribution checks
(1) are returned to the Fund marked "undeliverable" or (2) remain uncashed for
six months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in Portfolio shares
at the net asset value determined as of the date of payment of the distribution.
In addition, any such undeliverable checks or checks that remain uncashed for
six months will be canceled and will be reinvested in Portfolio shares at the
net asset value determined as of the date of cancellation.
Dividends derived from interest and distributions from any net realized
short-term securities gains generally are taxable to investors as ordinary
income, whether received in cash or reinvested in additional Portfolio shares.
Distributions from net realized long-term securities gains, if any, generally
are taxable as long-term capital gains regardless of how long shareholders have
held their shares and whether such distributions are received in cash or
reinvested in additional Portfolio shares. No dividend will qualify for the
dividends-received deduction allowable to certain corporations.
Dividends derived from net investment income and distributions from net
realized short-term securities gains paid by the Portfolio to a foreign investor
generally are subject to U.S. nonresident withholding taxes at the rate of 30%,
unless the investor claims the benefit of a lower rate specified in a tax
treaty. Distributions from net realized long-term securities gains paid by the
Portfolio to a foreign investor generally will not be subject to U.S.
nonresident withholding tax. However, such distributions may be subject to
backup withholding, as described below, unless the foreign investor certifies
his non-U.S. residency status.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends and distributions
from net realized securities gains of the Portfolio paid to a shareholder if
such shareholder fails to certify either that the Taxpayer Identification Number
furnished in connection with opening an account is correct, or that such
shareholder has not received notice from the Internal Revenue Service of being
subject to backup withholding as a result of a failure to properly report
taxable dividend or interest income on a Federal income tax return. Furthermore,
the Internal Revenue Service may notify the Fund to institute backup withholding
if the Internal Revenue Service determines a shareholder's Taxpayer
Identification Number is incorrect or if a shareholder has failed to properly
report taxable dividend and interest income on a Federal income tax return.
A Taxpayer Identification Number is either the Social Security number or
employer identification number of the record owner of the account. Any tax
withheld as a result of backup withholding does not constitute an additional tax
imposed on the record owner of the account, and may be claimed as a credit on
the record owner's Federal income tax return.
Notice as to the tax status of your dividends and distributions will be
mailed to you annually. You also will receive periodic summaries of your account
which will include information as to income dividends and distributions from
securities gains, if any, paid during the year. Dividends and distributions
attributable to interest from direct obligations of the United States and paid
by the Portfolio to individuals currently are not subject to tax in most states.
Dividends and distributions attributable to interest from other securities in
which the Portfolio may invest may be subject to state tax. The Fund intends to
provide shareholders with a statement which sets forth the percentage of
dividends and distributions paid by the Portfolio that is attributable to
interest income from direct obligations of the United States.
Management of the Fund believes that the Portfolio qualified for the fiscal
year ended December 31, 1995 as a "regulated investment company" under the Code.
The Portfolio intends to continue to so qualify if such qualification is in the
best interests of its shareholders. Such qualification relieves the Portfolio of
any liability for Federal income tax to the extent its earnings are distributed
in accordance with applicable provisions of the Code. The Code subjects
regulated investment companies, such as the Portfolio, to a non-deductible 4%
excise tax to the extent that such investment companies do not distribute a very
substantial portion of their taxable investment income and capital gains,
generally determined on a calendar year basis.
You should consult your tax adviser regarding specific questions as to
Federal, state or local taxes.
General Information
The Fund was incorporated under Maryland law on March 6, 1990, and the
Portfolio commenced operations on September 20, 1990. The Fund is authorized to
issue 11 billion shares of Common Stock (with 1 billion allocated to the
Portfolio), par value $.001 per share. Each share has one vote.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Fund to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of Directors or the
appointment of auditors. However, pursuant to the Fund's By-Laws, the holders of
at least 10% of the shares outstanding and entitled to vote may require the Fund
to hold a special meeting of shareholders for purposes of removing a Director
from office or for any other purpose. Shareholders may remove a Director by the
affirmative vote of a majority of the Fund's outstanding voting shares. In
addition, the Board of Directors will call a meeting of shareholders for the
purpose of electing Directors if, at any time, less than a majority of the
Directors then holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios, each of which is treated as a separate entity for certain matters
under the 1940 Act and for other purposes. A shareholder of one portfolio is not
deemed to be a shareholder of any other portfolio. For certain matters Fund
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, shares of the Alpha Government Securities
Portfolio are being offered. From time to time, other portfolios may be
established and sold pursuant to other offering documents.
To date, 12 portfolios of shares have been authorized. The other portfolios
are not being offered by this Prospectus. All consideration received by the Fund
for shares of one of the portfolios and all assets in which such consideration
is invested, belong to that portfolio (subject only to the rights of creditors
of the Fund) and will be subject to the liabilities related thereto. The income
and expenses attributable to one portfolio (and as to classes within a
portfolio) are treated separately from those of the other portfolios (and
classes).
The Transfer Agent maintains a record of your ownership and sends
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
PROSPECTUS
(LOGO)
May 1, 1996
(LOGO)
----------------------------
The Infinity Mutual Funds, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-3035
----------------------------
Investment Adviser
BEA ASSOCIATES
One Citicorp Center
153 East 53rd Street
New York, NY 10019
----------------------------
Administrator
CONCORD HOLDING CORPORATION
3435 Stelzer Road
Columbus, Ohio 43219-3035
----------------------------
Distributor
CONCORD FINANCIAL GROUP, INC.
125 West 55th Street
New York, NY 10019
----------------------------
Custodian
THE BANK OF NEW YORK
90 Washington Street
New York, NY 10286
----------------------------
Transfer Agent
& Dividend Disbursing Agent
BISYS FUND SERVICES OHIO, INC.
3435 Stelzer Road
Columbus, Ohio 43219-3035
(LOGO)
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
ALPHA GOVERNMENT SECURITIES PORTFOLIO
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
MAY 1, 1996
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of the
Alpha Government Securities Portfolio (the "Portfolio") of The Infinity Mutual
Funds, Inc. (the "Fund"), dated May 1, 1996, as it may be revised from time to
time. To obtain a copy of the Portfolio's Prospectus, please write to the Fund
at 3435 Stelzer Road, Columbus, Ohio 43219- 3035. This Statement of Additional
Information relates only to the Portfolio and not to any of the Fund's other
portfolios.
BEA Associates (the "Adviser") serves as the Portfolio's investment
adviser.
Concord Holding Corporation (the "Administrator") serves as the Portfolio's
administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned
subsidiary of the Administrator, serves as the distributor of the Portfolio's
shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies..............B-2
Management of the Fund....................................B-6
Management Arrangements...................................B-8
Purchase and Redemption of Shares.........................B-13
Determination of Net Asset Value..........................B-14
Yield Information.........................................B-16
Portfolio Transactions....................................B-16
Information About the Portfolio...........................B-17
Custodian, Transfer and Dividend Disbursing
Agent, Counsel and Independent Auditors.................B-18
Financial Statements......................................B-20
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Description of the
Portfolio."
Repurchase Agreements. The Portfolio may enter into repurchase agreements.
The Fund's custodian or sub-custodian employed in connection with third-party
repurchase transactions will have custody of, and will hold in a segregated
account, securities acquired by a Portfolio under a repurchase agreement. In
connection with its third-party repurchase transactions, the Fund will employ
only eligible sub-custodians which meet the requirements set forth in Section
17(f) of the Investment Company Act of 1940, as amended (the "1940 Act"), and
the rules thereunder. Repurchase agreements are considered by the staff of the
Securities and Exchange Commission to be loans by the Portfolio. In an attempt
to reduce the risk of incurring a loss on a repurchase agreement, the Portfolio
will enter into repurchase agreements only with domestic banks (including
foreign branches and subsidiaries of domestic banks) with total assets in excess
of one billion dollars or primary government securities dealers reporting to the
Federal Reserve Bank of New York, with respect to securities in which the
Portfolio may invest or government securities regardless of their remaining
maturities, and will require that additional securities be deposited with it if
the value of the securities purchased should decrease below resale price. The
Adviser will monitor on an ongoing basis the value of the collateral to assure
that it always equals or exceeds the repurchase price. The Portfolio will
consider on an ongoing basis the creditworthiness of the institutions with which
it enters into repurchase agreements.
Reverse Repurchase Agreements. The Portfolio may enter into reverse
repurchase agreements. The Portfolio will maintain in a segregated custodial
account cash, cash equivalents or U.S. Government securities or, except for the
U.S. Treasury Portfolio, other high quality liquid debt securities equal to the
aggregate amount of its reverse repurchase obligations, plus accrued interest,
in certain cases, in accordance with releases promulgated by the Securities and
Exchange Commission. The Securities and Exchange Commission views reverse
repurchase agreement transactions as collateralized borrowings, and, pursuant to
the 1940 Act, each Portfolio must 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 Portfolio may be required to
sell some of its portfolio holdings within three days to reduce the debt and
restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time.
Illiquid Securities. Where a substantial market of qualified institutional
buyers has developed for certain restricted securities purchased by the
Portfolio pursuant to Rule 144A under the Securities Act of 1933, as amended,
the Fund intends to treat such securities as liquid securities in accordance
with procedures approved by the Fund's Board. Because it is not possible to
predict with assurance how the market for specific restricted securities sold
pursuant to Rule 144A will develop, the Fund's Board has directed the Adviser to
monitor carefully the Portfolio's investments in such securities with particular
regard to trading activity, availability of reliable price information and other
relevant information. To the extent that, for a period of time, qualified
institutional buyers cease purchasing restricted securities pursuant to Rule
144A, the Portfolio's investing in such securities may have the effect of
increasing the level of illiquidity in its investment portfolio during such
period.
Forward Commitments. Securities purchased on a forward commitment or
when-issued basis are subject to changes in value (generally changing in the
same way, i.e., appreciating when interest rates decline and depreciating when
interest rates rise) based upon the public's perception of the creditworthiness
of the issuer and changes, real or anticipated, in the level of interest rates.
Securities purchased on a forward commitment or when- issued basis may expose
the Portfolio to risks because they may experience such fluctuations prior to
their actual delivery. Purchasing securities on a when-issued basis can involve
the additional risk that the yield available in the market when the delivery
takes place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the
Portfolio is fully or almost fully invested may result in greater potential
fluctuation in the value of the Portfolio's net assets and its net asset value
per share.
Lending Portfolio Securities. To a limited extent, the Portfolio may lend
its portfolio securities to brokers, dealers and other financial institutions,
provided it receives cash collateral which at all times is maintained in an
amount equal to at least 100% of the current market value of the securities
loaned. By lending its portfolio securities, the Portfolio can increase its
income through the investment of the cash collateral. For the purposes of this
policy, the Fund considers collateral consisting of U.S. Government securities
to be the equivalent of cash. Such loans may not exceed 33-1/3% of the
Portfolio's total assets. From time to time, the Fund may pay a part of the
interest earned from the investment of collateral received for securities loaned
to the borrower or a third party which is unaffiliated with the Fund, and which
is acting as a "placing broker," in an amount determined by the Board of
Directors to be reasonable and based solely on services rendered.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Portfolio making the loan must receive at least 100% cash collateral from
the borrower; (2) the borrower must increase such collateral whenever the market
value of the securities rises above the level of such collateral; (3) the
Portfolio must be able to terminate the loan at any time; (4) the Portfolio must
receive reasonable interest on the loan, as well as any interest or other
distributions payable on the loaned securities, and any increase in market
value; and (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan. These conditions may be subject to future
modification.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental policies
which apply to the Portfolio. These restrictions cannot be changed without
approval by the holders of a majority (as defined in the 1940 Act) of the
outstanding voting shares of the Portfolio. The Portfolio may not:
1. Purchase common stocks, preferred stocks, warrants or other equity
securities, or purchase corporate bonds or debentures, state bonds, municipal
bonds or industrial revenue bonds (except through the purchase of debt
obligations referred to above and in the Portfolio's Prospectus).
2. Borrow money, except (i) from banks for temporary or emergency (not
leveraging) purposes in an amount up to 15% of the value of the Portfolio's
total assets (including the amount borrowed) based on the lesser of cost or
market, less liabilities (not including the amount borrowed) at the time the
borrowing is made (while borrowings exceed 5% of the value of the Portfolio's
total assets, the Portfolio will not make any additional investments) and (ii)
in connection with the entry into reverse repurchase agreements. At no time may
total borrowings exceed 33-1/3% of the value of the Portfolio's total assets.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
(i) to secure borrowings for temporary or emergency purposes and (ii) in
connection with the purchase of securities on a forward commitment basis and the
entry into reverse repurchase agreements.
4. Issue any senior security (as such term is defined in Section 18(f) of
the 1940 Act), other than in connection with the entry into certain reverse
repurchase agreements.
5. Sell securities short or purchase securities on margin.
6. Write or purchase put or call options or combinations thereof.
7. Act as underwriter of securities of other issuers. The Portfolio may not
enter into repurchase agreements providing for settlement in more than seven
days after notice or purchase securities which are illiquid, if, in the
aggregate, more than 10% of its net assets would be so invested.
8. Purchase or sell real estate, real estate investment trust securities,
commodities, or oil and gas interests.
9. Make loans to others, except through the purchase of debt obligations
and through repurchase agreements referred to in the Portfolio's Prospectus, and
except that the Portfolio may lend its portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets. Any loans of portfolio
securities will be made according to guidelines established by the Securities
and Exchange Commission and the Fund's Directors.
10. Invest in companies for the purpose of exercising control.
11. Invest in securities of other investment companies, except as they may
be acquired as part of a merger, consolidation or acquisition of assets.
12. Invest more than 25% of its total assets in the securities of issuers
in any single industry, provided that there shall be no such limitation on
investments in obligations issued or guaranteed by the U.S. Government.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values or
assets will not constitute a violation of that restriction.
The Fund may make commitments more restrictive than the restrictions listed
above so as to permit the sale of Portfolio shares in certain states. Should the
Fund determine that a commitment is no longer in the best interests of the
Portfolio and its shareholders, the Fund reserves the right to revoke the
commitment by terminating the sale of the Portfolio's shares in the state
involved.
MANAGEMENT OF THE FUND
Directors and officers of the Fund, together with information as to their
principal business occupations during at least the last five years, are shown
below. Each Director who is deemed to be an "interested person" of the Fund, as
defined in the 1940 Act, is indicated by an asterisk.
Directors of the Fund
*WILLIAM B. BLUNDIN, Chairman of the Board of Directors. An
employee of the Administrator. Mr. Blundin also is an
officer of other investment companies administered by
the Administrator or its affiliates and President and
Chief Executive Officer of Vista Broker/Dealer
Services, Inc. and BNY Hamilton Distributors, Inc.,
registered broker/dealers. He is 58 years old and his
address is 125 West 55th Street, New York, New York
10019.
NORMA A. COLDWELL, Director. International Economist and Consultant;
Executive Vice President of Coldwell Financial Consultants;
Trustee and Treasurer of Meridian House International
(International Education and Cultural Group); Member of the
Board of Advisors of Meridian International Center and
Emerging Capital Markets, S.A. (Montevideo, Uruguay); formerly
Chief International Economist of Riggs National Bank,
Washington, D.C. She is 70 years old and her address is 3330
Southwestern Boulevard, Dallas, Texas 75225.
RICHARD H. FRANCIS, Director. Former Executive Vice President
and Chief Financial Officer of Pan American World
Airways, Inc. (currently, debtor-in-possession under
the U.S. Bankruptcy Code), March 1988 to October 1991;
Senior Vice President and Chief Financial Officer of
American Standard Inc., 1960 to March 1988. Mr.
Francis is a director of Allendale Mutual Insurance and
The Indonesia Fund, Inc. He is 63 years old and his
address is 40 Grosvenor Road, Short Hills, New Jersey
07078.
WILLIAM W. McINNES, Director. Private investor. From July 1978
to February 1993, he was Vice President--Finance and
Treasurer of Hospital Corp. of America. He is also a
director of Gulf South Medical Supply and Diversified
Trust Co. He is 47 years old and his address is 116
30th Avenue South, Nashville, Tennessee 37212.
ROBERT A. ROBINSON, Director. Private investor. Since 1991,
President Emeritus, and from 1968 to 1991, President of
The Church Pension Group, NYC. From 1956 to 1966,
Senior Vice President of Colonial Bank & Trust Co. He
is also a director of Mariner Institutional Funds,
Inc., Mariner Tax-Free Institutional Funds, Inc., UST
Master Funds, UST Master Tax Exempt Funds, H.B. and
F.H. Bugher Foundation, Morehouse-Barlow Co.
Publishers, The Canterbury Cathedral Trust in America,
The Living Church Foundation and Hoosac School. He is
70 years old and his address is 2 Hathaway Common, New
Canaan, Connecticut 06840.
Officers of the Fund
GEORGE O. MARTINEZ, President and Secretary. Senior Vice President
and Director of Legal and Compliance Services with BISYS Fund
Services, Inc., an affiliate of the Administrator, since April
1995, and an officer of other investment companies
administered by the Administrator or its affiliates. Prior
thereto, he was Vice President and Associate General Counsel
with Alliance Capital Management L.P. He is 36 years old and
his address is 3435 Stelzer Road, Columbus, Ohio 43219.
JEFFREY C. CUSICK, Vice President and Assistant Secretary. An employee
of BISYS Fund Services, Inc., since July 1995, and an officer
of other investment companies administered by the
Administrator or its affiliates. From September 1993 to July
1995, he was Assistant Vice President and, from 1989 to
September 1993, he was Manager--Client Services, of Federated
Administrative Services. He is 37 years old and his address is
3435 Stelzer Road, Columbus, Ohio 43219.
WILLIAM TOMKO, Vice President. An employee of BISYS Fund
Services, Inc. and an officer of other investment
companies administered by the Administrator or its
affiliates. He is 37 years old and his address is 3435
Stelzer Road, Columbus, Ohio 43219.
ANN E. BERGIN, Vice President. An employee of the Administrator
and an officer of other investment companies
administered by the Administrator or its affiliates.
She is 35 years old and her address is 125 West 55th
Street, New York, New York 10019.
MARTIN R. DEAN, Treasurer. An employee of BISYS Fund Services, Inc.,
since May 1994, and an officer of other investment companies
administered by the Administrator or its affiliates. Prior
thereto, he was a Senior Manager of KPMG Peat Marwick LLP. He
is 32 years old and his address is 3435 Stelzer Road,
Columbus, Ohio 43219.
ROBERT L. TUCH, Assistant Secretary. An employee of BISYS Fund
Services, Inc., since June 1991, and an officer of other
investment companies administered by the Administrator or its
affiliates. From July 1990 to June 1991, he was Vice President
and Associate General Counsel with National Securities
Research Corp. Prior thereto, he was an Attorney with the
Securities and Exchange Commission. He is 44 years old and his
address is 3435 Stelzer Road, Columbus, Ohio 43219.
ALAINA METZ, Assistant Secretary. An employee of BISYS Fund
Services, Inc. and an officer of other investment
companies administered by the Administrator or its
affiliates. She is 28 years old and her address is
3435 Stelzer Road, Columbus, Ohio 43219.
Directors and officers of the Fund, as a group, owned less
than 1% of the Portfolio's shares of Common Stock outstanding on April 1, 1996.
The Fund does not pay any remuneration to its officers and
Directors other than fees and expenses to those Directors who are not directors,
officers or employees of the Adviser or Administrator or any of their
affiliates. The aggregate amount of compensation paid to each such Director by
the Fund for year ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Total Compensation
Aggregate From Fund and Fund
Compensation from Complex Paid to
Name of Board Member Fund* Board Member*
- - --------------------------------- ---------------------------- -----------------------------
<S> <C> <C>
Norma A. Coldwell $______ $______
Richard H. Francis $______ $______
William W. McInnes $______ $______
Robert A. Robinson $______ $______
- - ----------------------
</TABLE>
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $_____ for all Directors as a group.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Management of the
Portfolio."
Investment Advisory Agreement. The Adviser provides investment advisory
services pursuant to the Investment Advisory Agreement (the "Advisory
Agreement") dated March 31, 1995, with the Fund. The Advisory Agreement is
subject to annual approval by (i) the Fund's Board of Directors or (ii) vote of
a majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
securities, provided that in either event the continuance also is approved by a
majority of the Directors who are not "interested persons" (as defined in the
1940 Act) of the Fund or the Adviser, by vote cast in person at a meeting called
for the purpose of voting on such approval. Shareholders approved the Advisory
Agreement on March 31, 1995. The Advisory Agreement is terminable without
penalty, on 60 days' notice, by the Fund's Board of Directors or by vote of the
holders of a majority of the Portfolio's outstanding voting securities, or, on
not less than 90 days' notice, by the Adviser. The Advisory Agreement will
terminate automatically in the event of its assignment (as defined in the 1940
Act).
The Adviser is a New York general partnership comprised of Credit Suisse
Capital Corporation ("CSCC"), an indirect, wholly-owned subsidiary of Credit
Suisse, and Basic Appraisals, Inc. (formerly known as BEA Associates, Inc.). The
Adviser is majority-owned by CSCC and is governed by a board of directors, which
is controlled by CSCC, and an executive committee which runs its day-to-day
affairs and advisory activities.
The following persons are directors, executive committee members and/or
senior officers of the Adviser: Mark Arnold, Chief Operating Officer, Director,
Co-Chairman of Executive Committee and Managing Director; Emilio Bassini, Chief
Financial Officer, Executive Committee Member and Managing Director; Peter
Bosshard, Vice Chairman of the Board of Directors and Executive Committee
Member; Hans Geiger, Director; Jeffrey A. Geller, Executive Committee Member and
Managing Director; John B. Hurford, Vice Chairman of Executive Committee and
Managing Director; Hermann Maurer, Director; Michael F. Orr, Director; William
W. Priest, Jr., Chief Executive Officer, Secretary, Director, Co-Chairman of
Executive Committee and Managing Director; Daniel Regoletti, Director; William
R. Wirth, Chairman of the Board of Directors and Executive Committee Member; and
Albert L. Zesiger, Honorary Chairman of Executive Committee and Managing
Director.
The Adviser provides investment advisory services in accordance with the
stated policies of the Portfolio, subject to the approval of the Fund's Board of
Directors. The Adviser provides the Portfolio with Investment Officers who are
authorized by the Fund's Board of Directors to execute purchases and sales of
securities. The Chief Investment Officer of the Portfolio is Mark Silverstein
who is an employee of the Adviser. The Adviser also maintains a research
department with a professional staff of portfolio managers and securities
analysts who provide research services for the Portfolio as well as for other
funds advised by the Adviser. All purchases and sales are reported for the
Board's review at the meeting subsequent to such transactions.
As compensation for its services, the Portfolio pays the Adviser a monthly
fee at the annual rate of .10 of 1% of the value of the Portfolio's average
daily net assets. For the fiscal years ended December 31, 1993, 1994 and 1995,
the Portfolio paid the Adviser $48,358, $59,727 and $49,823, respectively.
Prior to March 31, 1995, Infinity Advisers, Inc. served as the Portfolio's
investment manager and received an annual fee of $4,000 from the Portfolio.
Prior to such date, the Adviser served as the Portfolio's sub-investment
adviser.
Administration Agreement. The Administrator provides certain administrative
services pursuant to the Administration Agreement (the "Administration
Agreement") dated March 29, 1995, with the Fund. The Administration Agreement
will continue until December 31, 1997 and thereafter is subject to annual
approval by (i) the Fund's Board of Directors or (ii) vote of a majority (as
defined in the 1940 Act) of the Portfolio's outstanding voting securities,
provided that in either event the continuance also is approved by a majority of
the Directors who are not "interested persons" (as defined in the 1940 Act) of
the Fund or the Administrator, by vote cast in person at a meeting called for
the purpose of voting such approval. The Administration Agreement was last
approved by the Fund's Board of Directors, including a majority of the Directors
who are not "interested persons" of any party to the Administration Agreement,
at a meeting held on January 26, 1995. The Administration Agreement is
terminable without penalty, at any time if for cause, by the Fund's Board of
Directors or by vote of the holders of a majority of thePortfolio's outstanding
voting securities, or, on not less than 90 days' notice, by the Administrator.
The Administration Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
As compensation for its services, the Portfolio has agreed to pay the
Administrator a monthly fee based on the Portfolio's assets as shown below:
Portfolio's Average
Annual Rate Daily Net Assets
- - ----------- ----------------
.13% Less than $200 million
.12% $200 million to less than $300 million
.11% $300 million to less than $350 million
.10% $350 million and over
For the fiscal years ended December 31, 1993, 1994 and 1995, the
administration fees payable by the Portfolio to the Administrator amounted to
$63,043, $77,644 and $64,007, respectively; however, pursuant to undertakings,
the Administrator reduced its fees for such periods by $24,247, $29,863 and
$24,939, respectively, resulting in net fees paid by the Portfolio to the
Administrator of $38,796, $47,781 and $39,068, respectively.
Shareholder Services Agreement. Certain financial institutions (which may
include banks) may provide shareholder services as described in the Prospectus
pursuant to a Shareholder Services Agreement (the "Shareholder Services
Agreement") with the Fund. The Shareholder Services Agreement is subject to
annual approval by (i) the Fund's Board of Directors or (ii) vote of a majority
(as defined in the 1940 Act) of the Portfolio's outstanding voting securities,
provided that in either event the continuance also is approved by a majority of
the Directors who are not "interested persons" (as defined in the 1940 Act) of
the Fund or such institution, by vote cast in person at a meeting called for the
purpose of voting such approval. The Board of Directors, including a majority of
the Directors who are not "interested persons" of any party to the Shareholder
Services Agreement, last approved the Shareholder Services Agreement at a
meeting held on October 25, 1995. The Shareholder Services Agreement is
terminable without penalty, on 60 days' notice, by the Fund's Board of Directors
or by vote of the holders of a majority of the Portfolio's outstanding voting
securities, or, on not less than 90 days' notice, by such institution. The
Shareholder Services Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act). To date, the Fund has entered into a
Shareholder Services Agreement with one financial institution.
As compensation for its services and any expenses assumed, the Portfolio
has agreed to pay such financial institutions a monthly fee at the annual rate
of .45 of 1% of the average daily value of the Portfolio's shares owned by
shareholders who are clients of the financial institution. For the fiscal year
ended December 31, 1993, no fees were paid by the Portfolio pursuant to an
undertaking by the financial institution. For the fiscal years ended December
31, 1994 and 1995, $268,767 and $221,563, respectively, was payable pursuant to
the Shareholder Services Agreement; however, the financial institution waived
$242,254 and $148,311, respectively, of such amounts, resulting in net fees paid
by the Portfolio of $26,513 for fiscal 1994 and $73,252 for fiscal 1995 pursuant
to the Shareholder Services Agreement to the financial institution.
Distribution Agreement. The Distributor acts as the exclusive distributor
of the Portfolio's shares on a best efforts basis pursuant to a Distribution
Agreement (the "Distribution Agreement") dated March 29, 1995 with the Fund.
Shares are sold on a continuous basis by the Distributor as agent, although the
Distributor is not obliged to sell any particular amount of shares. No
compensation is payable by the Portfolio to the Distributor for its distribution
services. The term and termination provisions of the Distribution Agreement are
substantially similar to those of the Administration Agreement with the
Administrator discussed above.
Expenses. All expenses incurred in the operation of the Fund are borne by
the Fund, except to the extent specifically assumed by others. The expenses
borne by the Fund include: organizational costs, taxes, interest, brokerage fees
and commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory, administration and
other shareholder services fees, charges of custodians, transfer and dividend
disbursing agents' fees, certain insurance premiums, industry association fees,
auditing and legal expenses, costs of calculating the net asset value of the
Portfolio's shares, costs of maintaining corporate existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
shareholders' reports and corporate meetings, costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders, and any extraordinary expenses.
Expenses attributable to the Portfolio are charged against the assets of the
Portfolio; other expenses of the Fund are allocated among the Fund's portfolios
on the basis determined by the Board of Directors, including, but not limited
to, proportionately in relation to the net assets of each portfolio.
The Adviser and Administrator have agreed that if, in any fiscal year, the
aggregate expenses of the Portfolio, exclusive of taxes, brokerage, interest on
borrowings and (with the prior written consent of the necessary state securities
commissions) extraordinary expenses, but including the investment advisory and
administration fees, exceed the expense limitation of any state having
jurisdiction over the Portfolio, the Fund may deduct from the payment to be made
to the Adviser and/or Administrator under their respective Agreements, or the
Adviser and/or Administrator will bear, such excess expense to the extent
required by state law. Such deduction or payment, if any, will be estimated
daily, and reconciled and effected or paid, as the case may be, on a monthly
basis.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Portfolio's Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."
"Sweep" Program. The Portfolio's shares may be purchased through the
"sweep" program established by certain financial institutions under which a
portion of their customers' accounts may be automatically invested in the
Portfolio. The customer becomes the beneficial owner of specific shares of the
Fund which may be purchased, redeemed and held by the financial institution in
accordance with the customer's instructions and may fully exercise all rights as
a shareholder. The shares will be held by BISYS Fund Services, Inc. (the
"Transfer Agent") in book-entry form. A statement with regard to the customer's
shares is generally supplied to the customer monthly, and confirmations of all
transactions for the account of the customer ordinarily are available to the
customer promptly on request. In addition, each customer is sent proxies,
periodic reports and other information from the Fund with regard to shares of
the Portfolio. The customer's shares are fully assignable and may be encumbered
by the customer. The "sweep" agreement can be terminated by the customer at any
time, without affecting its beneficial ownership of the shares.
To obtain the benefits of this service, a customer typically is required to
maintain a minimum balance subject to a monthly maintenance fee, or a higher
minimum balance for which no monthly fee would be imposed. In either case, a
penalty fee is imposed if the minimum should not be maintained. In general, the
automatic investment in the Portfolio's shares occurs on the same day that
withdrawals are made by the financial institution, at the next determined net
asset value after the order is received.
All agreements which relate to the service are with the financial
institution. Neither the Distributor nor the Fund is a party to any of those
agreements and no part of the compensation received by the financial institution
flows to the Fund or to the Distributor or to any of their affiliates, either
directly or indirectly. Further information concerning this program and any
related charges or fees is provided by the financial institution prior to any
purchase of the Portfolio's shares. Any fees charged by the financial
institution effectively reduces the Portfolio's yield for those customers.
Terms of Purchase. The Fund reserves the right to reject any purchase order
and to change the amount of the minimum investment and subsequent purchases in
the Portfolio.
Using Federal Funds. The Transfer Agent or the Fund may attempt to notify
the investor upon receipt of checks drawn on banks that are not members of the
Federal Reserve System as to the possible delay in conversion into Federal Funds
and may attempt to arrange for a better means of transmitting the money.
Reopening an Account. An investor may reopen an account with a minimum
investment of $100 without filing a new Account Application during the calendar
year the account is closed or during the following calendar year, provided that
the information on the old Account Application is still applicable.
Stock Certificates; Signatures. Any certificate representing Portfolio
shares to be redeemed must be submitted with the redemption request. Written
redemption requests must be signed by each shareholder, including each holder of
a joint account, and each signature must be guaranteed. Signatures on endorsed
certificates submitted for redemption also must be guaranteed. The Fund's
Transfer Agent has adopted standards and procedures pursuant to which
signature-guarantees in proper form generally will be accepted from domestic
banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations.
If the signature is guaranteed by a broker or dealer, such broker or dealer must
be a member of a clearing corporation and maintain net capital of at least
$100,000. Guarantees must be signed by an authorized signatory of the guarantor
and "Signature-Guaranteed" should appear with the signature.
Suspension of Redemptions. The right of redemption may be suspended or the
date of payment postponed (a) during any period when the New York Stock Exchange
is closed (other than customary weekend and holiday closing), (b) when trading
in the markets the Portfolio ordinarily utilizes is restricted, or when an
emergency exists as determined by the Securities and Exchange Commission so that
disposal of the Portfolio's investments or determination of its net asset value
is not reasonably practicable, or (c) for such other periods as the Securities
and Exchange Commission by order may permit to protect the Portfolio's
shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "How to Buy Shares."
Amortized Cost Pricing. The valuation of the Portfolio's investment
securities is based upon their amortized cost which does not take into account
unrealized capital gains or losses. This involves valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Portfolio would receive if it sold the
instrument.
The Board of Directors has established, as a particular responsibility
within the overall duty of care owed to the Portfolio's investors, procedures
reasonably designed to stabilize the Portfolio's price per share as computed for
the purpose of sales and redemptions at $1.00. Such procedures include review of
the Portfolio's investment holdings by the Board of Directors, at such intervals
as it deems appropriate, to determine whether the Portfolio's net asset value
calculated by using available market quotations or market equivalents deviates
from $1.00 per share based on amortized cost. In such review, investments for
which market quotations are readily available will be valued at the most recent
bid price or yield equivalent for such securities or for securities of
comparable maturity, quality and type, as obtained from one or more of the major
market makers for the securities to be valued. Other investments and assets will
be valued at fair value as determined in good faith by the Board of Directors.
The extent of any deviation between the Portfolio's net asset value based
upon available market quotations or market equivalents and $1.00 per share based
on amortized cost will be examined by the Board of Directors. If such deviation
exceeds 1/2 of 1%, the Board of Directors promptly will consider what action, if
any, will be initiated. In the event the Board of Directors determines that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, it has agreed to take such corrective
action as it regards as necessary and appropriate, including: selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding dividends or paying distributions from
capital or capital gains; redeeming shares in kind; or establishing a net asset
value per share by using available market quotations or market equivalents.
New York Stock Exchange and Custodian Closings. The holidays (as observed)
on which the New York Stock Exchange and the Custodian are closed currently are:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day and Christmas Day.
YIELD INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Yield Information."
For the seven-day period ended December 31, 1995, the Portfolio's "yield"
and "effective yield," net of absorbed expenses, was ____% and ____%,
respectively. The Portfolio's yield and effective yield for such period without
the absorption of certain expenses would have been ____% and ____%,
respectively. Yield is computed in accordance with a standardized method which
involves determining the net change in the value of a hypothetical pre-existing
Portfolio account having a balance of one share at the beginning of a seven
calendar day period for which yield is to be quoted, dividing the net change by
the value of the account at the beginning of the period to obtain the base
period return, and analyzing the results (i.e., multiplying the base period
return by 365/7). The net change in the value of the account reflects the value
of additional shares purchased with dividends declared on the original share and
any such additional shares and fees that may be charged to shareholder accounts,
in proportion to the length of the base period and the Portfolio's average
account size, but does not include realized gains and losses or unrealized
appreciation and depreciation. Effective annualized yield is computed by adding
1 to the base period return (calculated as described above), raising that sum to
a power equal to 365 divided by 7, and subtracting 1 from the result.
Yields will fluctuate and are not necessarily representative of future
results. The investor should remember that yield is a function of the type and
quality of the instruments held, their maturity and operating expenses. An
investor's principal in the Portfolio is not guaranteed. See "Determination of
Net Asset Value" for a discussion of the manner in which the Portfolio's price
per share is determined.
PORTFOLIO TRANSACTIONS
Portfolio securities ordinarily are purchased directly from the issuer or
an underwriter or a market maker for the securities. Usually no brokerage
commissions are paid for such purchases. Purchases from underwriters of
portfolio securities include a concession paid by the issuer to the underwriter
and the purchase price paid to market makers for the securities may include the
spread between the bid and asked price. No brokerage commissions have been paid
by the Portfolio to date.
Transactions are allocated to various dealers by the Portfolio's investment
personnel in their best judgment. The primary consideration is prompt and
effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected to act on an agency basis for
research, statistical or other services to enable the Adviser to supplement its
own research and analysis with the views and information of other securities
firms.
Research services furnished by brokers through which the Portfolio effects
securities transactions may be used by the Adviser in advising other funds or
accounts it advises and, conversely, research services furnished to the Adviser
by brokers in connection with other funds or accounts the Adviser advises may be
used by the Adviser in advising the Portfolio. Although it is not possible to
place a dollar value on these services, it is the opinion of the Adviser that
the receipt and study of such services should not reduce the overall expenses of
its research department.
INFORMATION ABOUT THE PORTFOLIOS
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "General Information."
The Portfolio share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and non-assessable.
Shares have no preemptive, subscription or conversion rights and are freely
transferable.
The Portfolio will send annual and semi-annual financial statements to all
its shareholders.
As of April 20, 1996, the following shareholders beneficially owned,
directly or indirectly, 5% or more of the Portfolio's outstanding shares:
Percent of
Total Shares
Name and Address Outstanding
The Bank of New York as agent for 20.71%
Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, New York 11779
The Bank of New York as agent for 8.66%
Shearson Shopco Malls Ltd.
1250 Broadway
New York, New York 10001
The Bank of New York as agent for 8.34%
St. John's Riverside Hospital
967 North Broadway
Yonkers, New York 10701
The Bank of New York as agent for 8.22%
United Methodist Development
475 Riverside Drive
New York, New York 10115
The Bank of New York as agent for 7.52%
4 World Trade Center
New York, New York 10048
The Bank of New York as agent for 6.06%
Hicks Nurseries Inc.
P.O. Box 648
Westbury, New York 11590
The Bank of New York as agent for 5.41%
Festo Corporation
395 Moreland Road
Hauppauge, New York 11788
A shareholder who beneficially owns, directly or indirectly, more than 25%
of the Portfolio's voting securities may be deemed a "control person" (as
defined in the 1940 Act) of the Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
The Bank of New York, 90 Washington Street, New York, New York 10286, acts
as custodian of the Portfolio's investments. BISYS Fund Services Ohio, Inc., an
affiliate of the Administrator, 3435 Stelzer Road, Columbus, Ohio 43219, acts as
the Fund's transfer and dividend disbursing agent (the "Transfer Agent"). Under
the transfer agency agreement with the Fund, the Transfer Agent maintains
shareholder account records for the Fund, handles certain communications between
shareholders and the Fund and pays dividends and distributions payable by the
Fund. For these services, the Transfer Agent receives a monthly fee compiled on
the basis of the number of shareholder accounts it maintains for the Fund during
the month, and is reimbursed for certain out-of-pocket expenses. Neither The
Bank of New York nor BISYS Fund Services Ohio, Inc. has any part in determining
the investment policies of the Portfolio or which securities are to be purchased
or sold by the Portfolio.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696,
as counsel for the Fund, has rendered its opinion as to certain legal matters
regarding the due authorization and valid issuance of the shares of Common Stock
being sold pursuant to the Portfolio's Prospectus.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154,
independent auditors, have been selected as the Portfolio's auditors.
<PAGE>
FINANCIAL STATEMENTS
The Portfolios' Annual Report to Shareholders for the fiscal year ended
December 31, 1995 is a separate document supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing therein are incorporated by reference
in this Statement of Additional Information.
<PAGE>
PROSPECTUS
May 1, 1996
LOGO
THE INFINITY MUTUAL FUNDS, INC.
BEA Short Duration Portfolio
The Infinity Mutual Funds, Inc. (the "Fund") is an open-end, management
investment company, known as a series fund. By this Prospectus, shares of the
BEA Short Duration Portfolio (the "Portfolio") are being offered.
The Portfolio is a non-diversified mutual fund that seeks to provide
investors with as high a level of current income as is consistent with the
preservation of capital. The Portfolio's duration, under normal circumstances,
will not exceed 1.5 years. The Portfolio's investment adviser will seek to
maintain a duration of approximately one year, but may vary the Portfolio's
duration depending upon market conditions. Under normal circumstances, the
dollar-weighted average life of the Portfolio's investment securities will be
longer than six months and less than three years. Since the Portfolio ordinarily
will invest in securities with longer maturities than those found in money
market funds, its total return is expected to be higher and fluctuations in its
net asset value are expected to be greater.
By this Prospectus, BEA Client Shares, BEA Investor Shares and BEA Service
Shares of the Portfolio are being offered. BEA Client Shares are offered only to
certain clients and employees of the Portfolio's investment adviser and its
affiliates. BEA Investor Shares are offered to any investor. BEA Service Shares
are offered only to clients of certain financial institutions, securities
dealers and other industry professionals. The BEA Client Shares, BEA Investor
Shares and BEA Service Shares are identical, except as to the services offered
to and the expenses borne by each class and certain voting rights, as more fully
set forth under "Expense Summary," "Management of the Portfolio" and "General
Information."
The Portfolio's investment adviser is BEA Associates (the "Adviser").
Concord Holding Corporation (the "Administrator") serves as the Portfolio's
administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned subsidiary
of the Administrator, serves as distributor of the Portfolio's shares.
This Prospectus sets forth concisely information about the Fund and the
Portfolio that an investor should know before investing. It should be read and
retained for future reference.
The Statement of Additional Information, dated May 1, 1996, which may be
revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, write to the Fund at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, contact your sales representative or call
1-800-442-3809.
Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other governmental
agency. Portfolio shares involve certain investment risks, including the
possible loss of principal. The Portfolio's share price and investment return
fluctuate and are not guaranteed.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
EXPENSE SUMMARY
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
BEA SHORT DURATION PORTFOLIO
<TABLE>
<CAPTION>
BEA CLIENT BEA INVESTOR BEA SERVICE
SHARES* SHARES SHARES
---------- ------------ -----------
<S> <C> <C> <C>
Management Fees..................................... .15% .15% .15%
12b-1 Fees.......................................... None None .25%
Other Expenses (after expense reimbursement)........ .39% .48% .55%
Total Portfolio Operating Expenses (after expense
reimbursement).................................... .54% .63% .95%
</TABLE>
- - ------------
* BEA Client Shares are offered only to clients of the Adviser and its
affiliates who have entered into separate advisory account agreements with the
Adviser and to employees of the Adviser and its affiliates.
<TABLE>
<CAPTION>
BEA CLIENT BEA INVESTOR BEA SERVICE
SHARES* SHARES SHARES
---------- ------------ -----------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a 1 Year $ $ $ 10
$1,000 investment, assuming (1) 5% 3 Years $ $ $ 30
annual return and (2) redemption at the 5 Years $ $ $ 52
end of each time period: 10 Years $ $ $ 116
</TABLE>
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE
OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, THE
PORTFOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN
GREATER OR LESS THAN 5%.
The purpose of the foregoing table is to assist you in understanding the
costs and expenses borne by the Portfolio, the payment of which will reduce
investors' annual return. Other Expenses and Total Portfolio Operating Expenses
noted above, without expense reimbursements, would be: .61% and .76%,
respectively, for BEA Investor Shares; and 1.66% and 2.06%, respectively, for
BEA Service Shares. Certain Service Organizations (as defined below) and other
institutions may charge their clients direct fees for effecting transactions in
Portfolio shares; such fees are not reflected in the foregoing table. The
Adviser has undertaken until such time as it gives investors at least 60 days'
notice to the contrary that if, in any fiscal year, certain expenses, including
the investment advisory fee, exceed .55%, .70% and .95% of the average net
assets of the BEA Client Class, BEA Investor Class and BEA Service Class,
respectively, for the fiscal year, the Adviser may waive a portion of its
investment advisory fee or bear other expenses to the extent of such excess
expense. Long-term investors in BEA Service Shares could pay more in 12b-1 fees
than the economic equivalent of paying a front-end sales charge. For a further
description of the various costs and expenses incurred in the Portfolio's
operation, see "Management of the Portfolio."
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net assets
and other supplemental data for each period indicated. The information in the
following table has been audited by KPMG Peat Marwick LLP, the Portfolio's
independent auditors, whose report thereon appears in the Statement of
Additional Information. Further financial data and related notes are included in
the Statement of Additional Information, available upon request. Before December
10, 1992, the Portfolio operated as a money market mutual fund, with a stable
net asset value of $1.00 per share. See "General Information."
BEA CLIENT SHARES:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------- PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993 1992 1991+++ 1990*+++
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period..................... $ 4.89 $ 5.01 $ 5.00 $ 5.00 $ 5.00 $ 5.00
------------ ------------ ------------ ------------ ------------ -----
Income from investment
operations:
Net investment income....... 0.30 0.25 0.22 0.20 0.32 0.14
Net realized and unrealized
(loss) gain on securities
transactions............... 0.10 (0.12) 0.05 0.01 0.00 0.00
------------ ------------ ------------ ------------ ------------ -----
Total income from investment
operations................. 0.40 0.13 0.27 0.21 0.32 0.14
------------ ------------ ------------ ------------ ------------ -----
Less dividends and
distributions:
Dividends from net
investment income......... (0.28) (0.25) (0.22) (0.20) (0.32) (0.14)
Return of capital
distributions.............. (0.02) -- -- -- -- --
Distributions from net
realized gains on securities
transactions............... -- -- (0.04) (0.01) (0.00) --
------------ ------------ ------------ ------------ ------------ -----
Total dividends and
distributions.............. (0.30) (0.25) (0.26) (0.21) (0.32) (0.14)
------------ ------------ ------------ ------------ ------------ -----
Net change in net asset
value...................... 0.10 (0.12) 0.01 0.00 0.00 0.00
------------ ------------ ------------ ------------ ------------ -----
Net asset value, end of
period..................... $ 4.99 $ 4.89 $ 5.01 $ 5.00 $ 5.00 $ 5.00
------------ ------------ ------------ ------------ ------------ -----
------------ ------------ ------------ ------------ ------------ -----
Total Return................. 8.30% 2.75% 5.06% 4.28% 6.55% 2.62%+
Ratios/Supplemental Data:
Net assets, end of period
(000s)..................... $ 76,354 $106,659 $119,854 $126,619 $205,302 $ 911
Ratio of expenses to average
net assets**................ 0.54% 0.48% 0.50% 0.16% 0.15% 0.15%++
Ratio of net investment
income to average net
assets**..................... 5.98% 5.12% 4.44% 4.09% 6.34% 6.07%++
Portfolio turnover........... 69% 263% 407% 70% -- --
</TABLE>
- - ------------
* For the period August 28, 1990 (commencement of operations) through December
31, 1990.
** Net of fee waivers and expense reimbursements which had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by 0.01%, 0.11%, 0.11%
and 0.21% (annualized) for the years or period ended December 31, 1993,
December 31, 1992, December 31, 1991 and December 31, 1990, respectively.
+ Not annualized.
++ Annualized.
+++ Immediately after the close of business on December 9, 1992 the Portfolio
underwent a reverse 5 for 1 stock split. As such, the per share data in the
table above has been restated to reflect a reverse 5 for 1 stock split.
Subsequently, the Portfolio changed its investment objective from that of a
money market with a stable net asset value of $1.00 per share, to a non-
money market fund with a fluctuating net asset value.
3
<PAGE>
BEA SERVICE SHARES:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------- PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993 1992*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period...... $ 4.89 $ 5.01 $ 5.00 $ 5.01
----- ------ ------------ ------
Income from investment operations:
Net investment income.................... 0.27 0.23 0.20 0.00
Net realized and unrealized (loss) gain
on securities.......................... 0.10 (0.12) 0.05 0.00
----- ------ ------------ ------
Total income from investment
operations.............................. 0.37 0.11 0.25 0.00
----- ------ ------------ ------
Less dividends and distributions:
Dividends from net investment income..... (0.25) (0.23) (0.20) (0.00)
Return of capital distributions.......... (0.02) -- -- --
Distributions from net realized gains on
securities.............................. -- -- (0.04) (0.01)
----- ------ ------------ ------
Total dividends and distributions........ (0.27) (0.23) (0.24) (0.01)
----- ------ ------------ ------
Net change in net asset value............. 0.10 (0.12) 0.01 (0.01)
----- ------ ------------ ------
Net asset value, end of period............ $ 4.99 $ 4.89 $ 5.01 $ 5.00
----- ------ ------------ ------
----- ------ ------------ ------
Total Return.............................. 7.67% 2.25% 4.62% 0.33%+
Ratios/Supplemental Data:
Net assets, end of period (000s)......... $ 1 $5,566 $ 36,821 $1,085
Ratio of expenses to average net
assets................................. 0.95%** 0.95%** 0.93%** 0.79%++
Ratio of net investment income to average
net assets............................. 5.58%** 4.46%** 4.01%** 4.77%++
Portfolio turnover....................... 69% 263% 405% 70%
</TABLE>
- - ------------
* For the period December 29, 1992 (initial sale) through December 31, 1992.
** Net of fee waivers which had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 1.11%, 0.34% and 0.05% for the years ended December 31,
1995, 1994 and 1993, respectively.
+ Not annualized.
++ Annualized.
BEA INVESTOR SHARES:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993*
------------ ------------ ------------
<S> <C> <C> <C>
Net asset value, beginning of period... $ 4.89 $ 5.00 $ 5.04
------------ ------------ ------------
Income from investment operations:
Net investment income................. 0.29 0.25 0.03
Net realized and unrealized (loss)
gain on securities.................. 0.10 (0.11) 0.00
------------ ------------ ------------
Total income from investment
operations.......................... 0.39 0.14 0.03
------------ ------------ ------------
Less dividends and distributions:
Dividends from net investment
income............................... (0.27) (0.25) (0.03)
Return of capital distributions........ (0.02) -- --
Distributions from net realized gains
on securities....................... -- -- (0.04)
------------ ------------ ------------
Total dividends and distributions..... (0.29) (0.25) (0.07)
------------ ------------ ------------
Net change in net asset value.......... (0.10) (0.11) (0.04)
------------ ------------ ------------
Net asset value, end of period......... $ 4.99 $ 4.89 $ 5.00
------------ ------------ ------------
------------ ------------ ------------
Total Return........................... 8.21% 2.88% 0.59%+
Ratios/Supplemental Data:
Net assets, end of period (000s)...... $ 33,479 $ 30,861 $ 24,847
Ratio of expenses to average net
assets**............................. 0.63% 0.55% 0.55%++
Ratio of net investment income to
average net assets**................ 5.90% 5.03% 4.48%++
Portfolio turnover.................... 69% 263% 405%
</TABLE>
- - ------------
* For the period November 4, 1993 (initial sale) through December 31, 1993.
** Net of fee waivers which had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.13%, 0.16% and 0.15% (annualized) for the years ended
December 31, 1995 and 1994 and period ended December 31, 1993, respectively.
+ Not annualized.
++ Annualized.
Further information about the Portfolio's performance is contained in the
Portfolio's annual report, which may be obtained without charge by writing to
the address set forth on the cover page of this Prospectus.
DESCRIPTION OF THE PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide investors with as high a level of current
income as is consistent with the preservation of capital. The Portfolio's
investment objective cannot be changed without approval by the holders of a
majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Portfolio's outstanding voting shares. There can be no
assurance that the Portfolio's investment objective will be achieved.
<PAGE>
MANAGEMENT POLICIES
The Portfolio will invest primarily in U.S. Dollar and foreign currency
denominated debt securities and securities with debt-like characteristics (e.g.,
bearing interest or having a stated principal), such as bonds, debentures,
notes, mortgage-related securities (including stripped mortgage-backed
securities), asset-backed securities, municipal obligations and convertible debt
obligations of domestic and foreign issuers throughout the world, including
supranational entities. These securities also include money market instruments
consisting of U.S. Government securities, certificates of deposit, time
deposits, bankers' acceptances, short-term investment grade corporate bonds,
participation interests and other short-term debt instruments, and repurchase
agreements, as described in the "Appendix -- Portfolio Securities." The
Portfolio also may purchase shares of other investment companies that invest in
these securities to the extent permitted under the 1940 Act. The Adviser will
endeavor to hedge foreign currency denominated debt using various investment
techniques in an effort to minimize fluctuations in the Portfolio's net asset
value resulting from fluctuations in currency exchange rates relative to the
U.S. dollar. See "Appendix -- Investment Techniques and Practices."
The maturity of any single instrument held by the Portfolio is not limited.
The duration of the Portfolio, however, under normal circumstances, will not
exceed 1.5 years. The Adviser will seek to maintain a duration of approximately
one year, but may vary the Portfolio's duration depending upon market
conditions. As a measure of a fixed-income security's cash flow, duration is an
alternative to the concept of "term to maturity" in assessing the price
volatility associated with changes in interest rates. Generally, the longer the
duration, the more volatility an investor should expect. For example, the market
price of a bond with a duration of two years would be expected to decline 2% if
interest rates rose 1%. Conversely, the market price of the same bond would be
expected to increase 2% if interest rates fell 1%. Duration is a way of
measuring a security's maturity in terms of the average time required to receive
the present value of all interest and principal payments as opposed to its term
to maturity. The maturity of a security measures only the time until final
payment is due; it does not take account of the pattern of a security's cash
flows over time, which would include how cash flow is affected by prepayments
and by changes in interest rates. Incorporating a security's yield, coupon
interest payments, final maturity and option features into one measure, duration
is computed by determining the weighted average maturity of a bond's cash flows,
where the present values of the cash flows serve as weights. In computing the
duration of the Portfolio, the Adviser will estimate the duration of obligations
that are subject to prepayment or redemption by the issuer, taking into account
the influence of interest rates on prepayments and coupon flows. This method of
computing duration is known as option-adjusted duration. Since the Portfolio
ordinarily will invest in securities with longer maturities than those found in
money market funds, its total return is expected to be higher and fluctuations
in its net asset value are expected to be greater.
The average dollar-weighted credit rating of the securities held by the
Portfolio will be at least A- by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("S&P"), Fitch Investors Service, L.P. ("Fitch")
or Duff & Phelps Credit Rating Co., ("Duff"). To further limit risk, each
security in which the Portfolio invests must be rated at least Baa by Moody's or
BBB by S&P, Fitch or Duff or, if unrated, deemed to be of comparable quality by
the Adviser. The average dollar-weighted portfolio credit rating will be
measured on the basis of the dollar value of the securities purchased and their
credit rating without reference to rating subcategories. See "Investment
Considerations and Risk Factors -- Fixed-Income Securities" below, and
"Appendix" in the Portfolio's Statement of Additional Information.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
As set forth above, the Portfolio may engage in currency exchange
transactions to protect against uncertainty in the level of future exchange
rates. In addition, the Portfolio may utilize various other investment
techniques and practices, such as options and futures transactions, buying and
selling interest rate and currency swaps, caps, floors and collars, which are
forms of derivative securities, and short sales to further hedge against the
overall risk to the Portfolio. The Portfolio also may engage in leveraging,
lending portfolio securities, purchasing securities on a when-issued or forward
commitment basis and purchasing illiquid securities. For a discussion of these
investment techniques and their related risks, see "Appendix -- Investment
Techniques and Practices" and "Investment Considerations and Risk Factors --
Investment Techniques" below.
CERTAIN FUNDAMENTAL POLICIES
The Portfolio may (i) borrow money to the extent permitted under the 1940
Act, which currently limits borrowing to no more than 33 1/3% of the value of
the Portfolio's total assets; and (ii) invest up to 25% of the value of its
total assets in the securities of issuers in a single industry, provided there
is no limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
This paragraph describes fundamental policies that cannot be changed without
approval by the holders of a majority (as defined in the 1940 Act) of the
Portfolio's outstanding voting shares. See "Investment Objective and Management
Policies -- Investment Restrictions" in the Portfolio's Statement of Additional
Information.
INVESTMENT CONSIDERATIONS AND RISK FACTORS
General. The net asset value of the Portfolio's shares should be expected to
fluctuate. Investors should consider the Portfolio as a supplement to an overall
investment program and should invest only if they are willing to undertake the
risks involved.
Fixed-Income Securities. Investors should be aware that even though
interest-bearing securities are investments which promise a stable stream of
income, the prices of such securities generally are inversely affected by
changes in interest rates and, therefore, are subject to the risk of market
price fluctuations. The values of fixed-income securities also may be affected
by changes in the credit rating or financial condition of the issuing entities.
Once the rating of a portfolio security has been adversely changed, the
Portfolio will consider all circumstances deemed relevant in determining whether
to continue to hold the security.
<PAGE>
Debt securities which are rated Baa by Moody's are considered medium grade
obligations; they are neither highly protected nor poorly secured, and are
considered by Moody's to have speculative characteristics. Debt securities rated
BBB by S&P are regarded as having adequate capacity to pay interest and repay
principal, and while such debt securities normally exhibit 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 securities in this category than in higher rated categories. Fitch
considers the obligor's ability to pay interest and repay principal on debt
securities rated BBB to be adequate; adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these debt
securities and, therefore, impair timely payment. Debt securities rated BBB by
Duff are considered to have below average protection factors but still
considered sufficient for prudent investment. See "Appendix" in the Portfolio's
Statement of Additional Information.
Investing in Foreign Securities and Commodities. Foreign securities markets
generally are not as developed or efficient as those in the United States.
Securities of some foreign issuers are less liquid and more volatile than
securities of comparable U.S. issuers. Similarly, volume and liquidity in most
foreign securities markets are less than in the United States and, at times,
volatility of price can be greater than in the United States.
Because evidences of ownership of such securities usually are held outside
the United States, the Portfolio will be subject to additional risks which
include possible adverse political and economic developments, possible seizure
or nationalization of foreign deposits and possible adoption of governmental
restrictions that might adversely affect the payment of principal and interest
on the foreign securities or restrict the payment of principal and interest to
investors located outside the country of the issuers, whether from currency
blockage or otherwise.
Since foreign securities often are purchased with and payable in currencies
of foreign countries, the value of these assets as measured in U.S. dollars may
be affected favorably or unfavorably by changes in currency rates and exchange
control regulations.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the Commodity Futures Trading Commission (the
"CFTC") and may be subject to greater risks than trading on domestic exchanges.
For example, some foreign exchanges are principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract.
Investment Techniques. The investment techniques and practices in which the
Portfolio may engage, such as those described under "Management Policies" above
involve risk. See "Appendix -- Investment Techniques and Practices."
Using certain investment techniques may produce higher than normal
portfolio turnover and may affect the degree to which the Portfolio's net asset
value fluctuates. Higher portfolio turnover rates are likely to result in
comparatively greater brokerage commissions. In addition, short-term gains
realized from portfolio transactions are taxable to shareholders as ordinary
income. The amount of portfolio activity will not be a limiting factor when
making portfolio decisions. Under normal market conditions, the Portfolio's
turnover rate generally will not exceed 500%. See "Portfolio Transactions" in
the Portfolio's Statement of Additional Information.
Use of Derivatives. The Portfolio may invest in derivatives ("Derivatives").
These are financial instruments which derive their performance, at least in
part, from the performance of an underlying asset, index or interest rate. The
Derivatives the Portfolio may use include, options and futures, and
mortgage-related securities and asset-backed securities. While Derivatives can
be used effectively in furtherance of the Portfolio's investment objective,
under certain market conditions, they can increase the volatility of of the
Portfolio's net asset value, can decrease the liquidity of the Portfolio's
investments and make more difficult the accurate pricing of the Portfolio's
investments.
Illiquid Securities. The Portfolio may invest up to 15% of the value of its
net assets in illiquid securities. As to these securities, the Portfolio is
subject to a risk that should the Portfolio desire to sell them when a ready
buyer is not available at a price the Portfolio deems representative of their
value, the value of the Portfolio's net assets could be adversely affected.
Non-Diversified Status. The Portfolio's classification as a
"non-diversified" investment company means that the proportion of the
Portfolio's assets that may be invested in the securities of a single issuer is
not limited by the 1940 Act. A "diversified" investment company is required by
the 1940 Act generally to invest, with respect to 75% of its total assets, not
more than 5% of such assets in the securities of a single issuer. Since a
relatively high percentage of the Portfolio's assets may be invested in the
securities of a limited number of issuers, some of which may be within the same
industry the Portfolio's investments may be more sensitive to changes in the
market value of single issuer or industry. However, to meet Federal tax
requirements, at the close of each quarter the Portfolio may not have more than
25% of its total assets invested in any one issuer and, with respect to 50% of
total assets, not more than 5% of its total assets invested in any one issuer.
These limitations do not apply to U.S. Government securities or the securities
of other regulated investment companies.
Simultaneous Investments. Investment decisions for the Portfolio are made
independently from those of other investment companies advised by the Adviser.
However, if such other investment companies desire to invest in, or dispose of,
the same securities as the Portfolio, available investments or opportunities for
sales will be allocated equitably to each investment company. In some cases,
this procedure may adversely affect the size of the position obtained for or
disposed of by the Portfolio or the price paid or received by the Portfolio.
MANAGEMENT OF THE PORTFOLIO
BOARD OF DIRECTORS
The business affairs of the Fund are managed under the general supervision
of its Board of Directors. The Portfolio's Statement of Additional Information
contains the name and general business experience of each Director.
INVESTMENT ADVISER
BEA Associates, located at One Citicorp Center, 153 East 53rd Street, New
York, New York 10022, serves as the Portfolio's investment adviser. The Adviser
is a New York general partnership comprised of Credit Suisse Capital Corporation
("CSCC"), an indirect, wholly-owned subsidiary of Credit Suisse, and Basic
Appraisals, Inc. (which formerly was known as BEA Associates, Inc., the
Portfolio's predecessor investment adviser). The Adviser is a registered
investment adviser which, together with its predecessor companies, has been in
the money management business for over 50 years and currently manages
approximately $ billion in assets. The Adviser manages global equity, balanced,
fixed-income and derivative securities accounts for other investment companies
and private individuals, corporate pension and profit-sharing plans, state
pension funds, union funds, endowments and charitable institutions.
The Adviser supervises and assists in the overall management of the
Portfolio's affairs under an Investment Advisory Agreement between the Adviser
and the Fund, subject to the overall authority of the Fund's Board of Directors
in accordance with Maryland law. The Portfolio's primary investment officer is
Mark Silverstein. He has held that position since November 1994 and has been a
Vice President of the Adviser since 1991. Prior thereto, he was employed in the
fixed-income research department of The First Boston Corporation. The Adviser
also provides research services for the Portfolio through a professional staff
of portfolio managers and securities analysts.
For the fiscal year ended December 31, 1995, the Portfolio paid the Adviser
a monthly fee at the annual rate of .15 of 1% of the value of the Portfolio's
average daily net assets. From time to time, the Adviser may waive receipt of
its fees and/or voluntarily assume certain expenses of the Portfolio, which
would have the effect of lowering the overall expense ratio of the Portfolio and
increasing yield to investors. The Portfolio will not pay the Adviser at a later
time for any amounts it may waive, nor will the Portfolio reimburse the Adviser
for any amounts it may assume.
ADMINISTRATOR
Concord Holding Corporation, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, serves as the Portfolio's administrator. The Administrator currently
provides administrative services or sub-administrative services to other
investment companies with over $60 billion in assets. The Administrator is a
wholly-owned subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator
generally assists in all aspects of the Fund's operations, other than providing
investment advice, subject to the overall authority of the Fund's Board of
Directors in accordance with Maryland law. In connection therewith, the
Administrator provides the Fund with office facilities, personnel, and certain
clerical and bookkeeping services (e.g., preparation of reports to shareholders
and the Securities and Exchange Commission and filing of Federal, state and
local income tax returns) that are not being furnished by The Bank of New York,
the Fund's Custodian.
For the fiscal year ended December 31, 1995, the Portfolio paid the
Administrator a monthly administration fee at the annual rate of .12 of 1% of
the value of the Portfolio's average daily net assets.
DISTRIBUTOR
Concord Financial Group, Inc., located at 125 West 55th Street, New York,
New York 10019, serves as the Fund's principal underwriter and distributor of
the Portfolio's shares. The Distributor, a wholly-owned subsidiary of the
Administrator, was organized to distribute shares of mutual funds to
institutional and retail investors. The Distributor distributes the shares of
other investment companies with over $80 billion in assets. The Distributor is
the Fund's sponsor.
The Distributor makes a continuous offering of the Portfolio's shares and
bears the costs and expenses of printing and distributing to prospective
investors copies of any prospectuses, statements of additional information and
annual and interim reports of the Portfolio (after such items have been prepared
and set in type by the Fund) which are used in connection with the offering of
shares, and the costs and expenses of preparing, printing and distributing any
other literature used by the Distributor in connection with the offering of the
Portfolio's shares for sale to the public.
SPECIAL INVESTORS SERVICES PLAN
The Fund has adopted a Special Investors Services Plan (the "Special
Services Plan") pursuant to which the Fund has agreed to pay one or more
financial institutions, securities dealers and other industry professionals,
including BEA Associates (collectively, "Service Organizations"), at an annual
rate of up to .15% of the value of the average daily net assets of the BEA
Investor Class and BEA Service Class, respectively, for certain services to be
provided to holders of the BEA Investor Shares and BEA Service Shares. Holders
of the BEA Investor Shares and BEA Service Shares bear all fees paid for
services under the Special Services Plan. The Special Services Plan does not
cover, and the fees thereunder are not payable with respect to, the BEA Client
Shares.
The services provided by Service Organizations may include providing
personal services relating to shareholder accounts, such as answering
shareholder inquiries regarding the Portfolio and providing reports and other
information, and providing services related to the maintenance of shareholder
accounts. Each Service Organization is required to disclose to its clients any
compensation payable to it by the Fund pursuant to the Special Services Plan and
any other compensation payable by its clients in connection with the investment
of their assets in Portfolio shares. Clients of Service Organizations should
read this Prospectus in light of the terms governing their accounts with such
Service Organizations. The Fund understands that Service Organizations may
charge fees to their clients who are the beneficial owners of BEA Investor
Shares or BEA Service Shares in connection with their client accounts. These
fees would be in addition to any amounts which may be received by Service
Organizations pursuant to the Special Services Plan.
DISTRIBUTION PLAN
Under a plan adopted by the Fund's Board of Directors pursuant to Rule
12b-1 under the 1940 Act (the "Distribution Plan"), the Portfolio pays the
Distributor for advertising, marketing and distributing the BEA Service Shares
at an annual rate of .25 of 1% of the value of the average daily net assets of
the BEA Service Class. Under the Distribution Plan, the Distributor may make
payments to one or more Service Organizations in respect of these services. The
Distributor determines the amounts to be paid to Service Organizations. Service
Organizations receive such fees in respect of the average daily value of the BEA
Service Shares owned by their clients. The Distribution Plan also provides that
the Distributor may pay Service Organizations out of its past profits or any
other source available to it. From time to time, the Distributor may defer or
waive receipt of fees under the Distribution Plan while retaining the ability to
be paid by the Fund under the Distribution Plan thereafter. The fees payable to
the Distributor under the Distribution Plan for advertising, marketing and
distributing the BEA Service Shares are payable without regard to actual
expenses incurred.
The Fund understands that Service Organizations may charge fees to their
clients who are the beneficial owners of BEA Service Shares in connection with
their client accounts. These fees would be in addition to any amounts which may
be received by a Service Organization under its agreement with the Distributor.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York, 90 Washington Street, New York, New York 10286, is the
Fund's Custodian. BISYS Fund Services Ohio, Inc., an affiliate of the
Administrator, located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, is the
Fund's Transfer and Dividend Disbursing Agent (the "Transfer Agent").
EXPENSES
All expenses incurred in the operation of the Fund are borne by the Fund,
except to the extent specifically assumed by others. The expenses borne by the
Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator, or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory and administration
fees, Distribution Plan and Special Services Plan fees, charges of custodians,
transfer and dividend disbursing agents' fees, certain insurance premiums,
industry association fees, auditing and legal expenses, costs of maintaining
corporate existence, costs of independent pricing services, costs of calculating
the net asset value of the Portfolio's shares, costs of shareholders' reports
and corporate meetings, costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders, and any extraordinary expenses. Expenses
attributable to the Portfolio are charged against the assets of the Portfolio;
other expenses of the Fund are allocated among the Fund's portfolios on the
basis determined by the Board of Directors, including, but not limited to,
proportionately in relation to the net assets of each portfolio.
The Adviser has undertaken until such time as it gives investors at least
60 days' notice to the contrary that if, in any fiscal year, certain expenses,
including the investment advisory fee, exceed .55%, .70% and .95% of the average
net assets of the BEA Client Class, BEA Investor Class and BEA Service Class,
respectively, for the fiscal year, the Adviser may waive a portion of its
investment advisory fee or bear other expenses to the extent of such excess
expense.
HOW TO BUY SHARES
GENERAL
The Portfolio's BEA Client Shares may be purchased only by clients of the
Adviser and its affiliates who have entered into separate advisory account
agreements with the Adviser and to employees of the Adviser and its affiliates.
BEA Investor Shares may be purchased by any investor. BEA Service Shares may be
purchased only by clients of Service Organizations. Service Organizations may
receive different compensation for selling BEA Client Shares than for selling
BEA Investor Shares or BEA Service Shares. Stock certificates are issued only
upon written request. No certificates are issued for fractional shares. The Fund
reserves the right to reject any purchase order.
The minimum initial investment in the Portfolio's BEA Investor Shares and
BEA Service Shares is $100,000. However, with respect to BEA Service Shares,
there is no minimum initial investment if you are a customer of a Service
Organization which has made an aggregate minimum initial purchase of BEA Service
Shares for its customers of $100,000. There is no minimum initial investment in
the Portfolio's BEA Client Shares. Subsequent investments may be made in any
amount. The Fund reserves the right to vary the initial and subsequent
investment minimum requirements at any time. Investments by employees of the
Adviser and its affiliates and their advisory clients are not subject to minimum
investment requirements.
Shares are sold on a continuous basis at the net asset value per share next
determined after an order in proper form and Federal Funds (monies of member
banks within the Federal Reserve System which are held on deposit at a Federal
Reserve Bank) are received by the Transfer Agent. If you do not remit Federal
Funds, your payment must be converted into Federal Funds. This usually occurs
within one business day of receipt of a bank wire or within two business days of
receipt of a check drawn on a member bank of the Federal Reserve System. Checks
drawn on banks which are not members of the Federal Reserve System may take
considerably longer to convert into Federal Funds. Prior to receipt of Federal
Funds, your money will not be invested.
The Portfolio's net asset value per share is determined as of the close of
trading on the New York Stock Exchange (currently 4:00 p.m., Eastern time) on
each business day (which, as used herein, shall include each day that the New
York Stock Exchange and the Fund's Custodian are open for business). Net asset
value per share is computed by dividing the value of the Portfolio's net assets
(i.e., the value of its assets less liabilities) by the total number of shares
outstanding. The Portfolio's investments are valued each business day by an
independent pricing service approved by the Fund's Board of Directors and are
valued at fair value as determined by the pricing service under the general
supervision of the Board of Directors. For further information regarding the
methods employed in valuing Portfolio investments, see "Determination of Net
Asset Value" in the Portfolio's Statement of Additional Information.
Federal regulations require that you provide a certified Taxpayer
Identification Number upon opening or reopening an account. See "Dividends,
Distributions and Taxes" for further information concerning this requirement.
WRITTEN ORDERS
You may send your initial or subsequent purchase order (which may be sent by
ordinary letter), along with your check or money order payable to "The Infinity
Mutual Funds, Inc., BEA Short Duration Portfolio," to: The Infinity Mutual
Funds, Inc., BEA Short Duration Portfolio, c/o BISYS Fund Services, Inc.,
Department [L-1686], Columbus, Ohio 43260-[1686]. For subsequent investments,
your Fund account number should appear on the check or money order. All payments
should be made in U.S. dollars and, to avoid fees and delays, should be drawn
only on U.S. banks. A charge will be imposed if a check used for investment in
your account does not clear.
WIRE ORDERS
[If you desire to purchase shares by wire, you should request your bank to
transmit immediately available funds by wire to The Bank of New York, DDA #
8900118849, for purchases of shares in your name. It is important that the wire
include your name, address and Taxpayer Identification Number, indicate whether
a new account is being established or a subsequent payment is being made to an
established account and indicate the name of the Fund, Portfolio and Class
purchased.] [For wire orders, you must call the Transfer Agent at
1-800-[852-0045]. If a subsequent payment is being made, your Fund account
number should be included. Information on remitting funds in this manner may be
obtained from your bank, which must be a commercial bank that is either a member
of the Federal Reserve System or has a correspondent bank located in New York
City.
AUTOMATICALLY THROUGH "SWEEP" PROGRAMS
Certain investor accounts with the Adviser and its affiliates may be
eligible for an automatic investment privilege, commonly called a "sweep," under
which amounts in excess of a certain minimum held in these accounts will be
invested automatically in shares of the Portfolio at predetermined intervals at
the next determined net asset value. If you desire to use this privilege, you
should consult the Adviser for details. It is the responsibility of the
financial institution holding your funds to transmit your order on a timely
basis. The "sweep" program may be modified or terminated at any time by the
Fund.
HOW TO REDEEM SHARES
GENERAL
You may request redemption of your shares at any time. Redemption requests
may be made as described below. When a request is received in proper form, the
Fund will redeem the shares at the next determined net asset value.
The Fund ordinarily will make payment for all shares redeemed within seven
days after receipt by the Transfer Agent of a redemption request in proper form,
except as provided by the rules of the Securities and Exchange Commission.
However, if an investor has purchased shares by check and subsequently submits a
redemption request by mail, the redemption proceeds will not be transmitted to
the investor until the check used for investment has cleared, which may take up
to seven business days. Where redemption is requested other than by mail, the
redemption proceeds for shares purchased by check will not be transmitted for a
period of seven business days after their purchase. This procedure does not
apply to shares purchased by wire payment.
The Fund reserves the right to redeem your account at its option upon not
less than 45 days' written notice if your account's net asset value is $500 or
less, for reasons other than market conditions, and remains so during the notice
period.
PROCEDURES
Written Orders. If you do not hold share certificates, send your written
request for redemption, indicating that the shares are to be redeemed from the
Portfolio, with signature appropriately guaranteed, if required, and otherwise
in accordance with the requirements listed below, to: The Infinity Mutual Funds,
Inc., BEA Short Duration Portfolio, c/o BISYS Fund Services, Inc., Department
[L-1686], Columbus, Ohio 43260-[1686].
If you hold certificates for your shares, you must submit your duly endorsed
certificates with appropriate signature-guarantee of the signature(s) on the
certificate and all the requirements listed below, in addition to your written
instructions.
Redemption proceeds may be transmitted by wire to your account at your bank.
For identification purposes, the Transfer Agent may require such information as
it deems necessary. To change the account designated to receive redemption
proceeds, it will be necessary to send to the Transfer Agent a written request,
with your signature guaranteed and otherwise in compliance with the redemption
requirements set forth herein.
Automatically Through "Sweep" Programs. See page 15.
Redemption Requirements. Written redemption instructions, indicating the
name of the Portfolio, and duly endorsed share certificates, if previously
issued, must be received by the Transfer Agent in proper form and signed exactly
as the shares are registered. Except as noted below, all signatures must be
guaranteed. The Fund's Transfer Agent has adopted standards and procedures
pursuant to which signature-guarantees in proper form generally will be accepted
from domestic banks, brokers, dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations, as well as from participants in the New York Stock Exchange
Medallion Signature Program, the Securities Transfer Agents Medallion Program
("STAMP") and the Stock Exchanges Medallion Program. If the signature is
guaranteed by a broker or dealer, such broker or dealer must be a member of a
clearing corporation and maintain net capital of at least $100,000.
Signature-guarantees may not be provided by notaries public. The signature
guarantee requirement will be waived if the following conditions apply: (1) the
redemption check is payable to the shareholder(s) of record; and (2) the
redemption check is mailed to the shareholder(s) at the address of record or the
proceeds are either mailed or wired to a financial institution account
previously designated. Redemption requests by corporate and fiduciary
shareholders must be accompanied by appropriate documentation establishing the
authority of the person seeking to act on behalf of the account. You may obtain
from the Adviser, the Fund or the Transfer Agent, forms of resolutions and other
documentation which have been prepared in advance to assist compliance with the
Portfolio's procedures.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Portfolio declares dividends from net investment income on each day the
Portfolio is open for business. Dividends usually are paid on the last calendar
day of each month, and are automatically reinvested in additional Portfolio
shares at net asset value or, at your option, paid in cash. The Portfolio's
earnings for Saturdays, Sundays and holidays are declared as dividends on the
preceding business day. Shares begin accruing dividends on the day payment in
Federal Funds is received for such shares and continue to earn dividends through
the day before a redemption order for such shares is processed by the Transfer
Agent. Dividends on each BEA Client Share, BEA Investor Share and BEA Service
Share are determined in the same manner and are paid in the same amount
regardless of class, except that BEA Investor Shares and BEA Service Shares bear
the fees paid under the Special Services Plan described under "Management of the
Portfolio -- Special Investors Services Plan" and BEA Service Shares bear the
fees paid under the Distribution Plan described under "Management of the
Portfolio -- Distribution Plan" above. If you redeem all shares in your account
at any time during the month, all dividends to which you are entitled will be
paid to you along with the proceeds of the redemption.
Distributions from net realized securities gains, if any, are declared and
paid once a year, but the Portfolio may make distributions on a more frequent
basis to comply with the distribution requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), in all events in a manner consistent with the
provisions of the 1940 Act. You may choose whether to receive distributions in
cash or to reinvest in additional Portfolio shares at net asset value. All
expenses are accrued daily and deducted before declaration of dividends to
investors.
If you elect to receive distribution in cash and your distribution checks
(1) are returned to the Fund marked "undeliverable" or (2) remain uncashed for
six months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in Portfolio shares
at the net asset value determined as of the date of payment of the distribution.
In addition, any such undeliverable checks or checks that remain uncashed for
six months will be canceled and will be reinvested in Portfolio shares at the
net asset value determined as of the date of cancellation.
Dividends derived from interest, together with distributions from any net
realized short-term securities gains and all or a portion of any gain realized
from the sale or other disposition of certain market discount bonds, generally
are taxable to investors as ordinary income, whether received in cash or
reinvested in additional Portfolio shares. Distributions from net realized
long-term securities gains, if any, generally are taxable as long-term capital
gains regardless of how long shareholders have held their shares and whether
such distributions are received in cash or reinvested in additional Portfolio
shares. Dividends and distributions may be subject to certain state and local
taxes. No dividend will qualify for the dividends-received deduction allowable
to certain corporations.
Dividends paid by the Portfolio derived from net investment income, together
with distributions from net realized short-term securities gains and all or a
portion of any gain realized from the sale or other disposition of certain
market discount bonds, paid by the Portfolio to a foreign investor generally are
subject to U.S. nonresident withholding taxes at the rate of 30%, unless the
investor claims the benefit of a lower rate specified in a tax treaty.
Distributions from net realized long-term securities gains paid by the Portfolio
to a foreign investor as well as the proceeds of any redemptions from a foreign
investor's account, regardless of the extent to which gain or loss may be
realized, generally will not be subject to U.S. nonresident withholding tax.
However, such distributions may be subject to backup withholding, as described
below, unless the foreign investor certifies his non-U.S. residency status.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and the proceeds of any redemption,
regardless of the extent to which gain or loss may be realized, paid to a
shareholder if such shareholder fails to certify either that the Taxpayer
Identification Number furnished in connection with opening an account is
correct, or that such shareholder has not received notice from the Internal
Revenue Service of being subject to backup withholding as a result of a failure
to properly report taxable dividend or interest income on a Federal income tax
return. Furthermore, the Internal Revenue Service may notify the Fund to
institute backup withholding if the Internal Revenue Service determines a
shareholder's Taxpayer Identification Number is incorrect or if a shareholder
has failed to properly report taxable dividend and interest income on a Federal
income tax return.
A Taxpayer Identification Number is either the Social Security number or
employer identification number of the record owner of the account. Any tax
withheld as a result of backup withholding does not constitute an additional tax
imposed on the record owner of the account, and may be claimed as a credit on
the record owner's Federal income tax return.
Notice as to the tax status of your dividends and distributions is mailed to
you annually. You also will receive periodic summaries of your account which
will include information as to income dividends and distributions from
securities gains, if any, paid during the year.
Management of the Fund believes that the Portfolio qualified for the fiscal
year ended December 31, 1995 as a "regulated investment company" under the Code.
The Portfolio intends to continue to so qualify if such qualification is in the
best interests of its shareholders. Such qualification relieves the Portfolio of
any liability for Federal income tax to the extent its earnings are distributed
in accordance with applicable provisions of the Code. The Code subjects
regulated investment companies, such as the Portfolio, to a non-deductible 4%
excise tax to the extent that such investment companies do not distribute a very
substantial portion of their taxable investment income and capital gains,
generally determined on a calendar year basis.
You should consult your tax adviser regarding specific questions as to
Federal, state or local taxes.
PERFORMANCE INFORMATION
For purposes of advertising, performance may be calculated on several bases,
including current yield, average annual total return and/or total return. The
fees paid pursuant to the Special Services Plan will be borne by the holders of
the BEA Investor Shares and BEA Service Shares, and not the BEA Client Shares,
and those paid pursuant to the Distribution Plan will be borne by the holders of
the BEA Service Shares and not the BEA Client Shares or BEA Investor Shares. As
a result, at any given time, the performance of the BEA Service Class should be
expected to be lower than that of the BEA Investor Class and the performance of
the BEA Service Class and BEA Investor Class should be expected to be lower than
that of the BEA Client Class. Performance for the BEA Client Class, BEA Investor
Class and BEA Service Class will be calculated separately.
Current yield refers to the Portfolio's annualized net investment income per
share over a 30-day period, expressed as a percentage of the net asset value per
share at the end of the period. For purposes of calculating current yield, the
amount of net investment income per share during that 30-day period, computed in
accordance with regulatory requirements, is compounded by assuming that it is
reinvested at a constant rate over a six-month period. An identical result is
then assumed to have occurred during a second six-month period which, when added
to the result for the first six months, provides an "annualized" yield for an
entire one-year period. Calculations of current yield may reflect absorbed
expenses pursuant to any undertaking that may be in effect. See "Management of
the Portfolio."
Average annual total return is calculated pursuant to a standardized
formula which assumes that an investment in the Portfolio was purchased with an
initial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends and
distributions during the period. The return is expressed as a percentage rate
which, if applied on a compounded annual basis, would result in the redeemable
value of the investment at the end of the period. Advertisements of the
Portfolio's performance will include the Portfolio's average annual total return
for one, five and ten year periods, or for shorter periods depending upon the
length of time during which the Portfolio has operated.
Total return is computed on a per share basis and assumes the reinvestment
of dividends and distributions. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the net asset value per share at
the beginning of the period. Advertisements may include the percentage rate of
total return or may include the value of a hypothetical investment at the end of
the period which assumes the application of the percentage rate of total return.
Performance will vary from time to time and past results are not necessarily
representative of future results. You should remember that performance is a
function of portfolio management in selecting the type and quality of portfolio
securities and is affected by operating expenses. Performance information, such
as that described above, may not provide a basis for comparison with other
investments or other investment companies using a different method of
calculating performance.
Comparative performance information may be used from time to time in
advertising or marketing the Portfolio's shares, including data from Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc.,
Moody's Bond Survey Bond Index, the Dow Jones Industrial Average, Standard &
Poor's 500 Composite Stock Price Index, Standard & Poor's MidCap 400 Index,
Wilshire 5000 Index, Lehman Brothers Bond Indexes, Consumer Price Index, Bond
Buyer's 20-Bond Index, Mutual Fund Forcaster, Wiesenberger Investment Companies
Services, national financial publications such as Money, Forbes, Barron's, The
Wall Street Journal or The New York Times or publications of a local or regional
nature, and other industry publications. The Portfolio's yield should generally
be higher than money market funds (which offer a stabilized price per share),
and its price per share should fluctuate less than long-term bond funds (which
generally have somewhat higher yields).
GENERAL INFORMATION
The Fund was incorporated under Maryland law on March 6, 1990, and the
Portfolio commenced operations on August 28, 1990. Before December 10, 1992, the
Portfolio operated as a money market mutual fund, with a stable net asset value
of $1.00 per share, under the name "Pegasus Prime Portfolio." On December 10,
1992, the Portfolio commenced operations with its current investment objective
and management policies. Immediately prior to December 10, 1992, the Portfolio's
shares were reverse split, on the basis of 5 to 1, resulting in the Portfolio's
net asset value per share increasing to $5.00.
The Fund is authorized to issue 11 billion shares of Common Stock (with 1
billion allocated to the Portfolio), par value $.001 per share. The Portfolio's
shares are classified into BEA Client Shares (500 million), BEA Investor Shares
(250 million) and BEA Service Shares (250 million). Each share has one vote and
shareholders will vote in the aggregate and not by class except as otherwise
required by law. Only holders of the BEA Investor Shares and BEA Service Shares,
however, will be entitled to vote on matters submitted to shareholders
pertaining to the Special Services Plan and only holders of the BEA Service
Shares will be entitled to vote on matters submitted to shareholders pertaining
to the Distribution Plan.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Fund to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of Directors or the
appointment of auditors. However, pursuant to the Fund's By-Laws, the holders of
at least 10% of the shares outstanding and entitled to vote may require the Fund
to hold a special meeting of shareholders for purposes of removing a Director
from office or for any other purpose. Shareholders may remove a Director by the
affirmative vote of a majority of the Fund's outstanding voting shares. In
addition, the Board of Directors will call a meeting of shareholders for the
purpose of electing Directors if, at any time, less than a majority of the
Directors then holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios, each of which is treated as a separate entity for certain matters
under the 1940 Act and for other purposes. A shareholder of one portfolio is not
deemed to be a shareholder of any other portfolio. For certain matters Fund
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, three classes of shares of the Portfolio are
being offered -- BEA Client Shares, BEA Investor Shares and BEA Service Shares
(each such class being referred to as a "Class"). Shares of each Class are
identical, except that BEA Investor Shares and BEA Service Shares bear special
investors services fees payable by the Portfolio at an annual rate of .15% of
the value of the average daily net assets of the respective Class and BEA
Service Shares also bear fees pursuant to a 12b-1 plan adopted by the Portfolio
at an annual rate of .25% of value of the average daily net assets of the BEA
Service Class. Such fees are not payable with respect to the BEA Client Shares.
From time to time, other portfolios may be established and sold pursuant to
other offering documents.
To date, 12 portfolios of shares have been authorized. The other portfolios
are not being offered by this Prospectus. All consideration received by the Fund
for shares of one of the portfolios, and all assets in which such consideration
is invested, belong to that portfolio (subject only to the rights of creditors
of the Fund) and will be subject to the liabilities related thereto. The income
and expenses attributable to one portfolio (and as to classes within a
portfolio) are treated separately from those of the other portfolios (and
classes).
The Transfer Agent maintains a record of your ownership and sends
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
APPENDIX
PORTFOLIO SECURITIES
U.S. Government Obligations. The Portfolio may invest in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities. Such
securities include U.S. Treasury securities and issues of U.S. Government
agencies and instrumentalities established under the authority of an act of
Congress. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued by
the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Principal and
interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance can
be given that it will always do so, since it is not so obligated by law.
Bank Obligations. The Portfolio may invest in certificates of deposit, time
deposits and bankers' acceptances issued by domestic banks, foreign branches of
domestic banks, foreign subsidiaries of domestic banks, and foreign branches of
foreign banks. The issuers of foreign bank obligations may be subject to less
stringent or different regulations than are U.S. issuers. In addition, there may
be less publicly available information about a non-U.S. issuer, and non-U.S.
issuers generally are not subject to uniform accounting and financial reporting
standards, practices and requirements comparable to those applicable to U.S.
issuers. See "Description of the Portfolio -- Investment Considerations and Risk
Factors -- Investing in Foreign Securities." Certificates of deposit are
negotiable certificates representing the obligation of a bank to repay funds
deposited with it for a specified period of time. Time deposits are
non-negotiable deposits maintained in a bank for a specified period of time at a
stated interest rate. Time deposits which may be held by the Portfolio will not
benefit from insurance from the Bank Insurance Fund or the Savings Association
Insurance Fund administered by the Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of a bank
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The Portfolio also may invest in other short-term
obligations issued by banks, which include uninsured, direct obligations bearing
fixed, floating or variable rates of interest.
Certain Corporate Obligations. The Portfolio may invest in commercial
paper, which consists of short-term, unsecured promissory notes issued by
domestic or foreign entities to finance short-term credit needs. The Portfolio
may purchase floating and variable rate demand notes and bonds, which are
obligations ordinarily having stated maturities in excess of one year, but which
permit the holder to demand payment of principal at any time or at specified
intervals. Variable rate demand notes include variable amount master demand
notes, which are obligations that permit the Portfolio to invest fluctuating
amounts at varying rates of interest pursuant to direct arrangements between the
Portfolio, as lender, and the borrower. These notes permit daily changes in the
amount borrowed. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary market
for these obligations, although they are redeemable at face value, plus accrued
interest, at any time. Accordingly, where these obligations are not secured by
letters of credit or other credit support arrangements, the Portfolio's right to
redeem is dependent on the ability of the borrower to pay principal and interest
on demand. In connection with floating and variable rate demand obligations, the
Adviser will consider, on an ongoing basis, earning power, cash flow and other
liquidity ratios of the borrower, and the borrower's ability to pay principal
and interest on demand. Such obligations frequently are not rated by credit
rating agencies, and the Portfolio may invest in them only if at the time of an
investment the borrower meets the criteria set forth above for other commercial
paper issuers.
Loans. The Portfolio may invest in fixed and floating rate loans and
securities purchase and resale agreements denominated in various currencies
arranged through private negotiations between a foreign issuer and one or more
financial institutions.
Participation Interests. The Portfolio may invest in corporate obligations,
denominated in U.S. Dollars or foreign currencies, that are originated,
negotiated and structured by a syndicate of lenders ("Co-Lenders") consisting of
commercial banks, thrift institutions, insurance companies, finance companies or
other financial institutions one or more of which administers the security on
behalf of the syndicate (the "Agent Bank"). Co-Lenders may sell such securities
to third parties called "Participants." The Portfolio may invest in such
securities either by participating as a Co-Lender at origination or by acquiring
an interest in the security from a Co-Lender or a Participant (collectively,
"participation interests"). Co-Lenders and Participants interposed between the
Portfolio and the corporate borrower (the "Borrower"), together with Agent
Banks, are referred to herein as "Intermediate Participants." The Portfolio also
may purchase a participation interest in a portion of the rights of an
Intermediate Participant. The Portfolio will not act as an Agent Bank,
guarantor, sole negotiator or sole structuror with respect to securities that
are the subject of a participation interest.
A participation interest gives the Portfolio an undivided interest in the
security in the proportion that the Portfolio's participation interest bears to
the total principal amount of the security. These instruments may have fixed,
floating or variable rates of interest. If the participation interest is
unrated, or has been given a rating below that which is permissible for purchase
by the Portfolio, the participation interest will be backed by an irrevocable
letter of credit or guarantee of a bank the debt securities of which would be
permissible Portfolio investments, or the payment obligation otherwise will be
collateralized by U.S. Government securities, or, in the case of unrated
participation interest, the Adviser must have determined that the instrument is
of comparable quality to those instruments in which the Portfolio may invest.
The guarantor of a participation interest will be treated as a separate issuer
to the extent required by the 1940 Act. For certain participation interests, the
Portfolio will have the right to demand payment, on not more than seven days'
notice, for all or any part of the Portfolio's participation interest in the
security, plus accrued interest. As to these instruments, the Portfolio intends
to exercise its right to demand payment only upon a default under the terms of
the security, as needed to provide liquidity to meet redemptions, or to maintain
or improve the quality of its investment portfolio. The Portfolio will not
invest more than 15% of the value of its net assets in participation interests
maturing in more than seven days that do not have this demand feature, and in
other securities that are illiquid.
Repurchase Agreements. The Portfolio may enter into repurchase agreements,
which involve the acquisition by the Portfolio of an underlying debt instrument,
subject to an obligation of the seller, which may be a domestic or foreign
entity, to repurchase, and the Portfolio to resell, the instrument at a fixed
price usually not more than one week after its purchase. Certain costs may be
incurred in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
securities, realization on the securities by the Portfolio may be delayed or
limited.
Municipal Obligations. Municipal obligations are debt obligations issued by
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, or
multistate agencies or authorities. While in general, municipal obligations are
tax exempt securities having relatively low yields as compared to taxable,
non-municipal obligations of similar quality, certain issues of municipal
obligations, both taxable and non-taxable, offer yields comparable and in some
cases greater than the yields available on other permissible investments.
Municipal obligations generally include debt obligations issued to obtain funds
for various public purposes as well as certain industrial development bonds
issued by or on behalf of public authorities. Dividends received by shareholders
on Portfolio shares which are attributable to interest income received by the
Portfolio from municipal obligations generally will be subject to Federal income
tax. It is currently the Portfolio's intention to invest no more than 25% of its
total assets in municipal obligations.
Convertible Securities. Convertible securities may be converted at a stated
price within a specified period of time into a specified number of shares of
common stock of the same or a different issuer. Convertible securities are
senior to common stock in a corporation's capital structure, but usually are
subordinated to non-convertible debt securities. While providing a fixed-income
stream (generally higher in yield than the income derivable from a common stock
but lower than that afforded by a non-convertible debt security), a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in the capital appreciation of the common stock into
which it is convertible.
The Portfolio also may invest in debt securities with warrants attached or
in units with warrants. A warrant is an instrument issued by a corporation which
gives the holder the right to subscribe to a specified amount of the
corporation's capital stock at a set price for a specified period of time.
In connection with its purchases of convertible securities (which include
debt securities with warrants), the Portfolio from time to time may hold common
stock received upon the conversion of the security or the exercise of the
warrant. The Portfolio does not intend to retain the common stock in its
portfolio and will sell it as promptly as it can and in a manner which it
believes will reduce the risk to the Portfolio of loss in connection with the
sale.
Zero Coupon and Stripped Securities. The Portfolio may invest in zero
coupon U.S. Treasury securities, which are Treasury Notes and Bonds that have
been stripped of their unmatured interest coupons, the coupons themselves and
receipts or certificates representing interests in such stripped debt
obligations and coupons. The Portfolio also may invest in zero coupon securities
issued by corporations and financial institutions which constitute a
proportionate ownership of the issuer's pool of underlying U.S. Treasury
securities. A zero coupon security pays no interest to its holder during its
life and is sold at a discount to its face value at maturity. The amount of the
discount fluctuates with the market price of the security. The market prices of
zero coupon securities generally are more volatile than the market prices of
securities that pay interest periodically and are likely to respond to a greater
degree to changes in interest rates than non-zero coupon securities having
similar maturities and credit qualities.
Mortgage-Related Securities. Mortgage-related securities are a form of
Derivative collateralized by pools of mortgages. The mortgage-related securities
in which the Portfolio may invest include those with fixed, floating and
variable interest rates, those with interest rates that change based on
multiples of changes in interest rates and those with interest rates that change
inversely to changes in interest rates, as well as stripped mortgage-backed
securities. Stripped mortgage-backed securities usually are structured with two
classes that receive different proportions of interest and principal
distributions on a pool of mortgage-backed securities or whole loans. A common
type of stripped mortgage-backed security will have one class receiving some of
the interest and most of the principal from the mortgage collateral, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the interest
(the interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). Although certain mortgage-related
securities are guaranteed by a third party or otherwise similarly secured, the
market value of the security, which may fluctuate, is not so secured. If the
Portfolio purchases a mortgage-related security at a premium, all or part of the
premium may be lost if there is a decline in the market value of the security,
whether resulting from changes in interest rates or prepayments in the
underlying mortgage collateral. As with other interest-bearing securities, the
prices of certain mortgage-backed securities are inversely affected by changes
in interest rates, while others, which the Portfolio may purchase, may be
structured so that their interest rates will fluctuate inversely (and thus their
price will increase as interest rates rise and decrease as interest rates fall)
in response to changes in interest rates. Though the value of a mortgage-related
security may decline when interest rates rise, the converse is not necessarily
true, since in periods of declining interest rates the mortgages underlying the
security are more likely to be prepaid. For this and other reasons, a
mortgage-related security's stated maturity may be shortened by unscheduled
prepayments on the underlying mortgages, and, therefore, it is not possible to
predict accurately the security's return to the Portfolio. Moreover, with
respect to stripped mortgage-backed securities, if the underlying mortgage
securities experience greater than anticipated prepayments of principal, the
Portfolio may fail to fully recoup its initial investment in these securities
even if the securities are rated in the highest rating category by a nationally
recognized statistical rating organization. See "Investment Techniques and
Practices--Illiquid Securities" below.
Asset-Backed Securities. The Portfolio may invest in asset-backed
securities. The securitization techniques used for asset-backed securities are
similar to those used for mortgage-related securities. Asset-backed securities
are a form of Derivative. These securities include debt securities and
securities with debt-like characteristics such as trust certificates with fixed
principal and interest amounts. The collateral for these securities has included
home equity loans, automobile and credit card receivables, boat loans, computer
leases, airplane leases, mobile home loans, recreational vehicle loans and
hospital account receivables. The Portfolio may invest in these and other types
of asset-backed securities that may be developed in the future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may provide the
Portfolio with a less effective security interest in the related collateral than
do mortgage-backed securities. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
INVESTMENT TECHNIQUES AND PRACTICES
Foreign Currency Transactions. The Portfolio may engage in currency exchange
transactions to protect against uncertainty in the level of future exchange
rates in connection with hedging and other non-speculative strategies involving
specific settlement transactions. The Portfolio will conduct its currency
exchange transactions either on a spot (i.e., cash) basis at the rate prevailing
in the currency exchange market, or through entering into forward contracts to
purchase or sell currencies. A forward currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which must
be more than two days from the date of the contract, at a price set at the time
of the contract. Transaction hedging is the purchase or sale of forward currency
with respect to specific receivables or payables of the Portfolio generally
arising in connection with the purchase or sales of its portfolio securities.
These contracts are entered into in the interbank market conducted directly
between currency traders (typically commercial banks or other financial
institutions) and their customers.
The Portfolio also may enter into swap agreements with currency traders to
hedge the Portfolio's foreign currency denominated investments. Under a currency
swap agreement, the Portfolio would acquire a foreign currency in exchange for
U.S. Dollars at an exchange rate fixed at the time of the agreement, less a
discount. The agreement grants the Portfolio the right, though not the
obligation, to repurchase the U.S. Dollars from the counterparty at the
expiration of the term of the contract at a price specified in the agreement.
See "Interest Rate Swaps, Caps, Floors and Collars" below.
Options on Foreign Currency. The Portfolio may purchase and sell call and
put options on foreign currency for the purpose of hedging against changes in
future currency exchange rates. These options, which are not considered by the
Portfolio as commodities, in the case of a call, convey the right to buy the
underlying currency at a price which is expected to be lower than the spot price
of the currency at the time the option expires, and, in the case of a put,
convey the right to sell the underlying currency at a price which is anticipated
to be higher than the spot prices of the currency at the time the option
expires. The Portfolio may use foreign currency options for the same purposes as
forward currency exchange and futures transactions, as described herein.
Call and Put Options on Specific Securities. The Portfolio may invest up to
5% of its assets, represented by the premium paid, in the purchase of call and
put options in respect of specific securities in which the Portfolio may invest.
The Portfolio may write covered call and put option contracts to the extent of
20% of the value of its net assets at the time such option contracts are
written. A call option gives the purchaser of the option the right to buy, and
obligates the writer to sell, the underlying security at the exercise price at
any time during the option period. Conversely, a put option gives the purchaser
of the option the right to sell, and obligates the writer to buy, the underlying
security at the exercise price at any time during the option period. A covered
call option sold by the Portfolio, which is a call option with respect to which
the Portfolio owns the underlying security, exposes the Portfolio during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or to possible continued holding of
a security which might otherwise have been sold to protect against depreciation
in the market price of the security. A covered put option sold by the Portfolio
exposes the Portfolio during the term of the option to a decline in price of the
underlying security. A put option sold by the Portfolio is covered when, among
other things, cash or liquid securities are placed in a segregated account with
the Portfolio's custodian to fulfill the obligation undertaken.
To close out a position when writing covered options, the Portfolio may make
a "closing purchase transaction," which involves purchasing an option on the
same security with the same exercise price and expiration date as the option
which it has previously written on the security. To close out a position as a
purchaser of an option, the Portfolio may make a "closing sale transaction,"
which involves liquidating the Portfolio's position by selling the option
previously purchased. The Portfolio will realize a profit or loss from a closing
purchase or sale transaction depending upon the difference between the amount
paid to purchase an option and the amount received from the sale thereof.
Futures Transactions. The Portfolio will not be a commodity pool. However,
as a substitute for a comparable market position in the underlying securities or
for hedging purposes, the Portfolio may engage in futures and options on futures
transactions. In particular, the Portfolio intends to engage in currency futures
and interest rate futures transactions.
The Portfolio may trade futures contracts and options on futures contracts
in U.S. domestic markets or on exchanges located outside the United States. The
Portfolio's commodities transactions must constitute bona fide hedging or other
permissible transactions pursuant to regulations promulgated by the CFTC. In
addition, the Portfolio may not engage in such transactions if the sum of the
amount of initial margin deposits and premiums paid for unexpired commodity
options, other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of the Portfolio's assets, after taking into account
unrealized profits and unrealized losses on such contracts it has entered into;
provided, however, that 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 calculating the 5%
limitation. Pursuant to regulations and/or published positions of the Securities
and Exchange Commission, the Portfolio may be required to segregate cash or high
quality money market instruments in connection with its commodities transactions
in an amount generally equal to the value of the underlying commodity.
Initially, when purchasing or selling futures contracts the Portfolio will
be required to deposit with its custodian in the broker's name an amount of cash
or cash equivalents up to approximately 10% of the contract amount. This amount
is known as "initial margin" and is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Portfolio upon
termination of the futures position, assuming all contractual obligations have
been satisfied. Subsequent payments, known as "variation margin," to and from
the broker will be made daily as the price of the index or securities underlying
the futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as "marking-to-market."
At any time prior to the expiration of a futures contract, the Portfolio may
elect to close the position by taking an opposite position, at the then
prevailing price, which will operate to terminate the Portfolio's existing
position in the contract.
The Portfolio may purchase and sell currency futures contracts and options
thereon. By selling foreign currency futures, the Portfolio can establish the
number of U.S. Dollars it will receive in the delivery month for a certain
amount of a foreign currency. In this way, if the Portfolio anticipates a
decline of a foreign currency against the U.S. Dollar, the Portfolio can attempt
to fix the U.S. Dollar value of some or all of the securities held in its
portfolio that are denominated in that currency. By purchasing foreign currency
futures, the Portfolio can establish the number of U.S. Dollars it will be
required to pay for a specified amount of a foreign currency in the delivery
month.
The Portfolio also may invest in interest rate futures contracts and options
on interest rate futures contracts to hedge against adverse movements in
interest rates.
Although the Portfolio intends to purchase or sell futures contracts only if
there is an active market for such contracts, no assurance can be given that a
liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Portfolio
to substantial losses. If it is not possible, or the Portfolio determines not,
to close a futures position in anticipation of adverse price movements, the
Portfolio will be required to make daily cash payments of variation margin. In
such circumstances, an increase in the value of the portion of the portfolio
being hedged, if any, may offset partially or completely losses on the futures
contract. However, no assurances can be given that the price of the securities
being hedged will correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract.
To the extent the Portfolio is engaging in a futures transaction as a
hedging device, because of the risk of an imperfect correlation between
securities held by the Portfolio that are the subject of a hedging transaction
and the futures contract used as a hedging device, it is possible that the hedge
will not be fully effective if, for example, losses on the portfolio securities
exceed gains on the futures contract or losses on the futures contract exceed
gains on the portfolio securities. For futures contracts based on indexes, the
risk of imperfect correlation increases as the composition of the Portfolio's
portfolio varies from the composition of the index. In an effort to compensate
for the imperfect correlation of movements in the price of the securities being
hedged and movements in the price of futures contracts, the Portfolio may buy or
sell futures contracts in a greater or lesser dollar amount than the dollar
amount of the securities being hedged if the historical volatility of the
futures contract has been less or greater than that of the securities. Such
"over hedging" or "under hedging" may adversely affect the Portfolio's net
investment results if market movements are not as anticipated when the hedge is
established.
Successful use of futures by the Portfolio also is subject to the Adviser's
ability to predict correctly movements in the direction of currency rates or
interest rates. Furthermore, if in such circumstance the Portfolio has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
Call options sold by the Portfolio with respect to futures contracts will be
covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying, or instruments the prices of which are
expected to move relatively consistently with the instruments underlying, the
futures contract. Put options sold by the Portfolio with respect to futures
contracts will be covered in the same manner as put options on specific
securities as described above.
Interest Rate Swaps, Caps, Floors and Collars. The Portfolio may enter into
interest rate swaps and may purchase or sell interest rate caps, floors and
collars. The Portfolio will enter into these transactions primarily to preserve
a return or spread on a particular investment or portion of its portfolio. The
Portfolio also may enter into these transactions to protect against any increase
in the price of securities the Portfolio anticipates purchasing at a later date.
Interest rate swaps involve the exchange by the Portfolio with another party of
their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed-rate payments). The exchange
commitments can involve payments to be made in the same currency or in different
currencies. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the seller
of such interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments on a notional principal amount from the
seller of such interest rate floor. A collar has aspects of both a cap and a
floor.
The Portfolio may enter into these transactions on either an asset-based or
liability-based basis depending on whether it is hedging its assets or its
liabilities, and will usually enter into interest rate swaps on a net basis. In
so doing, the two payment streams are netted out, with the Portfolio receiving
or paying, as the case may be, only the net amount of the two payments. The net
amount of the excess, if any, of the Portfolio's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or high-quality liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Portfolio's custodian. If the
Portfolio enters into an interest rate swap other than on a net basis, the
Portfolio would maintain a segregated account in the full amount accrued on a
daily basis of the Portfolio's obligations with respect to the swap. The
Portfolio will enter into swap, cap or floor transactions with its custodian,
and with other counterparties, but only if: (i) for transactions with maturities
under one year, such other counterparty has outstanding short-term paper rated
at least A-1 by S&P, Prime-1 by Moody's, F-1 by Fitch or Duff-1 by Duff, or (ii)
for transactions with maturities greater than one year, the counterparty has
outstanding debt securities rated at least Aa by Moody's or AA by S&P, Fitch or
Duff. If there is a default by the other party to such a transaction, the
Portfolio will have contractual remedies pursuant to the agreements related to
the transaction. To the extent the Portfolio sells (i.e., writes) caps and
floors, it will maintain in a segregated account cash or high-quality liquid
debt securities having an aggregate net asset value at least equal to the full
amount accrued on a daily basis, of the Portfolio's obligations with respect to
any caps or floors.
The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. If the Adviser is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Portfolio would diminish compared with what it
would have been if these investment techniques were not used. Moreover, even if
the Adviser is correct in its forecasts, there is a risk that the swap position
may correlate imperfectly with the price of the asset or liability being hedged.
There is no limit on the amount of interest rate swap transactions that may be
entered into by the Portfolio. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Portfolio is contractually obligated to make. If the
other party to an interest rate swap defaults, the Portfolio's risk of loss
consists of the net amount of interest payments that the Portfolio contractually
is entitled to receive. The Portfolio may purchase and sell (i.e., write) caps
and floors without limitation, subject to the segregated account requirement
described above. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. Caps and floors are more
recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps.
Leveraging. The Portfolio may borrow for investment purposes up to 33 1/3%
of the value of its total assets. This borrowing, which is known as leveraging,
generally will be unsecured, except to the extent the Portfolio enters into
reverse repurchase agreements described below. Leveraging will exaggerate the
effect on net asset value of any increase or decrease in the market value of the
Portfolio's investments. Money borrowed for leveraging will be subject to
interest costs that may or may not be recovered by appreciation of the
securities purchased; in certain cases, interest costs may exceed the return
received on the securities purchased.
Among the forms of borrowing in which the Portfolio may engage is the entry
into reverse repurchase agreements with banks, brokers or dealers. These
transactions involve the transfer by the Portfolio of an underlying debt
instrument in return for cash proceeds based on a percentage of the value of the
security. The Portfolio retains the right to receive interest and principal
payments on the security. At an agreed upon future date, the Portfolio
repurchases the security at principal, plus accrued interest.
Portfolio Lending. From time to time, the Portfolio may lend securities from
its portfolio to brokers, dealers and other financial institutions needing to
borrow securities to complete certain transactions. Such loans may not exceed 33
1/3% of the Portfolio's total assets. In connection with such loans, the
Portfolio will receive collateral consisting of cash, U.S. Government securities
or irrevocable letters of credit issued by third party financial institutions.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The Portfolio can
increase its income through the investment of such collateral. The Portfolio
continues to be entitled to the interest or other distributions payable on the
loaned security and receives interest on the amount of the loan. Such loans will
be terminable at any time upon specified notice. The Portfolio might experience
risk of loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Portfolio.
Short-Selling. Short sales are transactions in which the Portfolio sells a
security it does not own in anticipation of a decline in the market value of
that security. To complete such a transaction, the Portfolio must borrow the
security to make delivery to the buyer. The Portfolio then is obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. Until the security is replaced, the Portfolio is required to pay
to the lender amounts equal to any interest which accrues during the period of
the loan. To borrow the security, the Portfolio also may be required to pay a
premium, which would increase the cost of the security sold. The Portfolio will
incur a loss as a result of the short sale if the price of the security
increases between the date of the short sale and the date on which the Portfolio
replaces the borrowed security. The Portfolio will realize a gain if the
security declines in price between those dates.
Short-selling will be used primarily in conjunction with a long transaction,
but not necessarily in the same instrument or an instrument with a similar
maturity or interest rate, to effect a hedged position to take advantage of
spreads in the market place. The Portfolio may purchase call options to provide
a hedge against an increase in the price of a security sold short by the
Portfolio. See "Call and Put Options on Specific Securities" above.
The Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short sales.
However, 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 Portfolio's net assets.
In addition to the short sales discussed above, the Portfolio may make short
sales "against the box," a transaction in which the Portfolio enters into a
short sale of a security which the Portfolio owns. The Portfolio at no time will
have more than 15% of the value of its net assets in deposits on short sales
against the box. It currently is anticipated that the Portfolio will make short
sales against the box for purposes of protecting the value of the Portfolio's
net assets.
When-Issued Securities. The Portfolio may purchase money market securities
on a when-issued or forward commitment basis, which means that delivery and
payment for such securities ordinarily take place within 45 days after the date
of the commitment to purchase. The payment obligation and the interest rate that
will be received on the securities are fixed at the time the buyer enters into
the commitment. The Portfolio will make commitments to purchase such securities
only with the intention of actually acquiring the securities, but the Portfolio
may sell these securities before the settlement date if it is deemed advisable.
The Portfolio will not accrue income in respect of a security purchased on a
when-issued or forward commitment basis prior to its stated delivery date.
Illiquid Securities. The Portfolio may invest up to 15% of the value of its
net assets in securities as to which a liquid trading market does not exist.
Such securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, repurchase agreements providing for settlement in more than seven days
after notice, and certain asset-backed and mortgage-backed securities, such as
certain collateralized mortgage obligations and stripped mortgage-backed
securities.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE FUND'S
OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE FUND'S SHARES,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NO BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
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Expense Summary................. 2
Financial Highlights............ 3
Description of the Portfolio.... 5
Management of the Portfolio..... 9
How to Buy Shares............... 13
How to Redeem Shares............ 15
Dividends, Distributions and
Taxes......................... 16
Performance Information......... 18
General Information............. 19
Appendix........................ 21
THE INFINITY MUTUAL FUNDS, INC.
BEA SHORT DURATION PORTFOLIO
BEA CLIENT SHARES, BEA INVESTOR SHARES AND BEA SERVICE SHARES
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
MAY 1, 1996
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of the
BEA Short Duration Portfolio (the "Portfolio") of The Infinity Mutual Funds,
Inc. (the "Fund"), dated May 1, 1996, as it may be revised from time to time. To
obtain a copy of the Portfolio's Prospectus, please write to the Fund at 3435
Stelzer Road, Columbus, Ohio 43219-3035. This Statement of Additional
Information relates only to the Portfolio and not to any of the Fund's other
portfolios.
BEA Associates (the "Adviser") serves as the Portfolio's investment
adviser.
Concord Holding Corporation (the "Administrator") serves as the
Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned
subsidiary of the Administrator, serves as the distributor of the Portfolio's
shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies...............B-2
Management of the Fund.....................................B-14
Management Arrangements....................................B-17
Purchase and Redemption of Shares..........................B-21
Determination of Net Asset Value...........................B-23
Performance Information....................................B-25
Dividends, Distributions and Taxes.........................B-26
Portfolio Transactions.....................................B-27
Information About the Portfolio............................B-28
Custodian, Transfer and Dividend Disbursing
Agent, Counsel and Independent Auditors..................B-31
Appendix...................................................B-32
Financial Statements.......................................B-37
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Description
of the Portfolio."
Portfolio Securities
Bank Obligations. Domestic commercial banks organized under Federal
law are supervised and examined by the Comptroller of the Currency and are
required to be members of the Federal Reserve System and to have their deposits
insured by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic
banks organized under state law are supervised and examined by state banking
authorities but are members of the Federal Reserve System only if they elect to
join. In addition, state banks whose certificates of deposit ("CDs") may be
purchased by the Portfolio are insured by the Bank Insurance Fund administered
by the FDIC (although such insurance may not be of material benefit to the
Portfolio, depending upon the principal amount of the CDs of each bank held by
the Portfolio) and are subject to Federal examination and to a substantial body
of Federal law and regulation. As a result of Federal and state laws and
regulations, domestic branches of domestic banks, among other things, are
generally required to maintain specified levels of reserves, and are subject to
other supervision and regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic and foreign branches of foreign
banks, such as CDs and time deposits ("TDs"), may be general obligations of the
parent banks in addition to the issuing branch, or may be limited by the terms
of a specific obligation or governmental regulation. Such obligations are
subject to different risks than are those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. Foreign branches and subsidiaries are not necessarily subject to the
same or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. In addition, Federal branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may be required to: (1) pledge to the regulator, by depositing assets
with a designated bank within the state, a certain percentage of their assets as
fixed from time to time by the appropriate regulatory authority; and (2)
maintain assets within the state in an amount equal to a specified percentage of
the aggregate amount of liabilities of the foreign bank payable at or through
all of its agencies or branches within the state. The deposits of Federal and
State Branches generally must be insured by the FDIC if such branches take
deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Adviser carefully evaluates such investments on a
case-by-case basis.
The Portfolio may invest in short-term corporate obligations
denominated in U.S. and foreign currencies that are originated, negotiated and
structured by a syndicate of lenders ("Co-Lenders") consisting of commercial
banks, thrift institutions, insurance companies, finance companies or other
financial institutions one or more of which administers the security on behalf
of the syndicate (the "Agent Bank"). Co- Lenders may sell such securities to
third parties called "Participants." The Portfolio may invest in such securities
either by participating as a Co-Lender at origination or by acquiring an
interest in the security from a Co-Lender or a Participant (collectively,
"participation interests"). Co-Lenders and Participants interposed between the
Fund and the corporate borrower (the "Borrower"), together with Agent Banks, are
referred herein as "Intermediate Participants." The Portfolio also may purchase
a participation interest in a portion of the rights of an Intermediate
Participant, which would not establish any direct relationship between the
Portfolio and the Borrower. In such cases, the Portfolio would be required to
rely on the Intermediate Participant that sold the participation interest not
only for the enforcement of the Portfolio's rights against the Borrower but also
for the receipt and processing of payments due to the Portfolio under the
security. Because it may be necessary to assert through an Intermediate
Participant such rights as may exist against the Borrower, in the event the
Borrower fails to pay principal and interest when due, the Portfolio may be
subject to delays, expenses and risks that are greater than those that would be
involved if the Portfolio could enforce its rights directly against the
Borrower. Moreover, under the terms of a participation interest, the Portfolio
may be regarded as a creditor of the Intermediate Participant (rather than of
the Borrower), so that the Fund may also be subject to the risk that the
Intermediate Participant may become insolvent. Similar risks may arise with
respect to the Agent Bank if, for example, assets held by the Agent Bank for the
benefit of the Portfolio were determined by the appropriate regulatory authority
or court to be subject to the claims of the Agent Bank's creditors. In such
cases, the Portfolio might incur certain costs and delays in realizing payment
in connection with the participation interest or suffer a loss of principal
and/or interest. Further, in the event of the bankruptcy or insolvency of the
Borrower, the obligation of the Borrower to repay the loan may be subject to
certain defenses that can be asserted by such Borrower as a result of improper
conduct by the Agent Bank or Intermediate Participant.
Repurchase Agreements. The Portfolio will enter into repurchase
agreements only with domestic banks (including foreign branches and subsidiaries
of domestic banks), foreign banks or broker/dealers, or primary government
securities dealers reporting to the Federal Reserve Bank of New York, with
respect to securities in which the Fund may invest or government securities
regardless of their remaining maturities, and will require that additional
securities be deposited with it if the value of the securities purchased should
decrease below resale price. The Fund's custodian or sub-custodian employed in
connection with third-party repurchase transactions will have custody of, and
will hold in a segregated account, securities acquired by the Portfolio under a
repurchase agreement. In connection with its third-party repurchase
transactions, the Fund will employ only eligible sub-custodians which meet the
requirements set forth in Section 17(f) of the Investment Company Act of 1940,
as amended (the "1940 Act") and the rules thereunder. Repurchase agreements are
considered by the staff of the Securities and Exchange Commission to be loans by
the Portfolio. The Adviser will monitor on an ongoing basis the value of the
collateral to assure that it always equals or exceeds the repurchase price. The
Portfolio will consider on an ongoing basis the creditworthiness of the
institutions with which it enters into repurchase agreements.
Municipal Obligations. Municipal obligations are classified as general
obligation bonds, revenue bonds and notes. General obligation bonds are secured
by the issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenue derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source, but not from the
general taxing power. Industrial development bonds, in most cases, are revenue
bonds and generally do not carry the pledge of the credit of the issuing
municipality, but generally are guaranteed by the corporate entity on whose
behalf they are issued. Notes are short-term instruments which are obligations
of the issuing municipalities or agencies and are sold in anticipation of a bond
sale, collection of taxes or receipt of other revenues. Municipal obligations
include municipal lease/purchase agreements which are similar to installment
purchase contracts for property or equipment issued by municipalities. Municipal
obligations bear fixed, floating or variable rates of interest, which are
determined in some instances by formulas under which the municipal obligation's
interest rate will change directly or inversely to changes in interest rates or
an index, or multiples thereof, in many cases subject to a maximum and minimum.
Certain municipal obligations are subject to redemption at a date earlier than
their stated maturity pursuant to call options, which may be separated from the
related municipal obligation and purchased and sold separately. The Portfolio
will invest in municipal obligations, the ratings of which correspond with the
ratings of other permissible Portfolio investments.
Convertible Securities. The Portfolio also may purchase convertible
securities. In general, the market value of a convertible security is the higher
of its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., the value of the underlying shares of common stock if
the security is converted). As a fixed-income security, the market value of a
convertible security generally increases when interest rates decline and
generally decreases when interest rates rise. However, the price of a
convertible security also is influenced by the market value of the security's
underlying common stock. Thus, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
Investment Company Securities. The Portfolio may invest in securities
issued by other investment companies which principally invest in securities of
the type in which the Portfolio invests. Under the 1940 Act, the Portfolio's
investments in such securities, subject to certain exceptions, currently are
limited to (i) 3% of the total voting stock of any one investment company, (ii)
5% of the Portfolio's total assets with respect to anyone investment company and
(iii) 10% of the Portfolio's total assets in the aggregate. Investments in the
securities of other investment companies may involve duplication of advisory
fees and certain other expenses.
Mortgage-Related Securities
Government Agency Securities. Mortgage-related securities issued by
the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Government Related Securities. Mortgage-related securities issued by
the Federal National Mortgage Association ("FNMA") include FNMA Guaranteed
Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are
solely the obligations of the FNMA and are not backed by or entitled to the full
faith and credit of the Untied States. The FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to timely payment of principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of
the United States created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. The FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When the FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
Illiquid Securities. Where a substantial market of qualified
institutional buyers has developed for certain restricted securities purchased
by the Portfolio pursuant to Rule 144A under the Securities Act of 1933, as
amended, the Fund intends to treat such securities as liquid securities in
accordance with procedures approved by the Fund's Board. Because it is not
possible to predict with assurance how the market for specific restricted
securities sold pursuant to Rule 144A will develop, the Fund's Board has
directed the Adviser to monitor carefully each Portfolio's investments in such
securities with particular regard to trading activity, availability of reliable
price information and other relevant information. To the extent that, for a
period of time, qualified institutional buyers cease purchasing restricted
securities pursuant to Rule 144A, the Portfolio's investing in such securities
may have the effect of increasing the level of illiquidity in its investment
portfolio during such period.
Forward Commitments. Securities purchased on a forward commitment or
when-issued basis are subject to changes in value (generally changing in the
same way, i.e., appreciating when interest rates decline and depreciating when
interest rates rise) based upon the public's perception of the creditworthiness
of the issuer and changes, real or anticipated, in the level of interest rates.
Securities purchased on a forward commitment or when- issued basis may expose
the Portfolio to risks because they may experience such fluctuations prior to
their actual delivery. Purchasing securities on a when-issued basis can involve
the additional risk that the yield available in the market when the delivery
takes place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the
Portfolio is fully or almost fully invested may result in greater potential
fluctuation in the value of the Portfolio's net assets and its net asset value
per share.
Management Policies. The Portfolio engages in the following practices
in furtherance of its objective.
Leveraging. The Portfolio may borrow for investment purposes. The 1940
Act requires the Portfolio 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 Portfolio may be required to sell some
of its portfolio holdings within three days to reduce the debt and restore the
300% asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. The Portfolio also may be required
to maintain minimum average balances in connection with such borrowings 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.
In certain types of repurchase agreements, there is no agreed upon
repurchase date and interest payments are calculated daily, often based on the
prevailing overnight repurchase rate. The Portfolio will maintain in a
segregated custodial account cash or 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 Securities and Exchange Commission.
The Securities and Exchange Commission views reverse repurchase transactions as
collateralized borrowings by the Portfolio. These agreements, which are treated
as if reestablished each day, are expected to provide the Portfolio with a
flexible borrowing tool.
Options Transactions. The Portfolio may engage in options
transactions, such as purchasing or writing covered call or put options. The
principal reason for writing covered call options is to realize, through the
receipt of premiums, a greater return than would be realized on the Portfolio's
securities alone. In return for a premium, the writer of a covered call option
forfeits the right to any appreciation in the value of the underlying security
above the strike price for the life of the option (or until a closing purchase
transaction can be effected). Nevertheless, the call writer retains the risk of
a decline in the price of the underlying security. Similarly, the principal
reason for writing covered put options is to realize income in the form of
premiums. The writer of a covered put option accepts the risk of a decline in
the price of the underlying security. The size of the premiums that the
Portfolio may receive may be adversely affected as new or existing institutions,
including other investment companies, engage in or increase their option-writing
activities.
Options written ordinarily will have expiration dates between one and
nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
time the options are written. In the case of call options, these exercise prices
are referred to as "in-the-money," "at-the-money" and "out-of-the- money,"
respectively. The Portfolio may write (a) in-the-money call options when the
Adviser expects that the price of the underlying security will remain stable or
decline moderately during the option period, (b) at-the-money call options when
the Adviser expects that the price of the underlying security will remain stable
or advance moderately during the option period and (c) out-of-the-money call
options when the Adviser expects that the premiums received from writing the
call option plus the appreciation in market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the- money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the Portfolio's obligation as the writer of an option
continues, the Portfolio may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring the Portfolio to deliver, in the
case of a call, or take delivery of, in the case of a put, the underlying
security against payment of the exercise price. This obligation terminates when
the option expires or the Portfolio effects a closing purchase transaction. The
Portfolio can no longer effect a closing purchase transaction with respect to an
option once it has been assigned an exercise notice.
While it may choose to do otherwise, the Portfolio generally will
purchase or write only those options for which the Adviser believes there is an
active secondary market so as to facilitate closing transactions. There is no
assurance that sufficient trading interest to create a liquid secondary market
on a securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may exist. A
liquid secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading activity or
order flow, or other unforeseen events, at times have rendered certain clearing
facilities inadequate and resulted in the institution of special procedures,
such as trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance that
similar events, or events that otherwise may interfere with the timely execution
of customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If as a covered call option
writer the Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
Futures Contracts and Options on Futures Contracts. Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of options on
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the time of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the Portfolio.
Foreign Currency Transactions. If the Portfolio enters into a foreign
currency transaction, it will deposit, if required by applicable regulations,
with the Fund's custodian cash or readily marketable securities in a segregated
account of the Portfolio in an amount at least equal to the value of the
Portfolio's total assets committed to the consummation of the forward contract.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account so that the value of
the account will equal the amount of the Portfolio's commitment with respect to
the contract.
At or before the maturity of a forward contract, the Portfolio either
may sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Portfolio will obtain, on the
same maturity date, the same amount of the currency which it is obligated to
deliver. If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio, at the time of execution of the
offsetting transaction, will incur a gain or loss to the extent movement has
occurred in forward contract prices. Should forward prices decline during the
period between the Portfolio's entering into a forward contract for the sale of
a currency and the date it enters into an offsetting contract for the purchase
of the currency, the Portfolio will realize a gain to the extent the price of
the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Portfolio will suffer a
loss to the extent the price of the currency it has agreed to purchase exceeds
the price of the currency it has agreed to sell.
The cost to the Portfolio of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because transactions in currency
exchange usually are conducted on a principal basis, no fees or commissions are
involved. The use of forward currency exchange contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does establish a
rate of exchange that can be achieved in the future. If a devaluation generally
is anticipated, the Portfolio may not be able to contract to sell the currency
at a price above the devaluation level it anticipates. The requirements for
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"), may cause the Portfolio to restrict the degree
to which it engages in currency transactions. See "Dividends, Distributions and
Taxes."
Future Developments. The Portfolio may take advantage of opportunities
in the area of options and futures contracts and options on futures contracts
and any other derivative investments which are not presently contemplated for
use by the Portfolio or which are not currently available but which may be
developed, to the extent such opportunities are both consistent with the
Portfolio's investment objective and legally permissible for the Portfolio.
Before entering into such transactions or making any such investment, the
Portfolio will provide appropriate disclosure in its prospectus.
Lending Portfolio Securities. To a limited extent, the Portfolio may
lend its portfolio securities to brokers, dealers and other financial
institutions, provided it receives cash collateral which at all times is
maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, the Portfolio can
increase its income through the investment of the cash collateral. For the
purposes of this policy, the Fund considers collateral consisting of U.S.
Government securities or irrevocable letters of credit issued by banks whose
securities meet the standards for investment by the Portfolio to be the
equivalent of cash. Such loans may not exceed 33-1/3% of the Portfolio's total
assets. From time to time, the Fund may pay a part of the interest earned from
the investment of collateral received for securities loaned to the borrower or a
third party which is unaffiliated with the Fund, and which is acting as a
"placing broker," in an amount determined by the Board of Directors to be
reasonable and based solely on services rendered.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Portfolio must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Portfolio must be
able to terminate the loan at any time; (4) the Portfolio must receive
reasonable interest on the loan, as well as any interest or other distributions
payable on the loaned securities, and any increase in market value; and (5) the
Portfolio may pay only reasonable custodian fees in connection with the loan.
These conditions may be subject to future modification.
Short-Selling. The Portfolio may engage in short- selling. Until the
Portfolio replaces a borrowed security in connection with a short sale, the
Portfolio will: (a) maintain daily a segregated account, containing cash, cash
equivalents or U.S. Government securities, at such a level that the amount
deposited in the account plus the amount deposited with the broker as collateral
always equals the current value of the security sold short; or (b) otherwise
cover its short position.
Investment Restrictions
The Fund has adopted investment restrictions numbered 1 through 7 as
fundamental policies of the Portfolio. These restrictions cannot be changed
without approval by the holders of a majority (as defined in the 1940 Act) of
the outstanding voting shares of the Portfolio. Investment restrictions numbered
8 through 12 are not fundamental policies and may be changed by a vote of a
majority of the Directors at any time. The Portfolio may not:
1. Invest in commodities, except that the Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
2. Purchase, hold or deal in real estate, or oil, gas or other mineral
leases or exploration or development programs, but the Portfolio may purchase
and sell securities that are secured by real estate or issued by companies that
invest or deal in real estate. In particular, the Portfolio may purchase
mortgage-backed securities and real estate investment trust securities.
3. Borrow money, except to the extent permitted under the Act. For
purposes of this investment restriction, the entry into options, forward
contracts, futures contracts, including those relating to indexes, and options
on futures contracts or indexes shall not constitute borrowing.
4. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, the Portfolio may
lend its securities in an amount not to exceed 33-1/3% of the value of its total
assets. Any loans of portfolio securities will be made according to guidelines
established by the Securities and Exchange Commission and the Fund's Board of
Directors.
5. Act as an underwriter of securities of other issuers, except to the
extent the Fund may be deemed an underwriter under the Securities Act of 1933,
as amended, by virtue of disposing of portfolio securities.
6. Invest more than 25% of its assets in the securities of issuers in
any single industry, provided there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
7. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act). The Portfolio's investments permitted under Investment
Restriction Nos. 1, 3, 9 and 10 are not considered senior securities for
purposes of this investment restriction.
8. Invest in the securities of a company for the purpose of exercising
management or control, but the Portfolio will vote the securities it owns in its
portfolio as a shareholder in accordance with its views.
9. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with writing covered put and call
options and the purchase of securities on a when-issued or forward commitment
basis and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
10. Purchase, sell or write puts, calls or combinations thereof,
except as described in the Portfolio's Prospectus and this Statement of
Additional Information.
11. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid, if, in
the aggregate, more than 15% of the value of the Portfolio's net assets would be
so invested.
12. Invest in securities of other investment companies, except to the
extent permitted under the 1940 Act.
In addition, the Portfolio has adopted the following policies as
non-fundamental policies: (a) the Portfolio will not purchase securities on
margin, but the Portfolio may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of securities; (b) other than in
connection with short sales against-the-box, the dollar amount of short sales at
any one time will not exceed 25% of the net assets of the Portfolio, and the
value of securities of any one issuer in which the Portfolio is short will not
exceed the lesser of 2% of the value of the Portfolio's net assets or 2% of the
securities of any class of any single issuer. In addition, such short sales will
be made only in those securities which are fully listed on a national securities
exchange; (c) the Portfolio will not purchase warrants, valued at the lower of
cost or market, in excess of 5% of the value of the Portfolio's net assets.
Included in such amount, but not to exceed 2% of the value of the Portfolio's
net assets, are warrants which are not listed on the New York or American Stock
Exchange. Warrants acquired by the Portfolio in units or attached to securities
are not subject to such restrictions; and (d) the Portfolio will not invest in
real estate limited partnership interests.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values or
assets will not constitute a violation of that restriction.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of Portfolio shares in certain states.
Should the Fund determine that a commitment is no longer in the best interests
of the Portfolio and its shareholders, the Fund reserves the right to revoke the
commitment by terminating the sale of Portfolio shares in the state involved.
MANAGEMENT OF THE FUND
Directors and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Director who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
Directors of the Fund
*WILLIAM B. BLUNDIN, Chairman of the Board of Directors. An Employee of
the Administrator. Mr. Blundin also is an officer of other
investment companies administered by the Administrator or its
affiliates and President and Chief Executive Officer of Vista
Broker/Dealer Services, Inc. and BNY Hamilton Distributors,
Inc., registered broker/dealers. He is 58 years old and his
address is 125 West 55th Street, New York, New York 10019.
NORMA A. COLDWELL, Director. International Economist and Consultant;
Executive Vice President of Coldwell Financial Consultants;
Trustee and Treasurer of Meridian House International
(International Education and Cultural Group); Member of the
Board of Advisors of Meridian International Center and
Emerging Capital Markets, S.A. (Montevideo, Uruguay); formerly
Chief International Economist of Riggs National Bank,
Washington, D.C. She is 70 years old and her address is 3330
Southwestern Boulevard, Dallas, Texas 75225.
RICHARD H. FRANCIS, Director. Former Executive Vice President
and Chief Financial Officer of Pan American World
Airways, Inc. (currently, debtor-in-possession under the
U.S. Bankruptcy Code), March 1988 to October 1991;
Senior Vice President and Chief Financial Officer of
American Standard Inc., 1960 to March 1988. Mr. Francis
is a director of Allendale Mutual Insurance and The
Indonesia Fund, Inc. He is 63 years old and his address
is 40 Grosvenor Road, Short Hills, New Jersey 07078.
WILLIAM W. McINNES, Director. Private investor. From July 1978
to February 1993, he was Vice President--Finance and
Treasurer of Hospital Corp. of America. He is also a
director of Gulf South Medical Supply and Diversified
Trust Co. He is 47 years old and his address is 116
30th Avenue South, Nashville, Tennessee 37212.
ROBERT A. ROBINSON, Director. Private investor. Since 1991,
President Emeritus, and from 1968 to 1991, President of
The Church Pension Group, NYC. From 1956 to 1966,
Senior Vice President of Colonial Bank & Trust Co. He
is also a director of Mariner Institutional Funds, Inc.,
Mariner Tax-Free Institutional Funds, Inc., UST Master
Funds, UST Master Tax Exempt Funds, H.B. and F.H. Bugher
Foundation, Morehouse-Barlow Co. Publishers, The
Canterbury Cathedral Trust in America, The Living Church
Foundation and Hoosac School. He is 70 years old and
his address is 2 Hathaway Common, New Canaan,
Connecticut 06840.
Officers of the Fund
GEORGE O. MARTINEZ, President and Secretary. Senior Vice President
and Director of Legal and Compliance Services with BISYS Fund
Services, Inc., an affiliate of the Administrator, since April
1995, and an officer of other investment companies
administered by the Administrator or its affiliates. Prior
thereto, he was Vice President and Associate General Counsel
with Alliance Capital Management, L.P. He is 36 years old and
his address is 3435 Stelzer Road, Columbus, Ohio 43219.
JEFFREY C. CUSICK, Vice President and Assistant Secretary. An employee
of BISYS Fund Services, Inc., since July 1995, and an officer
of other investment companies administered by the
Administrator or its affiliates. From September 1993 to July
1995, he was Assistant Vice President and, from 1989 to
September 1993, he was Manager--Client Services, of Federated
Administrative Services. He is 37 years old and his address is
3435 Stelzer Road, Columbus, Ohio 43219.
WILLIAM TOMKO, Vice President. An employee of BISYS Fund Services,
Inc., an affiliate of the Administrator, and an officer of
other investment companies administered by the Administrator
or its affiliates. He is 37 years old and his address is
3435 Stelzer Road, Columbus, Ohio 43219.
ANN E. BERGIN, Vice President. An employee of the Administrator
and an officer of other investment companies
administered by the Administrator or its affiliates.
She is 35 years old and her address is 125 West 55th
Street, New York, New York 10019.
MARTIN R. DEAN, Treasurer. An employee of BISYS Fund Services, Inc.,
since May 1994, and an officer of other investment companies
administered by the Administrator or its affiliates. Prior
thereto, he was a Senior Manager of KPMG Peat Marwick LLP. He
is 32 years old and his address is 3435 Stelzer Road,
Columbus, Ohio 43219.
ROBERT L. TUCH, Assistant Secretary. An employee of BISYS Fund
Services, Inc., since June 1991, and an officer of other
investment companies administered by the Administrator or its
affiliates. From July 1990 to June 1991, he was Vice President
and Associate General Counsel with National Securities
Research Corp. Prior thereto, he was an Attorney with the
Securities and Exchange Commission. He is 44 years old and his
address is 3435 Stelzer Road, Columbus, Ohio 43219.
ALAINA METZ, Assistant Secretary. An employee of BISYS Fund
Services, Inc. and an officer of other investment
companies administered by the Administrator or its
affiliates. She is 28 years old and her address is 3435
Stelzer Road, Columbus, Ohio 43219.
For so long as the Portfolio Distribution Plan described in the
section captioned "Management Arrangements--Distribution Plan" remains in
effect, the Directors of the Fund who are not "interested persons" of the Fund,
as defined in the 1940 Act, will be selected and nominated by the Directors who
are not "interested persons" of the Fund.
Directors and officers of the Fund, as a group, owned less than 1% of
the Portfolio's shares of Common Stock outstanding on April 1, 1996.
The Fund does not pay any remuneration to its officers and Directors
other than fees and expenses to those Directors who are not directors, officers
or employees of the Adviser or Administrator or any of their affiliates. The
aggregate amount of compensation paid to each such Director by the Fund for year
ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Total Compensation
Aggregate From Fund and
Name of Board Compensation from Fund Complex Paid
Member Fund* to Board Member*
<S> <C> <C>
Norma A. Coldwell $_______ $_______
Richard H. Francis $_______ $_______
William W. McInnes $_______ $_______
Robert A. Robinson $_______ $_______
</TABLE>
- - ------------------------------
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $_______ for all Directors as a group.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Management
of the Portfolio."
Investment Advisory Agreement. The Adviser provides investment
advisory services pursuant to the Investment Advisory Agreement (the
"Agreement") dated December 21, 1990, as amended, with the Fund. The Agreement
is subject to annual approval by (i) the Fund's Board of Directors or (ii) vote
of a majority (as defined in the 1940 Act) of the outstanding voting securities
of the Portfolio, provided that in either event the continuance also is approved
by a majority of the Board of Directors who are not "interested persons" (as
defined in the 1940 Act) of the Fund or the Adviser, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Board of
Directors, including a majority of the Directors who are not "interested
persons" of any party to the Agreement, last approved the Agreement at a meeting
held on October 25, 1995. Shareholders approved the Agreement on November 30,
1992. The Agreement is terminable without penalty, on 60 days' notice, by the
Fund's Board of Directors or by vote of the holders of a majority of the
Portfolio's shares, or, on not less than 90 days' notice, by the Adviser. The
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act). Prior to December 21, 1990, the Portfolio's investment
adviser was BEA Associates, Inc., the predecessor of the Adviser.
The Adviser is a New York general partnership comprised of Credit
Suisse Capital Corporation ("CSCC"), an indirect, wholly-owned subsidiary of
Credit Suisse, and Basic Appraisals, Inc. (formerly known as BEA Associates,
Inc.). The Adviser is majority-owned by CSCC and is governed by a board of
directors, which is controlled by CSCC, and an executive committee which runs
its day-to-day affairs and advisory activities.
The following persons are directors, executive committee members
and/or senior officers of the Adviser: Mark Arnold, Chief Operating Officer,
Director, Co-Chairman of Executive Committee and Managing Director; Emilio
Bassini, Chief Financial Officer, Executive Committee Member and Managing
Director; Peter Bosshard, Vice Chairman of the Board of Directors and Executive
Committee Member; Hans Geiger, Director; Jeffrey A. Geller, Executive Committee
Member and Managing Director; John B. Hurford, Vice Chairman of Executive
Committee and Managing Director; Hermann Maurer, Director; Michael F. Orr,
Director; William W. Priest, Jr., Chief Executive Officer, Secretary, Director,
Co-Chairman of Executive Committee and Managing Director; Daniel Regoletti,
Director; William R. Wirth, Chairman of the Board of Directors and Executive
Committee Member; and Albert L. Zesiger, Honorary Chairman of Executive
Committee and Managing Director.
The Adviser provides investment advisory services in accordance with
the stated policies of the Portfolio, subject to the approval of the Fund's
Board of Directors. The Adviser provides the Portfolio with Investment Officers
who are authorized by the Board of Directors to execute purchases and sales of
securities. The Chief Investment Officer is Mark Silverstein. The Adviser also
maintains a research department with a professional staff of portfolio managers
and securities analysts who provide research services for the Portfolio as well
as for other funds advised by the Adviser. All purchases and sales are reported
for the Board's review at the meeting subsequent to such transactions.
As compensation for the Adviser's services, the Portfolio has agreed
to pay the Adviser a monthly fee at the annual rate of .15 of 1% of the value of
the Portfolio's average daily net assets. For the fiscal years ended December
31, 1993, 1994 and 1995, the advisory fees paid to the Adviser by the Portfolio
amounted to $221,912, $231,749 and $177,405, respectively.
Administration Agreement. The Administrator provides certain
administrative services pursuant to the Administration Agreement (the
"Administration Agreement") dated March 29, 1995, with the Fund. The
Administration Agreement will continue until December 31, 1997 and thereafter is
subject to annual approval by (i) the Fund's Board of Directors or (ii) vote of
a majority (as defined in the 1940 Act) of the outstanding voting securities of
the Portfolio, provided that in either event the continuance also is approved by
a majority of the Directors who are not "interested persons" (as defined in the
1940 Act) of the Fund or the Administrator, by vote cast in person at a meeting
called for the purpose of voting such approval. The Administration Agreement was
last approved by the Fund's Board of Directors, including a majority of the
Directors who are not "interested persons" of any party to the Administration
Agreement, at a meeting held on January 26, 1995. The Administration Agreement
is terminable without penalty, at any time if for cause, by the Fund's Board of
Directors or by vote of the holders of a majority of the Portfolio's outstanding
voting securities, or, on not less than 90 days' notice, by the Administrator.
The Administration Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
As compensation for the Administrator's services, the Portfolio has
agreed to pay the Administrator a monthly fee at the annual rate of .12 of 1% of
the value of the Portfolio's average daily net assets. For the fiscal years
ended December 31, 1993, 1994 and 1995, the administration fees paid to the
Administrator amounted to $177,530, $185,399 and $141,924, respectively.
Distribution Agreement. The Distributor acts as the exclusive
distributor of the Portfolio's shares on a best efforts basis pursuant to a
Distribution Agreement (the "Distribution Agreement") dated March 29, 1995 with
the Fund. Shares are sold on a continuous basis by the Distributor as agent,
although the Distributor is not obliged to sell any particular amount of shares.
No compensation is payable by the Portfolio to the Distributor for its
distribution services. The term and termination provisions of the Distribution
Agreement are substantially similar to those of the Administration Agreement
with the Administrator discussed above.
Special Investors Services Plan. (Applicable only with respect to the
BEA Investor and BEA Service Shares). The Fund has adopted a Special Investors
Services Plan (the "Special Services Plan") pursuant to which the Fund has
agreed to pay one or more financial institutions, securities dealers and other
industry professionals, including BEA Associates, a fee at the annual rate of up
to .15% of the value of the average daily net assets of the BEA Investor Class
and BEA Service Class for certain services provided to the beneficial holders of
BEA Investor Shares and BEA Service Shares.
A quarterly report of the amounts expended under the Special Services
Plan, and the purposes for which such expenditures were incurred, must be made
to the Directors for their review. In addition, the Special Services Plan
provides that it may not be amended without approval of the Board of Directors,
and by the Directors who are neither "interested persons" (as defined in the
1940 Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Special Services Plan, by vote cast in person at a meeting
called for the purpose of considering such amendments. The Special Services Plan
is subject to annual approval by such vote cast in person at a meeting called
for the purpose of voting on the Special Services Plan. The Special Services
Plan was last so approved on October 25, 1995. The Special Services Plan is
terminable at any time by vote of a majority of the Directors who are not
"interested persons" and who have no direct or indirect financial interest in
the operation of the Special Services Plan.
For the fiscal year ended December 31, 1995, the Portfolio incurred
pursuant to the Special Services Plan $3,629 with respect to the BEA Service
Class and $48,379 with respect to the BEA Investor Class, of which $29,848 was
waived with respect to the BEA Investor Class.
Distribution Plan. (Applicable only with respect to the BEA Service
Shares). Rule 12b-1 (the "Rule") adopted by the Securities and Exchange
Commission under the 1940 Act provides, among other things, that an investment
company may bear expenses of distributing its shares only pursuant to a plan
adopted in accordance with the Rule. The Fund's Directors have adopted such a
plan (the "Distribution Plan") with respect to the BEA Service Shares. The
Fund's Directors believe that there is a reasonable likelihood that the
Distribution Plan will benefit the Portfolio and the holders of its BEA Service
Shares. In some states, banks or other institutions effecting transactions in
BEA Service Shares may be required to register as dealers pursuant to state law.
A quarterly report of the amounts expended under the Distribution
Plan, and the purposes for which such expenditures were incurred, must be made
to the Directors for their review. In addition, the Distribution Plan provides
that it may not be amended to increase materially the costs which holders of the
BEA Service Shares may bear for distribution pursuant to the Distribution Plan
without approval of such shareholders and that other material amendments of the
Distribution Plan must be approved by the Board of Directors, and by the
Directors who are neither "interested persons" (as defined in the 1940 Act) of
the Fund nor have any direct or indirect financial interest in the operation of
the Distribution Plan or in the related Distribution Plan agreements, by vote
cast in person at a meeting called for the purpose of considering such
amendments. The Distribution Plan and related agreements are subject to annual
approval by such vote cast in person at a meeting called for the purpose of
voting on the Distribution Plan. The Distribution Plan was last so approved on
October 25, 1995. The Distribution Plan is terminable at any time by vote of a
majority of the Directors who are not "interested persons" and who have no
direct or indirect financial interest in the operation of the Distribution Plan
or in the Distribution Plan agreements or by vote of a majority of the holders
of BEA Service Shares. A Distribution Plan agreement is terminable without
penalty, at any time, by such vote of the Directors, upon not more than 60 days'
written notice to the parties to such agreement or by vote of the holders of a
majority of the Portfolio's BEA Service Shares. A Distribution Plan agreement
will terminate automatically in the event of its assignment (as defined in the
1940 Act).
For the fiscal year ended December 31, 1995, the Portfolio incurred
$6,047 pursuant to the Distribution Plan with respect to the BEA Service Class.
Expenses. All expenses incurred in the operation of the Fund are borne
by the Fund, except to the extent specifically assumed by others. The expenses
borne by the Fund include: organizational costs, taxes, interest, brokerage fees
and commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory and administration
fees, Special Services Plan and Distribution Plan fees, charges of custodians,
transfer and dividend disbursing agents' fees, certain insurance premiums,
industry association fees, auditing and legal expenses, costs of maintaining
corporate existence, costs of independent pricing services, costs attributable
to investor services (including, without limitation, telephone and personnel
expenses), costs of calculating the net asset value of the Portfolio's shares,
costs of shareholders' reports and corporate meetings, costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders, and any extraordinary
expenses. Expenses attributable to the Portfolio are charged against the assets
of the Portfolio; other expenses of the Fund are allocated among the portfolios
on the basis determined by the Board of Directors, including, but not limited
to, proportionately in relation to the net assets of each portfolio.
The Adviser and Administrator have agreed that if, in any fiscal year,
the aggregate expenses of the Portfolio, exclusive of taxes, brokerage, interest
on borrowings and (with the prior written consent of the necessary state
securities commissions) extraordinary expenses, but including the administration
fees, exceed the expense limitation of any state having jurisdiction over the
Portfolio, the Fund may deduct from the payment to be made to the Administrator
under the Administration Agreement, or the Adviser and/or Administrator will
bear, such excess expense to the extent required by state law. Such deduction or
payment, if any, will be estimated daily, and reconciled and effected or paid,
as the case may be, on a monthly basis.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "How to Buy
Shares" and "How to Redeem Shares."
"Sweep" Program. Portfolio shares may be purchased through the "sweep"
program established for certain customers of the Adviser under which a portion
of such customers' accounts with the Adviser may be automatically invested in
the Portfolio. The customer becomes the beneficial owner of specific shares
which may be purchased, redeemed and held by the Adviser in accordance with the
customer's instructions and may fully exercise all rights as a shareholder. The
shares will be held by BISYS Fund Services, Inc. (the "Transfer Agent") in
book-entry form. A statement with regard to the customer's shares is generally
supplied to the customer monthly, and confirmations of all transactions for the
account of the customer ordinarily are available to the customer promptly on
request. In addition, each customer is sent proxies, periodic reports and other
information from the Fund with regard to shares of the Portfolio. The customer's
shares are fully assignable and may be encumbered by the customer. The "sweep"
agreement can be terminated by the customer at any time, without affecting its
beneficial ownership of the shares.
To obtain the benefits of this service, a customer typically is
required to maintain a minimum balance subject to a monthly maintenance fee, or
a higher minimum balance for which no monthly fee would be imposed. In either
case, a penalty fee is imposed if the minimum should not be maintained. In
general, the automatic investment in the Portfolio's shares occurs on the same
day that withdrawals are made by the Adviser, at the next determined net asset
value after the order is received.
All agreements which relate to the service are with the Adviser.
Neither the Distributor nor the Fund is a party to any of those agreements and
no part of the compensation received by the Adviser flows to the Fund or to the
Distributor or to any of their affiliates, either directly or indirectly.
Further information concerning this program and any related charges or fees is
provided by the Adviser prior to any purchase of the Portfolio's shares. Any
fees charged by the Adviser effectively reduces the Portfolio's yield for those
customers.
Terms of Purchase. The Fund reserves the right to reject any purchase
order and to change the amount of the minimum investment and subsequent
purchases in the Portfolio.
Using Federal Funds. The Transfer Agent or the Fund may attempt to
notify the investor upon receipt of checks drawn on banks that are not members
of the Federal Reserve System as to the possible delay in conversion into
Federal Funds and may attempt to arrange for a better means of transmitting the
money.
Stock Certificates; Signatures. Any certificate representing Portfolio
shares to be redeemed must be submitted with the redemption request. Written
redemption requests must be signed by each shareholder, including each holder of
a joint account, and each signature must be guaranteed. Signatures on endorsed
certificates submitted for redemption also must be guaranteed. The Fund's
Transfer Agent has adopted standards and procedures pursuant to which
signature-guarantees in proper form generally will be accepted from domestic
banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations.
If the signature is guaranteed by a broker or dealer, such broker or dealer must
be a member of a clearing corporation and maintain net capital of at least
$100,000. Guarantees must be signed by an authorized signatory of the guarantor
and "Signature-Guaranteed" must appear with the signature.
Redemption Commitment. The Portfolio has committed itself to pay in
cash all redemption requests by any shareholder of record, limited in amount
during any 90-day period to the lesser of $250,000 or 1% of the value of the
Portfolio's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of Directors reserves the right to make payments in whole or in part in
securities or other assets in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in the same
manner as the Portfolio is valued. If the recipient sold such securities,
brokerage charges would be incurred.
Suspension of Redemptions. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closing), (b) when
trading in the markets the Portfolio normally utilizes is restricted, or when an
emergency exists as determined by the Securities and Exchange Commission so that
disposal of the Portfolio's investments or determination of its net asset value
is not reasonably practicable, or (c) for such other periods as the Securities
and Exchange Commission by order may permit to protect the Portfolio's
shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "How to Buy
Shares."
Valuation of Portfolio Securities. Substantially all of the
Portfolio's investments (including short-term investments) are valued each
business day by one or more independent pricing services (the "Service")
approved by the Board of Directors. Securities valued by the Service for which
quoted bid prices in the judgment of the Service are readily available and are
representative of the bid side of the market are valued at the mean between the
quoted bid prices (as obtained by the Service from dealers in such securities)
and asked prices (as calculated by the Service based upon its evaluation of the
market for such securities). Other investments valued by the Service are carried
at fair value as determined by the Service, based on methods which include
consideration of: yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. Short-term investments are not valued by the Service and are carried
at amortized cost, which approximate value. Other investments that are not
valued by the Service are valued at the average of the most recent bid and asked
prices in the market in which such investments are primarily traded, or at the
last sales price for securities traded primarily on an exchange or the national
securities market. In the absence of reported sales of investments traded
primarily on an exchange or the national securities market, the average of the
most recent bid and asked prices is used. Bid price is used when no asked price
is available. Any assets or liabilities initially expressed in terms of foreign
currency will be translated into dollars at the midpoint of the New York
interbank market spot exchange rate as quoted on the day of such translation by
the Federal Reserve Bank of New York or if no such rate is quoted on such date,
at the exchange rate previously quoted by the Federal Reserve Bank of New York
or at such other quoted market exchange rate as may be determined to be
appropriate by the Adviser. Expenses and fees, including the management fee, are
accrued daily and taken into account for the purpose of determining the net
asset value of Portfolio shares.
Restricted securities, as well as securities or other assets for which
market quotations are not readily available, or are not valued by a pricing
service approved by the Board of Directors, are valued at fair value as
determined in good faith by the Board of Directors. The Board of Directors will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Directors generally will take the
following factors into consideration: restricted securities which are, or are
convertible into, securities of the same class of securities for which a public
market exists usually will be valued at market value less the same percentage
discount at which purchased. This discount will be revised periodically by the
Board of Directors if the Directors believe that it no longer reflects the value
of the restricted securities. Restricted securities not of the same class as
securities for which a public market exists usually will be valued initially at
cost. Any subsequent adjustment from cost will be based upon considerations
deemed relevant by the Board of Directors.
New York Stock Exchange and Custodian Closings. The holidays (as
observed) on which the New York Stock Exchange and Custodian are closed
currently are: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans
Day, Thanksgiving Day and Christmas Day.
PERFORMANCE INFORMATION
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Performance
Information."
Current yield is computed pursuant to a formula which operates as
follows: The amount of the Portfolio's expenses accrued for the 30-day period
(net of reimbursements) is subtracted from the amount of the dividends and
interest earned by the Portfolio during the period. That result is then divided
by the product of: (a) the average daily number of shares outstanding during the
period that were entitled to receive dividends, and (b) the maximum offering
price per share on the last day of the period less any undistributed earned
income per share reasonably expected to be declared as a dividend shortly
thereafter. The quotient is then added to 1, and that sum is raised to the 6th
power, after which 1 is subtracted. The current yield is then arrived at by
multiplying the result by 2. Current yield for the 30-day period ended December
31, 1995 was ____% for the BEA Client Shares, ____% for the BEA Service Shares
and ____% for the BEA Investor Shares. Current yield without the absorption of
certain expenses would have been ____% for the BEA Service Shares and ____% for
the BEA Investor Shares for the same period.
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased at net asset value per share with a
hypothetical $1,000 payment made at the beginning of the period (assuming the
reinvestment of dividends and distributions), dividing by the amount of the
initial investment, taking the "n"th root of the quotient (where "n" is the
number of years in the period) and subtracting 1 from the result. The average
annual total return for the 1 year and 3 year and __ day periods ended December
31, 1995 for BEA Client Shares was ____% and ____%, respectively. The average
annual total return for the 1 year and 3 year and two day periods ended December
31, 1995 for BEA Service Shares was ____% and ____%, respectively. The average
annual total return for the 1 year and 2 year and __ day periods ended December
31, 1995 for BEA Investor Shares was ____% and ____%, respectively.
Total return is calculated by subtracting the amount of the
Portfolio's net asset value per share at the beginning of a stated period from
the net asset value per share at the end of the period (after giving effect to
the reinvestment of dividends and distributions during the period), and dividing
the result by the net asset value per share at the beginning of the period. The
total return for the BEA Client Shares for the period December 10, 1992
(commencement of operations under the Portfolio's current investment objective
and management policies) through December 31, 1995 was ____%. The total return
for the BEA Service Shares for the period December 29, 1992 (date of initial
offering) through December 31, 1995 was ____%. The total return for the BEA
Investor Shares for the period November 4, 1993 (date of initial offering)
through December 31, 1995 was ____%.
DIVIDENDS, DISTRIBUTION AND TAXES
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Dividends,
Distributions and Taxes."
It is expected that the Portfolio will continue to qualify as a
"regulated investment company" under the Code, as long as such qualification is
in the best interests of its shareholders. Qualification as a regulated
investment company relieves the Portfolio from any liability for Federal income
taxes to the extent its earnings are distributed in accordance with the
applicable provisions of the Code. The term "regulated investment company" does
not imply the supervision of management or investment practices or policies by
any government agency.
Dividends from net investment income, together with distributions from
any realized short-term securities gains, generally are taxable as ordinary
income whether or not reinvested. Distributions from net realized long-term
securities gains (i.e., "capital gain distributions") generally are taxable as
long-term capital gains to a shareholder who is a citizen or resident of the
United States, regardless of the length of time the shareholder has held his
shares. Capital gain distributions are also taxable to citizens or residents of
the United States regardless whether such amounts are paid in cash or
reinvested.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the aggregate net asset value of his shares
below the cost of his investment. Such a dividend or distribution would be a
return on investment in an economic sense, although taxable as stated above. In
addition, the Code provides that if a shareholder holds shares of the Portfolio
for six months or less and has received a capital gain distribution with respect
to such shares, any loss incurred on the sale of such shares will be treated as
a long-term capital loss to the extent of the capital gain distribution
received.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gains and losses. However, a portion of the gain or loss
realized from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain financial futures and options, and certain
preferred stock) may be treated as ordinary income or loss under Section 988 of
the Code.
Under Section 1256 of the Code, gain or loss realized by the Portfolio
from certain financial futures and options transactions (other than those taxed
under Section 988 of the Code) will be treated as 60% long-term capital gain or
loss and 40% short-term capital gain or loss. Gain or loss will arise upon the
exercise or lapse of such futures and options as well as from closing
transactions. In addition, any such futures or options remaining unexercised at
the end of the Portfolio's taxable year will be treated as sold for their then
fair market value, resulting in additional gain or loss to the Portfolio
characterized in the manner described above.
Offsetting positions held by the Portfolio involving financial futures
and options may constitute "straddles." Straddles are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of straddles is governed by Section 1092 of the Code, which, in certain
circumstances, overrides or modifies the provisions of Sections 988 and 1256. If
the Portfolio was treated as entering into straddles by reason of its futures or
options transactions, such straddles could be characterized as "mixed straddles"
if the futures or options transactions comprising such straddles were governed
by Section 1256. The Portfolio may make one or more elections with respect to
"mixed straddles." Depending upon which election is made, if any, the results to
the Portfolio may differ. If no election is made, to the extent the straddle
rules apply to positions established by the Portfolio, losses realized by the
Portfolio will be deferred to the extent of unrealized gain in any offsetting
positions. Moreover, as a result of the straddle rules, short-term capital loss
on straddle positions may be recharacterized as long-term capital loss, and
long-term capital gain may be recharacterized as short-term capital gain.
Investment by the Portfolio in securities issued or acquired at a
discount, or providing for deferred interest or for payment of interest in the
form of additional obligations could under special tax rules affect the amount,
timing and character of distributions to shareholders by causing the Portfolio
to recognize income prior to the receipt of cash payments. For example, the
Portfolio could be required to accrue a portion of the discount (or deemed
discount) at which the securities were issued each year and to distribute such
income in order to maintain its qualification as a regulated investment company.
In such case, the Portfolio may have to dispose of securities which it might
otherwise have continued to hold in order to generate cash to satisfy these
distribution requirements.
PORTFOLIO TRANSACTIONS
The Adviser supervises the placement of orders on behalf of the
Portfolio for the purchase or sale of investment securities. Allocation of
brokerage transactions, including their frequency, is made in the best judgment
of the Adviser and in a manner deemed fair and reasonable to shareholders. The
primary consideration is prompt execution of orders at the most favorable net
price. Subject to this consideration, the brokers selected include those that
supplement the Adviser's research facilities with statistical data, investment
information, economic facts and opinions. Information so received is in addition
to and not in lieu of services required to be performed by the Adviser and the
Adviser's fee is not reduced as a consequence of the receipt of such
supplemental information. Such information may be useful to the Adviser in
serving both the Portfolio and other clients which it advises and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Adviser in carrying out its obligation to the Portfolio.
Brokers also are selected because of their ability to handle special executions
such as are involved in large block trades or broad distributions, provided the
primary consideration is met. Large block trades, in certain cases, may result
from two or more clients the Adviser might advise being engaged simultaneously
in the purchase or sale of the same security. Certain of the Portfolio's
transactions in securities of foreign issuers may not benefit from the
negotiated commission rates available to the Portfolio for transactions in
securities of domestic issuers. Foreign exchange transactions are made with
banks or institutions in the interbank market at prices reflecting a mark-up or
markdown and/or commission. When transactions are executed in the
over-the-counter market, the Portfolio will deal with the primary market makers
unless a more favorable price or execution otherwise is obtainable. No brokerage
commissions have been paid by the Portfolio to date.
Portfolio turnover may vary from year to year, as well as within a
year. High turnover rates are likely to result in comparatively greater
brokerage expenses. The overall reasonableness of brokerage commissions paid is
evaluated by the Adviser based upon its knowledge of available information as to
the general level of commissions paid by other institutional investors for
comparable services.
INFORMATION ABOUT THE PORTFOLIO
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "General
Information."
Each Portfolio share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and non-assessable.
Shares have no preemptive, subscription or conversion rights and are freely
transferable.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise, to the holders of the outstanding voting securities of an investment
company, such as the Fund, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
portfolio shall be deemed to be affected by a matter unless it is clear that the
interests of each portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, the Rule exempts the
election of directors from the separate voting requirements of the Rule.
The Portfolio will send annual and semi-annual financial statements to
all its shareholders.
As of April 20, 1996, the following shareholders beneficially owned,
directly or indirectly, 5% or more of the Portfolio's outstanding shares:
Percent of
Total BEA Client Shares
Name and Address Outstanding
American Electric 16.64%
Power Special
Investment Account
c/o BEA Associates
1 Citicorp Center
153 East 53rd Street
New York, New York 10022
Columbia University 14.41%
c/o BEA Associates
1 Citicorp Center
153 East 53rd Street
New York, New York 10022
General Mills, Inc. 13.81%
c/o BEA Associates
1 Citicorp Center
153 East 53rd Street
New York, New York 10022
The Cherokee Corporation 13.18%
Thrift Profit Sharing
c/o BEA Associates
1 Citicorp Center
153 East 53rd Street
New York, New York 10022
Uniroyal Holding Corporate 12.02%
Cash Financial Futures
c/o BEA Associates
1 Citicorp Center
153 East 53rd Street
New York, New York 10022
Massachusetts Medical 6.28%
Malpractice
c/o BEA Associates
1 Citicorp Center
153 East 53rd Street
New York, New York 10022
Mark IV Industries, Inc. 6.13%
c/o BEA Associates
1 Citicorp Center
153 East 53rd Street
New York, New York 10022
CDU Holding Inc. 6.02%
Liquidating Trust
c/o BEA Associates
1 Citicorp Center
153 East 53rd Street
New York, New York 10022
Exide Corp. 5.48%
Master Retirement Trust
c/o BEA Associates
1 Citicorp Center
153 East 53rd Street
New York, New York 10022
Percent of
Total BEA Investor Shares
Name and Address Outstanding
Asphalt Green Inc. Swim Center 100.00%
c/o BEA Associates
1 Citicorp Center
153 East 53rd Street
New York, New York 10022
Percent of Total
BEA Service Shares
Name and Address Outstanding
BISYS Fund Services Ohio, Inc. 100.00%
3435 Stelzer Road
Columbus, Ohio 43219
A shareholder who beneficially owns, directly or indirectly, more than
25% of the Portfolio's voting securities may be deemed a "control person" (as
defined in the 1940 Act) of the Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
The Bank of New York, 90 Washington Street, New York, New York 10286,
acts as custodian of the Portfolio's investments. BISYS Fund Services Ohio,
Inc., an affiliate of the Administrator, 3435 Stelzer Road, Columbus, Ohio
43219, acts as the Fund's transfer and dividend disbursing agent (the "Transfer
Agent"). Under the transfer agency agreement with the Fund, the Transfer Agent
maintains shareholder account records for the Fund, handles certain
communications between shareholders and the Fund and pays dividends and
distributions payable by the Fund. For these services, the Transfer Agent
receives a monthly fee compiled on the basis of the number of shareholder
accounts it maintains for the Fund during the month, and is reimbursed for
certain out-of-pocket expenses. Neither The Bank of New York nor BISYS Fund
Services Ohio, Inc. has any part in determining the investment policies of the
Portfolio or which securities are to be purchased or sold by the Portfolio.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York
10004-2696, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of Common Stock being sold pursuant to the Portfolio's Prospectus.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154,
independent auditors, have been selected as the Portfolio's auditors.
<PAGE>
APPENDIX
Description of certain ratings assigned by Standard & Poor's Ratings
Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch Investors
Service, L.P. ("Fitch") and Duff & Phelps Credit Rating Co. ("Duff"):
S&P
Bond Ratings
AAA
Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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
bonds in this category than for bonds in higher rated categories.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
Commercial Paper Rating
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's
Bond Ratings
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 edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category. The
modifier 1 indicates a ranking for the security in the higher end of a rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of a rating category.
Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or relating supporting institutions) rated Prime-2
(P-2) have a strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Fitch
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an 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.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Duff
Bond Ratings
AAA
Bonds rated AAA are considered highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA
Bonds rated AA are considered high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A
Bonds rated A have protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB
Bonds rated BBB are considered to have below average protection
factors but still considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
Plus (+) and minus (-) signs are used with a rating symbol (except
AAA) to indicate the relative position of a credit within the rating category.
Commercial Paper Rating
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
<PAGE>
FINANCIAL STATEMENTS
The Portfolios' Annual Report to Shareholders for the fiscal year
ended December 31, 1995 is a separate document supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing therein are incorporated by reference
in this Statement of Additional Information.
<PAGE>
PROSPECTUS MAY 1, 1996
THE INFINITY MUTUAL FUNDS, INC.
Correspondent Cash Reserves Money Market Portfolio
Institutional Shares
The Infinity Mutual Funds, Inc. (the "Fund") is an open-end,
management investment company, known as a series fund. By this Prospectus,
Institutional Shares of the Fund's Correspondent Cash Reserves Money Market
Portfolio (the "Portfolio") are being offered.
The Portfolio is a diversified, money market mutual fund that seeks to
provide investors with as high a level of current income as is consistent with
the preservation of capital and the maintenance of liquidity. The Portfolio
invests in a diversified portfolio of short-term money market obligations.
The Institutional Shares are offered only to institutional investors.
Institutional Shares may not be purchased by individuals directly, but
institutional investors may purchase shares for accounts maintained by
individuals. Investors can invest, reinvest or redeem Institutional Shares at
any time without charge or penalty.
An investment in the Portfolio is neither insured nor guaranteed by
the U.S. Government. There can be no assurance that the Portfolio will be able
to maintain a stable net asset value of $1.00 per share. (continued on next
page)
This Prospectus sets forth concisely information about the Fund that
an investor should know before investing. It should be read and retained for
future reference.
The Statement of Additional Information, dated May 1, 1996, which may
be revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, write to the Fund at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, contact your sales representative or call
1-800-852-9730.
Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other governmental
agency. Portfolio shares involve certain investment risks, including the
possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
(continued from previous page)
Another class of the Portfolio's shares -- the Retail Shares -- are
offered by a separate prospectus to individuals and are not offered hereby. The
Institutional Shares and Retail Shares are identical, except as to the services
offered to each class and the expenses borne by each class which may affect
performance. Investors desiring to obtain information about Retail Shares should
ask their sales representative or call 1-800-852-9730.
Mitchell Hutchins Asset Management Inc. (the "Adviser"), a
wholly-owned subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
Portfolio's investment adviser.
Concord Holding Corporation (the "Administrator") serves as the
Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly- owned
subsidiary of the Administrator, serves as distributor of the Portfolio's
shares.
TABLE OF CONTENTS
Page
Expense Summary.....................................3
Financial Highlights................................4
Yield Information...................................5
Description of the Portfolio........................5
Management of the Portfolio........................15
How to Buy Shares..................................18
How to Redeem Shares...............................19
Dividends, Distributions and Taxes.................20
General Information................................22
<PAGE>
EXPENSE SUMMARY
(as a percentage of average daily net assets)
Institutional
Shares
Management Fees .........................................10%
12b-1 Fees...............................................None
Other Expenses...........................................24%
Total Operating Expenses.................................34%
EXAMPLE:
Investors would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of
each time period: 1 Year $__
3 Years $__
5 Years $__
10 Years $__
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. Moreover, while the example assumes a 5% annual
return, the Portfolio's actual performance will vary and may result in an actual
return greater or less than 5%.
The purpose of the foregoing table is to assist investors in
understanding the costs and expenses borne by the Portfolio, the payment of
which will reduce investors' annual return. Institutions effecting transactions
in Institutional Shares for the accounts of their clients may charge their
clients direct fees in connection with such transactions. See "How to Buy
Shares." For a further description of the various costs and expenses incurred in
the Portfolio's operation, see "Management of the Portfolio."
<PAGE>
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for an
Institutional Share of common stock outstanding, total investment return, ratios
to average net assets and other supplemental data for each period indicated. The
information in the table has been audited by KPMG Peat Marwick LLP, the
Portfolio's independent auditors, whose report thereon appears in the Statement
of Additional Information. Further financial data and related notes are included
in the Statement of Additional Information, available upon request.
<TABLE>
<CAPTION>
Period
Year End Ended
December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1992 1991*
------------ ------------ ------------ ------------- ---------
INSTITUTIONAL SHARES:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.................. $0.9975 $0.9999 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment operations:
Net investment income............................... 0.0563 0.0402 0.0320 0.0391 0.0220
Net realized gain (loss) on securities.............. 0.0011 (0.0024) (0.0001) -- --
------- -------- ------- ---------- -------
Total income from investment operations............. 0.0574 0.0378 0.0319 0.0391 0.0220
Dividends from net investment income.................. (0.0563) (0.0402) (0.0320) (0.0391) (0.0220)
------- -------- ------- ------- -------
Net change in net asset value......................... 0.0011 (0.0024) (0.0001) 0.0000 0.0000
------- -------- ------- ------- -------
Net asset value, end of period........................ $0.9986 $0.9975 $0.9999 $1.0000 $1.0000
======= ======= ======= ======= =======
Total return.......................................... 5.78% 4.09% 3.25% 3.98% 4.30%+
Ratios/supplemental data:
Net assets, end of period (000s).................... $39,485 $31,091 $67,230 $64,306 $ 0
Ratio of expenses to average net assets............. 0.34% 0.31% 0.25% 0.27%** 0.40%**++
Ratio of net investment income
to average net assets............................. 5.66% 3.87% 3.20% 3.73%** 5.27%**++
</TABLE>
* For the period August 2, 1991 (commencement of operations) through
December 31, 1991.
** Net of fee waivers which had the effect of reducing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 0.05% and 0.10% (annualized) for the year ended
December 31, 1992 and the period ended December 31, 1991, respectively.
+ Not annualized.
++ Annualized.
YIELD INFORMATION
From time to time, the Portfolio will advertise its yield and
effective yield. Both yield figures are based on historical earnings and are not
intended to indicate future performance. It can be expected that these yields
will fluctuate substantially. The yield of the Portfolio refers to the income
generated by an investment in the Portfolio over a seven-day period (which
period will be stated in the advertisement). This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Portfolio is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment. The Portfolio's
yield and effective yield may reflect absorbed expenses pursuant to any
undertaking that may be in effect.
Yield information is useful in reviewing the Portfolio's performance,
but because yields will fluctuate, under certain conditions such information may
not provide a basis for comparison with domestic bank deposits, other
investments which pay a fixed yield for a stated period of time, or other
investment companies which may use a different method of computing yield.
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., Bank Rate Monitor(TM), N. Palm Beach, Fla. 33408,
IBC/Donoghue's Money Fund Report, Morningstar, Inc., other industry publications
and national financial publications, including Money, Forbes, Barron's, The Wall
Street Journal and The New York Times, or local or regional publications.
DESCRIPTION OF THE PORTFOLIO
Investment Objective
The Portfolio seeks to provide investors with as high a level of
current income as is consistent with the preservation of capital and the
maintenance of liquidity. The Portfolio's investment objective cannot be changed
without approval by the holders of a majority (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) of the Portfolio's outstanding
voting shares. There can be no assurance that the Portfolio's investment
objective will be achieved. Securities in which the Portfolio invests may not
earn as high a level of current income as long-term or lower quality securities
which generally have less liquidity, greater market risk and more fluctuation in
market value.
Management Policies
The Portfolio invests in U.S. dollar denominated short-term money
market obligations, including securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, certificates of deposit, time
deposits, bankers' acceptances and other short-term obligations issued by
domestic banks, foreign branches of domestic banks, foreign subsidiaries of
domestic banks, and domestic and foreign branches of foreign banks, repurchase
agreements, and high quality domestic and foreign commercial paper and other
high quality short-term corporate obligations, such as floating or variable rate
U.S. dollar denominated demand notes and bonds. The Portfolio invests in U.S.
dollar denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities, including obligations of supranational entities. The
Portfolio also may lend securities from its portfolio and enter into reverse
repurchase agreements as described below. During normal market conditions, at
least 25% of the Portfolio's total assets will be invested in domestic and/or
foreign bank obligations. See "Investment Considerations and Risk Factors"
below.
The Portfolio seeks to maintain a net asset value of $1.00 per share
for purchases and redemptions. To do so, the Fund uses the amortized cost of
method of valuing the Portfolio's securities pursuant to Rule 2a-7 under the
1940 Act, certain requirements of which are summarized below.
In accordance with Rule 2a-7, the Portfolio is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities determined in accordance with procedures
established by the Board of Directors to present minimal credit risks and which
are rated in one of the two highest rating categories for debt obligations by at
least two nationally recognized statistical rating organizations ("NRSRO") (or
one NRSRO if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Board of Directors. The Board of Directors has delegated to
the Adviser the day-to-day operations of the Portfolio; however, the Board of
Directors retains ultimate responsibility for compliance with Rule 2a-7 under
the 1940 Act. The NRSROs currently rating instruments of the type the Portfolio
may purchase are Moody's Investors Service, Inc., Standard & Poor's Rating
Group, Duff & Phelps Credit Rating Co., Fitch Investors Service, L.P., IBCA
Limited and IBCA Inc., and Thomson BankWatch, Inc. and their rating criteria are
described in the "Appendix" to the Portfolio's Statement of Additional
Information.
In addition, the Portfolio will not invest more than 5% of its total
assets in the securities (including the securities collateralizing a repurchase
agreement) of, or subject to puts issued by, a single issuer, except that (i)
the Portfolio may invest more than 5% of its total assets in a single issuer for
a period of up to three business days in certain limited circumstances as set
forth under Rule 2a-7, (ii) the Portfolio may invest in obligations issued or
guaranteed by the U.S. Government without any such limitation, and (iii) the
limitation with respect to puts does not apply to unconditional puts if no more
than 10% of the Portfolio's total assets is invested in securities issued or
guaranteed by the issuer of the unconditional put. Investments in rated
securities not rated in the highest category by at least two rating
organizations (or one rating organization if the instrument was rated by only
one such organization), and unrated securities not determined by the Board
of Directors to be comparable to those rated in the highest category, will be
limited to 5% of the Portfolio's total assets, with the investment in any one
such issuer being limited to no more than the greater of 1% of the Portfolio's
total assets or $1,000,000. As to each security, these percentages are measured
at the time the Portfolio purchases the security. For further information
regarding the amortized cost method of valuing securities, see "Determination of
Net Asset Value" in the Portfolio's Statement of Additional Information. There
can be no assurance that the Portfolio will be able to maintain a stable net
asset value of $1.00 per share.
Portfolio Securities
U.S. Government Obligations. The Portfolio may invest in securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Such securities include U.S. Treasury securities, such as
bills, notes, bonds and certificates of indebtedness, which differ in their
interest rates, maturities and times of issuance, and issues of U.S. Government
agencies and instrumentalities established under the authority of an act of
Congress. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued by
the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Interest may
fluctuate based on generally recognized reference rates or the relationship of
rates. While the U.S. Government provides financial support to such U.S.
Government- sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Portfolio
will invest in such securities only when it is satisfied that the credit risk
with respect to the issuer is minimal.
Foreign Government Obligations; Securities of Supranational Entities.
The Portfolio may invest in obligations issued or guaranteed by one or more
foreign governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Board of Directors to be of
comparable quality to the other obligations in which the Portfolio may invest.
Such securities also include debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of the
Portfolio's assets invested in securities issued by foreign governments will
vary depending on the relative yields of such securities, the economic and
financial markets of the countries in which the investments are made and the
interest rate climate of such countries. See "Investment Considerations and Risk
Factors" below.
Certificates of Deposit, Time Deposits and Bankers' Acceptances. The
Portfolio also will invest in certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations issued by domestic banks, foreign
branches of domestic banks, foreign subsidiaries of domestic banks, and domestic
and foreign branches of foreign banks. See "Risk Factors" below. Certificates of
deposit are certificates representing the obligation of a bank to repay funds
deposited with it for a specified period of time. Time deposits are
non-negotiable deposits maintained in a bank for a specified period of time at a
stated interest rate. Time deposits which may be held by the Portfolio will not
benefit from insurance from the Bank Insurance Fund or the Savings Association
Insurance Fund administered by the Federal Deposit Insurance Corporation. The
Portfolio will not invest more than 10% of the value of its net assets in time
deposits maturing in more than seven days and in other securities that are
illiquid. Bankers' acceptances are credit instruments evidencing the obligation
of a bank to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable rates of
interest.
Repurchase Agreements. Repurchase agreements involve the acquisition
by the Portfolio of an underlying debt instrument, subject to an obligation of
the seller to repurchase, and the Portfolio to resell, the instrument at a fixed
price usually not more than one week after its purchase. Certain costs may be
incurred in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
securities, realization on the securities by the Portfolio may be delayed or
limited.
Commercial Paper and Corporate Obligations. Commercial paper consists
of short-term, unsecured promissory notes issued to finance short-term credit
needs. The commercial paper purchased by the Portfolio will consist only of
direct obligations issued by domestic and foreign entities. The other corporate
obligations in which the Portfolio may invest consist of high quality, U.S.
dollar denominated short-term bonds and notes (including variable amount master
demand notes) issued by domestic and foreign corporations.
Floating and Variable Rate Obligations. The Portfolio also may
purchase floating and variable rate demand notes and bonds, which are
obligations ordinarily having stated maturities in excess of 13 months, but
which permit the holder to demand payment of principal at any time, or at
specified intervals not exceeding 13 months, in each case upon not more than 30
days' notice. Variable rate demand notes include master demand notes which are
obligations that permit the Portfolio to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the
Portfolio, as lender, and the borrower. The interest rates on these notes
fluctuate from time to time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally will
be traded, and there generally is no established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Portfolio's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. These obligations include
highly rated certificates of participation in trusts secured by accounts
receivable, including trade receivables, and other assets. Such obligations
frequently are not rated by credit rating agencies and, if not so rated, the
Portfolio may invest in them only if the Adviser, acting upon delegated
authority from, and subject to ratification by, the Fund's Board of Directors,
determines that at the time of investment the obligations are of comparable
quality to the other obligations in which the Portfolio may invest. The Adviser,
on behalf of the Portfolio, will consider on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate demand
obligations held by the Portfolio. The Portfolio will not invest more than 10%
of the value of its net assets in floating or variable rate demand obligations
as to which it cannot exercise the demand feature on not more than seven days'
notice if the Adviser determines, acting upon delegated authority from, and
procedures established by, the Fund's Board of Directors, that there is no
secondary market available for these obligations, and in other securities that
are illiquid. See "Certain Fundamental Policies" below.
Notes. The Portfolio also may purchase unsecured promissory notes
("Notes") which are not readily marketable and have not been registered under
the Securities Act of 1933, provided such investments are consistent with its
investment objective. The Portfolio will invest no more than 10% of its net
assets in such Notes and in other securities that are illiquid. See "Certain
Fundamental Policies" below.
Participation Interests. The Portfolio may invest in short-term
corporate obligations that are originated, negotiated and structured by a
syndicate of lenders ("Co-Lenders") consisting of commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions one or more of which administers the security on behalf of the
syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third
parties called "Participants." The Portfolio may invest in such securities
either by participating as a Co- Lender at origination or by acquiring an
interest in the security from a Co-Lender or a Participant (collectively,
"participation interests"). Co-Lenders land Participants interposed between the
Portfolio and the corporate borrower (the "Borrower"), together with Agent
Banks, are referred to herein as "intermediate Participants." The Portfolio also
may purchase a participation interest in a portion of the rights of an
Intermediate Participant. The Portfolio will not act as an Agent Bank,
guarantor, sole negotiator or sole structuror with respect to securities that
are the subject of a participation interest.
A participation interest gives the Portfolio an undivided interest in
the security in the proportion that the Portfolio's participation interest bears
to the total principal amount of the security. These instruments may have fixed,
floating or variable rates of interest with remaining maturities of 13 months or
less. If the participation interest is unrated, or has been given a rating below
that which is permissible for purchase by the Portfolio, the participation
interest will be backed by an irrevocable or unconditional letter of credit or
guarantee of a bank or other entity the debt securities of which are rated high
quality, or the payment obligation otherwise will be collateralized by U.S.
Government securities, or, in the case of an unrated participation interest, the
Adviser, acting upon delegated authority from the Fund's Board of Directors,
must have determined that the instrument is of comparable quality to those
instruments in which the Portfolio may invest. Participation interests with a
rating below high quality that are backed by an irrevocable letter of credit or
guarantee as described above will be purchased only if the Adviser, acting as
described above and subject to ratification by the Fund's Board of Directors,
determines after an analysis of, among other factors, the creditworthiness of
the guarantor that such participation interest is high quality, and if the
rating agency did not include the letter of credit or guarantee in its
determination of the instrument's rating. If the rating of a participation
interest is reduced subsequent to its purchase by the Portfolio, the Adviser
will consider, in accordance with procedures established by the Board of
Directors, all circumstances deemed relevant in determining whether the
Portfolio should continue to hold the participation interest. For certain
participation interests, the Portfolio will have the right to demand payment, on
not more than seven days' notice, for all or any part of the Portfolio's
participation interest in the security, plus accrued interest. As to these
instruments, although subject to unconditional demand for payment, the Portfolio
intends to exercise its right to demand payment only upon a default under the
terms of the security, as needed to provide liquidity to meet redemptions, or to
maintain or improve the quality of its investment portfolio. Not more than 10%
of the value of the Portfolio's net assets will be invested in participation
interests that do not have this demand feature, and in other securities that are
illiquid. See "Certain Fundamental Policies" below.
Investment Practices
Portfolio Lending. From time to time, the Portfolio may lend
securities from its portfolio to brokers, dealers and other financial
institutions needing to borrow securities to complete certain transactions. Such
loans may not exceed 33-1/3% of the Portfolio's total assets. In connection with
such loans, the Portfolio will receive collateral consisting of cash, U.S.
Government securities or irrevocable letters of credit issued by third party
financial institutions. Such collateral will be maintained at the Fund's
custodian, at all times in an amount equal to at least 100% of the current
market value of the loaned securities. The Portfolio can increase its income
through the investment of such collateral. The Portfolio continues to be
entitled to the interest or other distributions payable on the loaned security
and receives interest on the amount of the loan. Such loans will be terminable
at any time upon specified notice. The Portfolio might experience risk of loss
if the institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Portfolio.
Reverse Repurchase Agreements. The Portfolio may enter into reverse
repurchase agreements with banks, brokers or dealers. Reverse repurchase
agreements involve the transfer by the Portfolio of an underlying debt
instrument in return for cash proceeds based on a percentage of the value of the
security. The Portfolio retains the right to receive interest and principal
payments on the security. The Portfolio will use the proceeds of reverse
repurchase agreements only to make investments which generally either mature or
have a demand feature to resell to the issuer at a date simultaneous with or
prior to the expiration of the reverse repurchase agreement. At an agreed upon
future date, the Portfolio repurchases the security at principal plus accrued
interest. In certain types of agreements, there is no agreed upon repurchase
date and interest payments are calculated daily, often based on the prevailing
overnight repurchase rate. As a result of these transactions, the Portfolio may
be exposed to greater potential fluctuations in the value of its assets.
Interest costs on the money borrowed may exceed the return received on the
securities purchased. The Fund's Directors have considered the risks to the
Portfolio and its shareholders which may result from the entry into reverse
repurchase agreements and have determined that the entry into such agreements is
consistent with the Portfolio's investment objective and management policies.
When-Issued Securities. The Portfolio may purchase money market
securities on a when-issued or forward commitment basis, which means that
delivery and payment for such securities ordinarily take place within 45 days
after the date of the commitment to purchase. The payment obligation and the
interest rate that will be received on the securities are fixed at the time the
Portfolio enters into the commitment. The Portfolio will make commitments to
purchase such securities only with the intention of actually acquiring the
securities, but the Portfolio may sell these securities before the settlement
date if it is deemed advisable. The Portfolio will not accrue income in respect
of a security purchased on a forward commitment basis prior to its stated
delivery date. No additional forward commitments will be made if more than 20%
of the Portfolio's net assets would be so committed.
Illiquid Securities. The Portfolio will not invest more than 10% of
the value of its net assets in illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Portfolio has valued the securities and includes, among other
instruments, certain restricted securities. As to these securities, the
Portfolio is subject to a risk that should the Portfolio desire to sell them
when a ready buyer is not available at a price the Portfolio deems
representative of their value, the value of the Portfolio's net assets could be
adversely affected.
Certain Fundamental Policies
The Portfolio (i) may borrow money, but only (a) from banks for
temporary or emergency (not leveraging) purposes, in an amount up to 15% of the
value of the Portfolio's total assets (including the amount borrowed) valued at
the lesser of cost or market, less liabilities (not including the amount
borrowed) at the time the borrowing is made (borrowings repaid within 60 days
and not renewed or extended are presumed to be for temporary purposes) (while
such borrowings exceed 5% of the value of the Portfolio's total assets, the
Portfolio will not make any additional investments), and (b) in connection with
the entry into reverse repurchase agreements. At no time may total borrowings
exceed 33-1/3% of the value of the Portfolio's total assets; (ii) may pledge,
hypothecate, mortgage or otherwise encumber its assets, but only (a) to secure
borrowings for temporary or emergency purposes and (b) in connection with the
entry into reverse repurchase agreements in an amount equal to the aggregate
amount of its reverse repurchase obligations, plus accrued interest in certain
cases; (iii) may invest up to 10% of its net assets in repurchase agreements
providing for settlement in more than seven days after notice and in securities
that are illiquid; (iv) may invest up to 5% of its total assets in the
obligations of any one issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested (subject to the provisions of Rule
2a-7), and obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities may be purchased, without regard to any such limitation;
and (v) will invest, except when the Portfolio has adopted a temporary defensive
position, at least 25% of its total assets in securities issued by banks,
including foreign banks and branches, and may invest up to 25% of its total
assets in the securities of issuers in any other industry, provided that there
is no limitation on investments in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. This paragraph describes
fundamental policies that cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
shares. See "Investment Objective and Management Policies--Investment
Restrictions" in the Portfolio's Statement of Additional Information.
Investment Considerations and Risk Factors
General. The Portfolio will attempt to increase yields by trading to
take advantage of short-term market variations. This policy is expected to
result in high portfolio turnover but should not adversely affect the Portfolio
since the Portfolio usually will not pay brokerage commissions on purchases of
short-term debt obligations. The value of the securities held by the Portfolio
will vary inversely to changes in prevailing interest rates. Thus, if interest
rates have increased from the time a security was purchased, such security, if
sold, might be sold at a price less than its cost. Similarly, if interest rates
have declined from the time a security was purchased, such security, if sold,
might be sold at a price greater than its purchase cost. In either instance, if
the security was purchased at face value and held to maturity, no gain or loss
will be realized. Bank Securities. To the extent the Portfolio's investments are
concentrated in the banking industry, it will have correspondingly greater
exposure to the risk factors which are characteristic of such investments.
Sustained increases in interest rates can adversely affect the availability or
liquidity and cost of capital funds for lending activities, and a deterioration
in general economic conditions could increase the exposure to credit losses. In
addition, the value of and the investment return on the Portfolio's shares will
be affected by economic or regulatory developments in or related to the banking
industry, and competition within the banking industry as well as with other
types of financial institutions. The Portfolio, however, will seek to minimize
its exposure to such risks by investing only in debt securities which are
determined to be of high quality.
Foreign Securities. Since the Portfolio may invest in securities
issued by foreign governments and any of their political subdivisions, agencies
or instrumentalities, and by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, domestic and foreign branches of foreign banks,
and commercial paper issued by foreign issuers, it may be subject to additional
investment risks with respect to those securities that are different in some
respects from those incurred by a fund which invests only in debt obligations of
U.S. domestic issuers. Such risks include future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities, the possible establishment of exchange
controls, the possible seizure or nationalization of foreign deposits, or the
adoption of other foreign governmental restrictions which might adversely affect
the payment of principal and interest on these securities.
Simultaneous Investments. Investment decisions for the
Portfolio are made independently from those of the Fund's other portfolios and
other investment companies or accounts managed by the Adviser. However, if such
other entities desire to invest in, or dispose of, the same securities as the
Portfolio, available investments or opportunities for sales will be allocated
equitably to each of them. In some cases, this procedure may adversely affect
the size of the position obtained for or disposed of by the Portfolio or the
price paid or received by the Portfolio.
MANAGEMENT OF THE PORTFOLIO
Board of Directors
The business affairs of the Fund are managed under the general
supervision of its Board of Directors. The Portfolio's Statement of Additional
Information contains the name and general business experience of each Director.
Investment Adviser
Mitchell Hutchins Asset Management Inc., located at 1285 Avenue of the
Americas, New York, New York 10019, serves as the Portfolio's investment
adviser. The Adviser is a wholly-owned subsidiary of PaineWebber organized in
May 1977. The Adviser is registered as a broker-dealer under the Securities
Exchange Act of 1934 and as an investment adviser under the Investment Advisers
Act of 1940. As of March 31, 1996, the Adviser served as adviser or sub-adviser
to __ investment companies with __ investment portfolios having aggregate assets
in excess of $__ billion and managed discretionary and non- discretionary
accounts with assets in excess of $__ billion.
The Adviser supervises and assists in the overall management of the
Portfolio's affairs under an Investment Advisory Agreement between the Adviser
and the Fund, subject to the overall authority of the Fund's Board of Directors
in accordance with Maryland law.
For the fiscal year ended December 31, 1994, the Portfolio paid the
Adviser a monthly advisory fee at the annual rate of .10 of 1% of the value of
the Portfolio's average daily net assets.
Administrator
Concord Holding Corporation, located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as the Portfolio's administrator. The Administrator
currently provides administrative or sub-administrative services to other
investment companies with over $60 billion in assets. The Administrator is a
wholly-owned subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator
generally assists in all aspects of the Fund's operations, other than providing
investment advice, subject to the overall authority of the Fund's Board of
Directors in accordance with Maryland law. In connection therewith, the
Administrator provides the Fund with office facilities, personnel, and certain
clerical and bookkeeping services (e.g., preparation of reports to shareholders
and the Securities and Exchange Commission and filing of Federal, state and
local income tax returns) that are not being furnished by The Bank of New York,
the Fund's Custodian.
For the fiscal year ended December 31, 1995, the Portfolio paid the
Administrator a monthly fee at the annual rate of .10 of 1% of the value of the
Portfolio's average daily net assets.
Distributor
Concord Financial Group, Inc., located at 125 West 55th Street, New
York, New York 10019, serves as the Fund's principal underwriter and distributor
of the Portfolio's shares. The Distributor, a wholly-owned subsidiary of the
Administrator, was organized to distribute shares of mutual funds to
institutional and retail investors. The Distributor distributes the shares of
other investment companies with over $80 billion in assets. The Distributor is
the Fund's sponsor.
The Distributor makes a continuous offering of the Portfolio's shares
and bears the costs and expenses of printing and distributing to prospective
investors copies of any prospectuses, statements of additional information and
annual and interim reports of the Portfolio (after such items have been prepared
and set in type by the Fund) which are used in connection with the offering of
shares, and the costs and expenses of preparing, printing and distributing any
other literature used by the Distributor in connection with the offering of the
Portfolio's shares for sale to the public.
Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286,
is the Fund's Custodian (the "Custodian"). BISYS Fund Services Ohio, Inc., an
affiliate of the Administrator, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, is the Fund's Transfer and Dividend Disbursing Agent (the "Transfer
Agent").
Expenses
All expenses incurred in the operation of the Fund are borne by the
Fund, except to the extent specifically assumed by others. The expenses borne by
the Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator, or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory and administration
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, industry association fees, auditing and legal
expenses, costs of maintaining corporate existence, costs of independent pricing
services, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of calculating the net
asset value of the Portfolio's shares, costs of shareholders' reports and
corporate meetings, costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders, and any extraordinary expenses. Expenses attributable to
the Portfolio are charged against the assets of the Portfolio; other expenses of
the Fund are allocated among the Fund's portfolios on the basis determined by
the Board of Directors, including, but not limited to, proportionately in
relation to the net assets of each portfolio.
HOW TO BUY SHARES
Institutional Shares may be purchased only by institutional investors.
Institutional Shares may not be purchased by individuals directly, but
institutional investors may purchase shares for accounts maintained by
individuals. Securities dealers may receive different compensation for selling
Institutional Shares than for selling Retail Shares. The Fund does not impose
any sales load in connection with the purchase of Institutional Shares. Stock
certificates are issued only upon written request. No certificates are issued
for fractional shares. The Fund reserves the right to reject any purchase order.
The minimum initial investment for Institutional Shares is $250,000
and there is no minimum subsequent investment. Certain securities dealers and
other institutional investors may impose higher minimum investment amounts for
purchases of Portfolio shares by their clients.
Institutional Shares are sold at the net asset value per share next
determined after receipt of a purchase order by the Transfer Agent. Purchase
orders for Institutional Shares are accepted by the Fund on any business day
(which, as used herein, shall include each day that the New York Stock Exchange
and the Fund's Custodian are open for business) and must be transmitted to the
Transfer Agent by telephoning 1-800-[852-9730] or through compatible terminal
access.
Shares are sold on a continuous basis at the net asset value per share
next determined after an order in proper form and Federal Funds (monies of
member banks within the Federal Reserve System which are held on deposit at a
Federal Reserve Bank) are received by the Transfer Agent.
If an investor's purchase order is received by the Transfer Agent by
12:00 noon, New York time, on a business day, and Federal Funds are received by
the Transfer Agent by 4:00 p.m., New York time, on that day, Institutional
Shares will be purchased as of 12:00 noon, New York time, on such business day.
If the investor's purchase order is received after 12:00 noon, New York time, on
a given day, or Federal Funds are received after 4:00 p.m., New York time, on
such day, Institutional Shares will be purchased as of 12:00 noon, New York
time, on the next business day.
The Portfolio's net asset value per share is determined as of 12:00
noon, New York time, on each business day. Net asset value per share is computed
by dividing the value of the Portfolio's net assets (i.e., the value of its
assets less liabilities) by the total number of shares outstanding. See
"Determination of Net Asset Value" in the Portfolio's Statement of Additional
Information.
Federal regulations require that investors provide a certified
Taxpayer Identification Number upon opening or reopening an account. See
"Dividends, Distributions and Taxes" for further information concerning this
requirement.
HOW TO REDEEM SHARES
Investors may request redemption of their shares at any time.
Redemption requests must be transmitted to the Transfer Agent by telephoning
1-800-852-9730 or through compatible terminal access. When a request is received
in proper form, the Fund will redeem the shares at the next determined net asset
value.
The Fund imposes no charges when shares are redeemed directly through
the Transfer Agent. Institutions may charge their clients a fee for effecting
redemptions of Institutional Shares. Any stock certificates representing
Institutional Shares being redeemed must be submitted with the redemption
request. The value of the shares redeemed may be more or less than their
original cost, depending upon the Portfolio's then-current net asset value.
Payment for redeemed shares for which a redemption order is received
by the Transfer Agent prior to 12:00 noon, New York time, on a business day
ordinarily is made by wire in Federal Funds on the same business day. Payment
for redeemed shares for which a redemption order is received after 12:00 noon,
New York time, on a business day ordinarily is made by wire in Federal Funds on
the next business day following redemption. To allow the Adviser to most
effectively manage the Portfolio, investors are urged to initiate redemptions of
shares as early in the day as possible and to notify the Transfer Agent at least
one day in advance of redemptions in excess of $5 million. The Fund reserves the
right to wire redemption proceeds up to seven days after receiving the
redemption request if an earlier payment could adversely affect the Fund. In
making a redemption request, the name of the registered shareholder and the
account number must be supplied.
The Fund reserves the right to redeem an account at its option upon
not less than 45 days' written notice if the net asset value of the investor's
account is $500 or less and remains so during the notice period. Institutions
may impose, with respect to their client's investments in the Portfolio, a
minimum account balance which is higher than that specified above.
If an investor chooses to transmit instructions by telephone, the
investor authorizes the Transfer Agent to act on telephone instructions from any
person representing himself or herself to be a representative of the investor,
and reasonably believed by the Transfer Agent to be genuine. The Fund will
require the Transfer Agent to employ reasonable procedures, such as requiring a
form of identification, to confirm that instructions are genuine and, if it does
not follow such procedures, the Fund or the Transfer Agent may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Fund nor the
Transfer Agent will be liable for following telephone instructions reasonably
believed to be genuine.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Portfolio declares dividends from net investment income on each
day that the Portfolio is open for business. Dividends usually are paid on or
about the fifteenth day of each month, and are automatically reinvested in
additional Institutional Shares at net asset value or, at the investor's option,
paid in cash. The Portfolio's earnings for Saturdays, Sundays and holidays are
declared as dividends on the preceding business day. Shares begin accruing
dividends on the day the purchase order is received in proper form by the
Transfer Agent, if received by 12:00 noon, New York time, on such day, and
continue to earn dividends through the day before a redemption order for such
shares is processed by the Transfer Agent. If an investor redeems all shares in
its account at any time during the month, all dividends to which such investor
is entitled will be paid to the investor along with the proceeds of the
redemption. Dividends paid by each class of Portfolio shares will be calculated
at the same time and in the same manner and will be of the same amount, except
that expenses attributable solely to a class will be borne exclusively by such
class.
Distributions from net realized securities gains, if any, are declared
and paid once a year, but the Portfolio may make distributions on a more
frequent basis to comply with the distribution requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), in all events in a manner
consistent with the provisions of the 1940 Act. Dividends and distributions paid
to holders of Institutional Shares ordinarily are invested in additional
Institutional Shares at net asset value. Investors may elect to receive
dividends and distributions in cash by contacting the Transfer Agent. All
expenses are accrued daily and deducted before declaration of dividends to
investors.
If you elect to receive distributions in cash and your distribution
checks (1) are returned to the Fund marked "undeliverable" or (2) remain
uncashed for six months, your cash election will be changed automatically and
your future dividend and capital gains distributions will be reinvested in
Portfolio shares at the net asset value determined as of the date of payment of
the distribution. In addition, any such undeliverable checks or checks that
remain uncashed for six months will be canceled and will be reinvested in
Portfolio shares at the net asset value determined as of the date of
cancellation.
Dividends derived from interest and distributions from any net
realized short-term securities gains generally are taxable to investors as
ordinary income, whether received in cash or reinvested in additional Portfolio
shares. Distributions from net realized long-term securities gains, if any,
generally are taxable as long-term capital gains, regardless of how long
shareholders have held their Portfolio shares and whether such distributions are
received in cash or reinvested in additional Portfolio shares. Dividends and
distributions may be subject to certain state and local taxes. No dividend will
qualify for the dividends-received deduction allowable to certain corporations.
Dividends derived from net investment income and distributions from
net realized short-term securities gains paid by the Portfolio to a foreign
investor generally are subject to U.S. nonresident withholding taxes at the rate
of 30%, unless the foreign investor claims the benefit of a lower rate specified
in a tax treaty. Distributions from net realized long-term securities gains paid
by the Portfolio to a foreign investor generally will not be subject to U.S.
nonresident withholding tax. However, such distributions may be subject to
backup withholding, as described below, unless the investor certifies his
non-U.S. residency status.
Notice as to the tax status of an investor's dividends and
distributions is mailed to such investor annually from the Transfer Agent. Each
investor also will be sent periodic summaries of its account which will include
information as to dividends and distributions from securities gains, if any,
paid during the year.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends and distributions
from net realized securities gains paid to a shareholder if such shareholder
fails to certify either that the Taxpayer Identification Number furnished in
connection with opening an account is correct or that such shareholder has not
received notice from the Internal Revenue Service of being subject to backup
withholding as a result of a failure to properly report taxable dividend or
interest income on a Federal income tax return. Furthermore, the Internal
Revenue Service may notify the Fund to institute backup withholding if the
Internal Revenue Service determines a shareholder's Taxpayer Identification
Number is incorrect or if a shareholder has failed to properly report taxable
dividend and interest income on a Federal income tax return.
A Taxpayer Identification Number is either the Social Security number
or employer identification number of the record owner of the account. Any tax
withheld as a result of backup withholding does not constitute an additional tax
imposed on the record owner of the account, and may be claimed as a credit on
the record owner's Federal income tax return.
Management believes that the Portfolio has qualified for the fiscal
year ended December 31, 1995 as a "regulated investment company" under the Code.
The Portfolio intends to continue to so qualify so long as such qualification is
in the best interests of its shareholders. Such qualification relieves the
Portfolio of any liability for Federal income tax to the extent its earnings are
distributed in accordance with applicable provisions of the Code. The Code
subjects regulated investment companies, such as the Portfolio, to a
non-deductible 4% excise tax to the extent that such investment companies do not
distribute a very substantial portion of their taxable investment income and
capital gains, generally determined on a calendar year basis.
Each investor should consult its tax adviser regarding specific
questions as to Federal, state or local taxes.
GENERAL INFORMATION
The Fund was incorporated under Maryland law on March 6, 1990, and
commenced operations on August 28, 1990. The Fund is authorized to issue 11
billion shares of Common Stock (with 2 billion allocated to the Portfolio), par
value $.001 per share. The Portfolio's shares are classified into the
Institutional Shares (1 billion shares) and Retail Shares (1 billion shares).
Retail Shares, which are described in a separate prospectus, are sold to
individuals and bear fees and expenses with respect to the Fund's Special
Management Services Agreement and Distribution Plan. Each shares has one vote
and shareholders will vote in the aggregate and not by class except as otherwise
required by law.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Fund to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of Directors or the
appointment of auditors. However, pursuant to the Fund's By-Laws, the holders of
at least 10% of the shares outstanding and entitled to vote may require the Fund
to hold a special meeting of shareholders for purposes of removing a Director
from office or for any other purpose. Shareholders may remove a Director by the
affirmative vote of a majority of the Fund's outstanding voting shares. In
addition, the Board of Directors will call a meeting of shareholders for the
purpose of electing Directors if, at any time, less than a majority of the
Directors then holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into
separate portfolios, each of which is treated as a separate entity for certain
matters under the 1940 Act and for other purposes. A shareholder of one
portfolio is not deemed to be a shareholder of any other portfolio. For certain
matters Fund shareholders vote together as a group; as to others they vote
separately by portfolio. By this Prospectus, Institutional Shares of the
Portfolio are being offered. From time to time, other portfolios may be
established and sold pursuant to other offering documents.
To date, 12 portfolios of shares have been authorized. The other
portfolios are not being offered by this Prospectus. All consideration received
by the Fund for shares of one of the portfolios and all assets in which such
consideration is invested, belong to that portfolio (subject only to the rights
of creditors of the Fund) and will be subject to the liabilities related
thereto. The income and expenses attributable to one portfolio (and as to
classes within a portfolio) are treated separately from those of the other
portfolios (and classes).
The Transfer Agent maintains a record of shareholder ownership and
sends investors confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
<PAGE>
PROSPECTUS
May 1, 1996
LOGO
THE INFINITY MUTUAL FUNDS, INC.
Correspondent Cash Reserves
Money Market Portfolio
Retail Shares
The Infinity Mutual Funds, Inc. (the "Fund") is an open-end,
management investment company, known as a series fund. By this Prospectus,
Retail Shares of the Fund's Correspondent Cash Reserves Money Market Portfolio
(the "Portfolio") are being offered.
The Portfolio is a diversified, money market mutual fund that seeks to
provide investors with as high a level of current income as is consistent with
the preservation of capital and the maintenance of liquidity. The Portfolio
invests in a diversified portfolio of short-term money market obligations.
The Retail Shares are offered only to clients of certain securities
dealers that have entered into clearing arrangements with Correspondent Services
Corporation [CSC], a wholly-owned subsidiary of PaineWebber Incorporated
("PaineWebber"). You can invest, reinvest or redeem Retail Shares at any time
without charge or penalty imposed by the Fund.
Another class of the Portfolio's shares -- the Institutional Shares --
are offered by a separate prospectus to institutional investors and are not
offered hereby. The Retail Shares and the Institutional Shares are identical,
except as to the services offered to each class and the expenses borne by each
class which may affect performance. Investors desiring to obtain information
about the Institutional Shares should ask their sales representative or call
1-800-852-9730.
Mitchell Hutchins Asset Management Inc. (the "Adviser"), a
wholly-owned subsidiary of PaineWebber, is the Portfolio's investment adviser.
Concord Holding Corporation (the "Administrator") serves as the
Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned
subsidiary of the Administrator, serves as distributor of the Portfolio's
shares.
An investment in the Portfolio is neither insured nor guaranteed by
the U.S. Government. There can be no assurance that the Portfolio will be able
to maintain a stable net asset value of $1.00 per share.
------------------------
This Prospectus sets forth concisely information about the Fund and
the Portfolio that an investor should know before investing. It should be read
and retained for future reference.
The Statement of Additional Information, dated May 1, 1996, which may
be revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, write to the Fund at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, contact your sales representative or call
1-800-442-3809.
Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other governmental
agency. Portfolio shares involve certain investment risks, including the
possible loss of principal.
TABLE OF CONTENTS
Page
-----------
Expense Summary........................................ 2
Financial Highlights..................................... 3
Yield Information........................................ 4
Description of the Portfolio............................. 4
Management of the Portfolio.............................. 12
How to Buy Shares........................................ 15
How to Redeem Shares..................................... 16
Dividends, Distributions and Taxes....................... 18
General Information...................................... 20
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Expense Summary
(as a percentage of average daily net assets)
Retail
Shares
---------
Management Fees...................................................... .10%
12b-1 Fees (net of expense reimbursement) . %
Other Expenses (net of fee waivers).................................. . %
Total Operating Expenses (net of expense reimbursements or fee waivers).85%
Retail
Shares
---------
Example: 1 Year $
You would pay the following expenses on a $1,000 investment, 3 Years $
assuming (1) 5% annual return and (2) redemption at the 5 Years $
end of each time period: 10 Years $
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. Moreover, while the example assumes a 5% annual
return, the Portfolio's actual performance will vary and may result in an actual
return greater or less than 5%.
The purpose of the foregoing table is to assist you in understanding the
costs and expenses borne by the Portfolio, the payment of which will reduce
investors' annual return. The expenses noted above for the Retail Shares,
without expense reimbursements or fee waivers, would be: 12b-1 Fees -- .60%,
Other Expenses -- .33% and Total Operating Expenses -- 1.03%. Certain Securities
Firms (as defined below) may charge their clients direct fees for effecting
transactions in Portfolio shares. See "How to Buy Shares." Long-term investors
in Retail Shares could pay more in 12b-1 fees than the economic equivalent of
paying a front-end sales charge. For a further description of the various costs
and expenses incurred in the Portfolio's operation, see "Management of the
Portfolio."
<PAGE>
- - --------------------------------------------------------------------------------
Financial Highlights
Contained below is per share operating performance data for a Retail
Share of common stock outstanding, total investment return, ratios to average
net assets and other supplemental data for each period indicated. The
information in the table has been audited by KPMG Peat Marwick LLP, the
Portfolio's independent auditors, whose report thereon appears in the Statement
of Additional Information. Further financial data and related notes are included
in the Statement of Additional Information, available upon request.
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------ Period Ended
December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1992 1991*
------------ ------------ ------------ ------------ ------------
RETAIL SHARES:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 0.9975 $ 0.9999 $ 1.0000 $ 1.0000 $ 1.0000
------------ ------------ ------------ ------------ ------------
Income from investment operations:
Net investment income.................... 0.0512 0.0340 0.0245 0.0306 0.0310
Net realized gain (loss) on securities... 0.0011 (0.0024) (0.0001) -- --
------------ ------------ ------------ ------------ ------------
Net gains from investment operations..... 0.0523 0.0316 0.0244 0.0306 0.0310
Dividends from net investment income..... (0.0512) (0.0340) (0.0245) (0.0306) (0.0310)
------------ ------------ ------------ ------------ ------------
Net change in net asset value.............. 0.0011 (0.0024) (0.0001) 0.0000 0.0000
------------ ------------ ------------ ------------ ------------
Net asset value, end of period............. $ 0.9986 $ 0.9975 $ 0.9999 $ 1.0000 $ 1.0000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total Return............................. 5.24% 3.45% 2.48% 3.11% 5.07%+
Ratios/Supplemental Data:
Net assets, end of period (000s)......... $ 779,011 $ 458,092 $ 331,210 $ 267,895 $ 192,992
Ratio of expenses to average net
assets**................................... 0.85% 0.94% 1.02% 1.12% 0.83%++
Ratio of net investment income to average
net assets**............................... 5.14% 3.47% 2.44% 3.01% 4.99%++
</TABLE>
- - ---------------
* For the period May 20, 1991 (commencement of operations) through December 31,
1991.
** Net of fee waivers which had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.18%, 0.18%, 0.18%, 0.23% and 0.33% (annualized),
respectively.
+ Not annualized.
++ Annualized.
<PAGE>
Yield Iformation
From time to time, the Portfolio will advertise its yield and
effective yield. Both yield figures are based on historical earnings and are not
intended to indicate future performance. It can be expected that these yields
will fluctuate substantially. The yield of the Portfolio refers to the income
generated by an investment in the Portfolio over a seven-day period (which
period will be stated in the advertisement). This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Portfolio is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment. The Portfolio's
yield and effective yield may reflect absorbed expenses pursuant to any
undertaking that may be in effect.
Yield information is useful in reviewing the Portfolio's performance,
but because yields will fluctuate, under certain conditions such information may
not provide a basis for comparison with domestic bank deposits, other
investments which pay a fixed yield for a stated period of time, or other
investment companies which may use a different method of computing yield.
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., Bank Rate Monitor(TM), N. Palm Beach, Fla. 33408,
IBC/Donoghue's Money Fund Report, Morningstar, Inc., other industry publications
and national financial publications, including Money, Forbes, Barron's, The Wall
Street Journal and The New York Times, or local or regional publications.
- - --------------------------------------------------------------------------------
Description of the Portfolio
Investment Objective
The Portfolio seeks to provide investors with as high a level of
current income as is consistent with the preservation of capital and the
maintenance of liquidity. The Portfolio's investment objective cannot be changed
without approval by the holders of a majority (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) of the Portfolio's outstanding
voting shares. There can be no assurance that the Portfolio's investment
objective will be achieved. Securities in which the Portfolio invests may not
earn as high a level of current income as long-term or lower quality securities
which generally have less liquidity, greater market risk and more fluctuation in
market value.
Management Policies
The Portfolio invests in U.S. dollar denominated short-term money
market obligations, including securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, certificates of deposit, time
deposits, bankers' acceptances and other short-term obligations issued by
domestic banks, foreign branches of domestic banks, foreign subsidiaries of
domestic banks, and domestic and foreign branches of foreign banks, repurchase
agreements, and high quality domestic and foreign commercial paper and other
high quality short-term corporate obligations, such as floating or variable rate
U.S. dollar denominated demand notes and bonds. The Portfolio invests in U.S.
dollar denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities, including obligations of supranational entities. The
Portfolio also may lend securities from its portfolio and enter into reverse
repurchase agreements as described below. During normal market conditions, at
least 25% of the Portfolio's total assets will be invested in domestic and/or
foreign bank obligations. See "Investment Considerations and Risk Factors"
below.
The Portfolio seeks to maintain a net asset value of $1.00 per share
for purchases and redemptions. To do so, the Fund uses the amortized cost method
of valuing the Portfolio's securities pursuant to Rule 2a-7 under the 1940 Act,
certain requirements of which are summarized below.
In accordance with Rule 2a-7, the Portfolio is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities determined in accordance with procedures
established by the Board of Directors to present minimal credit risks and which
are rated in one of the two highest rating categories for debt obligations by at
least two nationally recognized statistical rating organizations ("NRSRO") (or
one NRSRO if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Board of Directors. The Board of Directors has delegated to
the Adviser the day-to-day operations of the Portfolio; however, the Board of
Directors retains ultimate responsibility for compliance with Rule 2a-7 under
the 1940 Act. The NRSROs currently rating instruments of the type the Portfolio
may purchase are Moody's Investors Service, Inc., Standard & Poor's Ratings
Group, Duff & Phelps Credit Rating Co., Fitch Investors Service, L.P., IBCA
Limited and IBCA Inc., and Thomson BankWatch, Inc. and their rating criteria are
described in the "Appendix" to the Portfolio's Statement of Additional
Information.
In addition, the Portfolio will not invest more than 5% of its total
assets in the securities (including the securities collateralizing a repurchase
agreement) of, or subject to puts issued by, a single issuer, except that (i)
the Portfolio may invest more than 5% of its total assets in a single issuer for
a period of up to three business days in certain limited circumstances as set
forth under Rule 2a-7, (ii) the Portfolio may invest in obligations issued or
guaranteed by the U.S. Government without any such limitation, and (iii) the
limitation with respect to puts does not apply to unconditional puts if no more
than 10% of the Portfolio's total assets is invested in securities issued or
guaranteed by the issuer of the unconditional put. Investments in rated
securities not rated in the highest category by at least two rating
organizations (or one rating organization if the instrument was rated by only
one such organization), and unrated securities not determined by the Board of
Directors to be comparable to those rated in the highest category, will be
limited to 5% of the Portfolio's total assets, with the investment in any one
such issuer being limited to no more than the greater of 1% of the Portfolio's
total assets or $1,000,000. As to each security, these percentages are measured
at the time the Portfolio purchases the security. For further information
regarding the amortized cost method of valuing securities, see "Determination of
Net Asset Value" in the Portfolio's Statement of Additional Information. There
can be no assurance that the Portfolio will be able to maintain a stable net
asset value of $1.00 per share.
Portfolio Securities
U.S. Government Obligations. The Portfolio may invest in securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Such securities include U.S. Treasury securities, such as
bills, notes, bonds and certificates of indebtedness, which differ in their
interest rates, maturities and times of issuance, and issues of U.S. Government
agencies and instrumentalities established under the authority of an act of
Congress. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued by
the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Interest may
fluctuate based on generally recognized reference rates or the relationship of
rates. While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Portfolio
will invest in such securities only when it is satisfied that the credit risk
with respect to the issuer is minimal.
Foreign Government Obligations; Securities of Supranational Entities.
The Portfolio may invest in obligations issued or guaranteed by one or more
foreign governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Board of Directors to be of
comparable quality to the other obligations in which the Portfolio may invest.
Such securities also include debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of the
Portfolio's assets invested in securities issued by foreign governments will
vary depending on the relative yields of such securities, the economic and
financial markets of the countries in which the investments are made and the
interest rate climate of such countries. See "Investment Considerations and Risk
Factors" below.
Certificates of Deposit, Time Deposits and Bankers' Acceptances. The
Portfolio also will invest in certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations issued by domestic banks, foreign
branches of domestic banks, foreign subsidiaries of domestic banks, and domestic
and foreign branches of foreign banks. See "Investment Considerations and Risk
Factors" below. Certificates of deposit are certificates representing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Time deposits are non-negotiable deposits maintained in a bank for a
specified period of time at a stated interest rate. Time deposits which may be
held by the Portfolio will not benefit from insurance from the Bank Insurance
Fund or the Savings Association Insurance Fund administered by the Federal
Deposit Insurance Corporation. The Portfolio will not invest more than 10% of
the value of its net assets in time deposits maturing in more than seven days
and in other securities that are illiquid. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations bearing fixed,
floating or variable rates of interest.
Repurchase Agreements. Repurchase agreements involve the acquisition
by the Portfolio of an underlying debt instrument, subject to an obligation of
the seller to repurchase, and the Portfolio to resell, the instrument at a fixed
price usually not more than one week after its purchase. Certain costs may be
incurred in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
securities, realization on the securities by the Portfolio may be delayed or
limited.
Commercial Paper and Corporate Obligations. Commercial paper consists
of short-term, unsecured promissory notes issued to finance short-term credit
needs. The commercial paper purchased by the Portfolio will consist only of
direct obligations issued by domestic and foreign entities. The other corporate
obligations in which the Portfolio may invest consist of high quality, U.S.
dollar denominated short-term bonds and notes (including variable amount master
demand notes) issued by domestic and foreign corporations.
Floating and Variable Rate Obligations. The Portfolio also may
purchase floating and variable rate demand notes and bonds, which are
obligations ordinarily having stated maturities in excess of 13 months, but
which permit the holder to demand payment of principal at any time, or at
specified intervals not exceeding 13 months, in each case upon not more than 30
days' notice. Variable rate demand notes include master demand notes which are
obligations that permit the Portfolio to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the
Portfolio, as lender, and the borrower. The interest rates on these notes
fluctuate from time to time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally will
be traded, and there generally is no established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Portfolio's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. These obligations include
highly rated certificates of participation in trusts secured by accounts
receivable, including trade receivables, and other assets. Such obligations
frequently are not rated by credit rating agencies and, if not so rated, the
Portfolio may invest in them only if the Adviser, acting upon delegated
authority from, and subject to ratification by, the Fund's Board of Directors,
determines that at the time of investment the obligations are of comparable
quality to the other obligations in which the Portfolio may invest. The Adviser,
on behalf of the Portfolio, will consider on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate demand
obligations held by the Portfolio. The Portfolio will not invest more than 10%
of the value of its net assets in floating or variable rate demand obligations
as to which it cannot exercise the demand feature on not more than seven days'
notice if the Adviser determines, acting upon delegated authority from, and
procedures established by, the Fund's Board of Directors, that there is no
secondary market available for these obligations, and in other securities that
are illiquid. See "Certain Fundamental Policies" below.
Notes. The Portfolio also may purchase unsecured promissory notes
("Notes") which are not readily marketable and have not been registered under
the Securities Act of 1933, provided such investments are consistent with its
investment objective. The Portfolio will invest no more than 10% of its net
assets in such Notes and in other securities that are illiquid. See "Certain
Fundamental Policies" below.
Participation Interests. The Portfolio may invest in short-term
corporate obligations that are originated, negotiated and structured by a
syndicate of lenders ("Co-Lenders") consisting of commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions one or more of which administers the security on behalf of the
syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third
parties called "Participants." The Portfolio may invest in such securities
either by participating as a Co-Lender at origination or by acquiring an
interest in the security from a Co-Lender or a Participant (collectively,
"participation interests"). Co-Lenders and Participants interposed between the
Portfolio and the corporate borrower (the "Borrower"), together with Agent
Banks, are referred to herein as "Intermediate Participants." The Portfolio also
may purchase a participation interest in a portion of the rights of an
Intermediate Participant. The Portfolio will not act as an Agent Bank,
guarantor, sole negotiator or sole structuror with respect to securities that
are the subject of a participation interest.
A participation interest gives the Portfolio an undivided interest in
the security in the proportion that the Portfolio's participation interest bears
to the total principal amount of the security. These instruments may have fixed,
floating or variable rates of interest with remaining maturities of 13 months or
less. If the participation interest is unrated, or has been given a rating below
that which is permissible for purchase by the Portfolio, the participation
interest will be backed by an irrevocable or unconditional letter of credit or
guarantee of a bank or other entity the debt securities of which are rated high
quality, or the payment obligation otherwise will be collateralized by U.S.
Government securities, or, in the case of an unrated participation interest, the
Adviser, acting upon delegated authority from the Fund's Board of Directors,
must have determined that the instrument is of comparable quality to those
instruments in which the Portfolio may invest. Participation interests with a
rating below high quality that are backed by an irrevocable letter of credit or
guarantee as described above will be purchased only if the Adviser, acting as
described above and subject to ratification by the Fund's Board of Directors,
determines after an analysis of, among other factors, the creditworthiness of
the guarantor that such participation interest is high quality, and if the
rating agency did not include the letter of credit or guarantee in its
determination of the instrument's rating. If the rating of a participation
interest is reduced subsequent to its purchase by the Portfolio, the Adviser
will consider, in accordance with procedures established by the Board of
Directors, all circumstances deemed relevant in determining whether the
Portfolio should continue to hold the participation interest. For certain
participation interests, the Portfolio will have the right to demand payment, on
not more than seven days' notice, for all or any part of the Portfolio's
participation interest in the security, plus accrued interest. As to these
instruments, although subject to unconditional demand for payment, the Portfolio
intends to exercise its right to demand payment only upon a default under the
terms of the security, as needed to provide liquidity to meet redemptions, or to
maintain or improve the quality of its investment portfolio. Not more than 10%
of the value of the Portfolio's net assets will be invested in participation
interests that do not have this demand feature, and in other securities that are
illiquid. See "Certain Fundamental Policies" below.
Investment Practices
Portfolio Lending. From time to time, the Portfolio may lend
securities from its portfolio to brokers, dealers and other financial
institutions needing to borrow securities to complete certain transactions. Such
loans may not exceed 33 1/3% of the Portfolio's total assets. In connection with
such loans, the Portfolio will receive collateral consisting of cash, U.S.
Government securities or irrevocable letters of credit issued by third party
financial institutions. Such collateral will be maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities. The Portfolio can increase its income through the investment of such
collateral. The Portfolio continues to be entitled to the interest or other
distributions payable on the loaned security and receives interest on the amount
of the loan. Such loans will be terminable at any time upon specified notice.
The Portfolio might experience risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with the
Portfolio.
Reverse Repurchase Agreements. The Portfolio may enter into reverse
repurchase agreements with banks, brokers or dealers. Reverse repurchase
agreements involve the transfer by the Portfolio of an underlying debt
instrument in return for cash proceeds based on a percentage of the value of the
security. The Portfolio retains the right to receive interest and principal
payments on the security. The Portfolio will use the proceeds of reverse
repurchase agreements only to make investments which generally either mature or
have a demand feature to resell to the issuer at a date simultaneous with or
prior to the expiration of the reverse repurchase agreement. At an agreed upon
future date, the Portfolio repurchases the security at principal plus accrued
interest. In certain types of agreements, there is no agreed upon repurchase
date and interest payments are calculated daily, often based on the prevailing
overnight repurchase rate. As a result of these transactions, the Portfolio may
be exposed to greater potential fluctuations in the value of its assets.
Interest costs on the money borrowed may exceed the return received on the
securities purchased. The Fund's Directors have considered the risks to the
Portfolio and its shareholders which may result from the entry into reverse
repurchase agreements and have determined that the entry into such agreements is
consistent with the Portfolio's investment objective and management policies.
When-Issued Securities. The Portfolio may purchase money market
securities on a when-issued or forward commitment basis, which means that
delivery and payment for such securities ordinarily take place within 45 days
after the date of the commitment to purchase. The payment obligation and the
interest rate that will be received on the securities are fixed at the time the
Portfolio enters into the commitment. The Portfolio will make commitments to
purchase such securities only with the intention of actually acquiring the
securities, but the Portfolio may sell these securities before the settlement
date if it is deemed advisable. The Portfolio will not accrue income in respect
of a security purchased on a forward commitment basis prior to its stated
delivery date. No additional forward commitments will be made if more than 20%
of the Portfolio's net assets would be so committed.
Illiquid Securities. The Portfolio will not invest more than 10% of
the value of its net assets in illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Portfolio has valued the securities and includes, among other
instruments, certain restricted securities. As to these securities, the
Portfolio is subject to a risk that should the Portfolio desire to sell them
when a ready buyer is not available at a price the Portfolio deems
representative of their value, the value of the Portfolio's net assets could be
adversely affected.
Certain Fundamental Policies
The Portfolio (i) may borrow money, but only (a) from banks for
temporary or emergency (not leveraging) purposes, in an amount up to 15% of the
value of the Portfolio's total assets (including the amount borrowed) valued at
the lesser of cost or market, less liabilities (not including the amount
borrowed) at the time the borrowing is made (borrowings repaid within 60 days
and not renewed or extended are presumed to be for temporary purposes) (while
such borrowings exceed 5% of the value of the Portfolio's total assets, the
Portfolio will not make any additional investments), and (b) in connection with
the entry into reverse repurchase agreements. At no time may total borrowings
exceed 33 1/3% of the value of the Portfolio's total assets; (ii) may pledge,
hypothecate, mortgage or otherwise encumber its assets, but only (a) to secure
borrowings for temporary or emergency purposes and (b) in connection with the
entry into reverse repurchase agreements in an amount equal to the aggregate
amount of its reverse repurchase obligations, plus accrued interest in certain
cases; (iii) may invest up to 10% of its net assets in repurchase agreements
providing for settlement in more than seven days after notice and in securities
that are illiquid; (iv) may invest up to 5% of its total assets in the
obligations of any one issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested (subject to the provisions of Rule
2a-7), and obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities may be purchased, without regard to any such limitation;
and (v) will invest, except when the Portfolio has adopted a temporary defensive
position, at least 25% of its total assets in securities issued by banks,
including foreign banks and branches, and may invest up to 25% of its total
assets in the securities of issuers in any other industry, provided that there
is no limitation on investments in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. This paragraph describes
fundamental policies that cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
shares. See "Investment Objective and Management Policies -- Investment
Restrictions" in the Portfolio's Statement of Additional Information.
Investment Considerations and Risk Factors
General. The Portfolio will attempt to increase yields by trading to take
advantage of short-term market variations. This policy is expected to result in
high portfolio turnover but should not adversely affect the Portfolio since the
Portfolio usually will not pay brokerage commissions on purchases of short-term
debt obligations. The value of the securities held by the Portfolio will vary
inversely to changes in prevailing interest rates. Thus, if interest rates have
increased from the time a security was purchased, such security, if sold, might
be sold at a price less than its cost. Similarly, if interest rates have
declined from the time a security was purchased, such security, if sold, might
be sold at a price greater than its purchase cost. In either instance, if the
security was purchased at face value and held to maturity, no gain or loss will
be realized.
Bank Securities. To the extent the Portfolio's investments are concentrated
in the banking industry, it will have correspondingly greater exposure to the
risk factors which are characteristic of such investments. Sustained increases
in interest rates can adversely affect the availability or liquidity and cost of
capital funds for lending activities, and a deterioration in general economic
conditions could increase the exposure to credit losses. In addition, the value
of and the investment return on the Portfolio's shares will be affected by
economic or regulatory developments in or related to the banking industry, and
competition within the banking industry as well as with other types of financial
institutions. The Portfolio, however, will seek to minimize its exposure to such
risks by investing only in debt securities which are determined to be of high
quality.
Foreign Securities. Since the Portfolio may invest in securities issued by
foreign governments and any of their political subdivisions, agencies or
instrumentalities, and by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, domestic and foreign branches of foreign banks,
and commercial paper issued by foreign issuers, it may be subject to additional
investment risks with respect to those securities that are different in some
respects from those incurred by a fund which invests only in debt obligations of
U.S. domestic issuers. Such risks include future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities, the possible establishment of exchange
controls, the possible seizure or nationalization of foreign deposits, or the
adoption of other foreign governmental restrictions which might adversely affect
the payment of principal and interest on these securities.
Simultaneous Investments. Investment decisions for the Portfolio are
made independently from those of the Fund's other portfolios and other
investment companies or accounts managed by the Adviser. However, if such other
entities desire to invest in, or dispose of, the same securities as the
Portfolio, available investments or opportunities for sales will be allocated
equitably to each of them. In some cases, this procedure may adversely affect
the size of the position obtained for or disposed of by the Portfolio or the
price paid or received by the Portfolio.
- - --------------------------------------------------------------------------------
Management of the Portfolio
Board of Directors
The business affairs of the Fund are managed under the general
supervision of its Board of Directors. The Portfolio's Statement of Additional
Information contains the name and general business experience of each Director.
Investment Adviser
Mitchell Hutchins Asset Management Inc., located at 1285 Avenue of the
Americas, New York, New York 10019, serves as the Portfolio's investment
adviser. The Adviser is a wholly-owned subsidiary of PaineWebber organized in
May 1977. The Adviser is registered as a broker-dealer under the Securities
Exchange Act of 1934 and as an investment adviser under the Investment Advisers
Act of 1940. As of March 31, 1996, the Adviser served as adviser or sub-adviser
to investment companies with investment portfolios having aggregate assets in
excess of $ billion and managed discretionary and non-discretionary accounts
with assets in excess of $ billion.
The Adviser supervises and assists in the overall management of the
Portfolio's affairs under an Investment Advisory Agreement between the Adviser
and the Fund, subject to the overall authority of the Fund's Board of Directors
in accordance with Maryland law.
For the fiscal year ended December 31, 1995, the Portfolio paid the
Adviser a monthly advisory fee at the annual rate of .10 of 1% of the value of
the Portfolio's average daily net assets.
In addition, under the terms of a Special Management Services
Agreement among the Fund, the Adviser and the Administrator, the Portfolio has
agreed to pay the Adviser and the Administrator each a monthly fee at the annual
rate of .05 of 1% of the value of the average daily net assets represented by
the Retail Shares for certain services, other than those provided pursuant to
the Portfolio's Distribution Plan, which will be provided to the holders of the
Retail Shares. These services include developing and monitoring customized
investor programs including individual retirement accounts and other ERISA
options, automatic deposit and withdrawal programs and other programs requested
by Securities Firms (as defined below). For the fiscal year ended December 31,
1995, the Portfolio did not pay the Adviser and the Administrator a fee pursuant
to the Special Management Services Agreement.
Administrator
Concord Holding Corporation, located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as the Portfolio's administrator. The Administrator
currently provides administrative or sub-administrative services to other
investment companies with over $60 billion in assets. The Administrator is a
wholly-owned subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator
generally assists in all aspects of the Fund's operations, other than providing
investment advice, subject to the overall authority of the Fund's Board of
Directors in accordance with Maryland law. In connection therewith, the
Administrator provides the Fund with office facilities, personnel, and certain
clerical and bookkeeping services (e.g., preparation of reports to shareholders
and the Securities and Exchange Commission and filing of Federal, state and
local income tax returns) that are not being furnished by The Bank of New York,
the Fund's Custodian.
For the fiscal year ended December 31, 1995, the Portfolio paid the
Administrator a monthly administration fee at the annual rate of .10 of 1% of
the value of the Portfolio's average daily net assets.
As described above, under the terms of the Special Management Services
Agreement, the Portfolio also has agreed to pay the Administrator a monthly fee
at the annual rate of .05 of 1% of the value of the average daily net assets
represented by the Retail Shares.
Distributor
Concord Financial Group, Inc., located at 125 West 55th Street, New
York, New York 10019, serves as the Fund's principal underwriter and distributor
of the Portfolio's shares. The Distributor, a wholly-owned subsidiary of the
Administrator, was organized to distribute shares of mutual funds to
institutional and retail investors. The Distributor distributes the shares of
other investment companies with over $80 billion in assets. The Distributor is
the Fund's sponsor.
The Distributor makes a continuous offering of the Portfolio's shares
and bears the costs and expenses of printing and distributing to prospective
investors copies of any prospectuses, statements of additional information and
annual and interim reports of the Portfolio (after such items have been prepared
and set in type by the Fund) which are used in connection with the offering of
shares, and the costs and expenses of preparing, printing and distributing any
other literature used by the Distributor in connection with the offering of the
Portfolio's shares for sale to the public.
Distribution Plan
Under a distribution plan adopted by the Fund's Board of Directors
pursuant to Rule 12b-1 under the 1940 Act (the "Distribution Plan"), the
Portfolio is authorized to pay Correspondent Services Corporation [CSC] and
correspondent firms a monthly fee at the annual rate of up to .60 of 1% of the
average daily net assets represented by the Retail Shares held in accounts
serviced by Correspondent Services Corporation [CSC] and such firms. Such fees
are paid pursuant to an agreement between the Fund and Correspondent Services
Corporation [CSC]. Such fees are not paid with respect to the Portfolio's
Institutional Shares. Such fees will be paid in respect of certain services
provided by such firms, including answering client inquiries regarding the
Portfolio; assisting clients in changing dividend options, account designations
and addresses; performing subaccounting; establishing and maintaining
shareholder accounts and records; processing purchase and redemption
transactions; investing client cash account balances automatically in Portfolio
shares; providing periodic statements showing a client's account balance and
integrating such statements with those of other transactions and balances in the
client's other accounts serviced by such firm; arranging for bank wires; and
such other services as the clients may request.
Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286,
is the Fund's Custodian (the "Custodian"). BISYS Fund Services Ohio, Inc., an
affiliate of the Administrator, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, is the Fund's Transfer and Dividend Disbursing Agent (the "Transfer
Agent").
Expenses
All expenses incurred in the operation of the Fund are borne by the
Fund, except to the extent specifically assumed by others. The expenses borne by
the Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator, or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory and administration
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, industry association fees, auditing and legal
expenses, costs of maintaining corporate existence, costs of independent pricing
services, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of calculating the net
asset value of the Portfolio's shares, costs of shareholders' reports and
corporate meetings, costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders, and any extraordinary expenses. Expenses attributable to
the Portfolio are charged against the assets of the Portfolio; other expenses of
the Fund are allocated among the Fund's portfolios on the basis determined by
the Board of Directors, including, but not limited to, proportionately in
relation to the net assets of each portfolio.
- - --------------------------------------------------------------------------------
How to Buy Shares
General
Retail Shares may be purchased only by clients of certain securities
dealers that have entered into securities clearing arrangements with
Correspondent Services Corporation [CSC] (the "Securities Firms"). Securities
Firms may receive different compensation for selling Retail Shares than for
selling Institutional Shares. If you desire to purchase Retail Shares for your
Keogh Plan, IRA or other retirement plan, you should consult your Securities
Firm. Stock certificates are issued only upon written request. No certificates
are issued for fractional shares. The Fund reserves the right to reject any
purchase order.
The Fund requires no minimum initial or subsequent investment amounts
for the Retail Shares. Certain Securities Firms may impose minimum investment
amounts for purchases of Portfolio shares by their clients, including clients
purchasing shares under Keogh Plans, IRAs or other retirement plans. You should
consult your Securities Firm in this regard.
Shares are sold on a continuous basis at the net asset value per share
next determined after an order in proper form and Federal Funds (monies of
member banks within the Federal Reserve System which are held on deposit at a
Federal Reserve Bank) are received by the Transfer Agent. See "Terms of
Purchase" below.
Payments Through Securities Firms
All orders must be made through your Securities Firm. The Securities
Firm will transmit your payment to the Fund and will supply the Fund with the
required information. It is your Securities Firm's responsibility to transmit
your order properly on a timely basis.
Wire Orders
If you have opened a Portfolio account, you may make subsequent
purchases by wire. Information on remitting funds in this manner may be obtained
from your Securities Firm.
You should consult your Securities Firm for information on any fees
that may be charged you directly for wires.
Terms of Purchase
If your purchase order is received by the Transfer Agent by 12:00
noon, Eastern time, on a business day (which, as used herein, shall include each
day that the New York Stock Exchange and the Fund's Custodian are open for
business), and Federal Funds are received by the Transfer Agent by 4:00 p.m.,
Eastern time, on that day, Retail Shares will be purchased as of 12:00 noon,
Eastern time, on such business day. If your purchase order is received after
12:00 noon, Eastern time, on a given day, or Federal Funds are received after
4:00 p.m., Eastern time, on such day, Retail Shares will be purchased as of
12:00 noon, Eastern time, on the next business day.
The Portfolio's net asset value per share is determined as of 12:00
noon, Eastern time, on each business day. Net asset value per share is computed
by dividing the value of the Portfolio's net assets (i.e., the value of its
assets less liabilities) by the total number of shares outstanding. See
"Determination of Net Asset Value" in the Portfolio's Statement of Additional
Information.
Federal regulations require that you provide a certified Taxpayer
Identification Number upon opening or reopening an account. See "Dividends,
Distributions and Taxes" for further information concerning this requirement.
- - --------------------------------------------------------------------------------
How to Redeem Shares
General
You may request redemption of your shares at any time through your
Securities Firm. Redemption requests may be made as described below. When a
request is received in proper form, the Fund will redeem the shares at the next
determined net asset value.
The Fund ordinarily will make payment for all shares redeemed within
seven days after receipt by the Transfer Agent of a redemption request in proper
form, except as provided by the rules of the Securities and Exchange Commission.
The Fund understands that, if you cease to be a client of a Securities
Firm, or if your Securities Firm's clearing arrangement with Correspondent
Services Corporation [CSC] is discontinued, the Securities Firm will cancel your
Fund account and request the Transfer Agent to remit the proceeds of your
redeemed shares, together with all accrued and unpaid dividends to which you are
entitled. You should consult your Securities Firm in this regard.
The Fund reserves the right to redeem your account at its option upon
not less than 45 days' written notice if your account's net asset value is $500
or less, for reasons other than market conditions, and remains so during the
notice period. Certain Securities Firms may impose, with respect to their
clients' investments in the Portfolio, a minimum account balance which is higher
than that specified above.
Procedures
Redemption by Check. If you desire to use check redemption, you should
consult your Securities Firm to determine its availability. At your Securities
Firm's request, the Transfer Agent will provide you with redemption checks if
you have a $1,000 minimum account. These checks may be made payable to the order
of any person in an amount not less than $500. The payee of the check may cash
or deposit the check. When a check is presented to the Transfer Agent for
payment, the Transfer Agent will present the check to the Fund as authority to
redeem a sufficient number of full and fractional shares in your account to
cover the amount of the check. You continue earning daily dividends until the
check is cleared. There currently is no charge for the use of checks; however,
the Transfer Agent may impose a charge for stopping payment of a check upon your
request, or if the check cannot be honored due to insufficient funds or other
valid reason. Shares for which stock certificates have been issued may not be
redeemed by check. The Fund or the Transfer Agent may modify or terminate the
check redemption privilege at any time upon notice to shareholders.
Repurchase Through Securities Firms. The Fund will repurchase Retail
Shares through Securities Firms. The Fund ordinarily will accept orders to
repurchase shares by wire or telephone from Securities Firms for their customers
at the net asset value next computed after receipt of the order from the
Securities Firm, provided that such request for repurchase is received from the
Securities Firm prior to 12:00 noon, Eastern time, on any business day. It is
your Securities Firm's responsibility to transmit your repurchase order properly
on a timely basis.
These repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund; however, Securities Firms may impose a
charge on the shareholder for transmitting the notice of repurchase to the Fund.
The Fund reserves the right to reject any order for repurchases through a
Securities Firm, but it may not reject other properly submitted requests for
redemption as described herein. The Fund promptly will notify the Securities
Firm of any rejection of a repurchase with respect to Retail Shares. For
shareholders repurchasing through their Securities Firm, payments will be made
by the Transfer Agent to the Securities Firm.
Automatic Withdrawal Plan. If you desire to participate in the
Automatic Withdrawal Plan, you should consult your Securities Firm to determine
its availability and any conditions which may be imposed on its use. The
Automatic Withdrawal Plan permits you to request withdrawal of a specified
dollar amount (minimum of $50) on either a monthly, quarterly, semi-annual or
annual basis if you have a $1,000 minimum account. The automatic withdrawal will
be made on the first or fifteenth day, at your option, of the period selected.
Redemption proceeds will be on deposit in your designated account at an
Automated Clearing House member bank ordinarily within two days following
redemption. To participate in the Automatic Withdrawal Plan, you must supply
your Securities Firm with the necessary information. Your participation in the
Automatic Withdrawal Plan may be ended at any time by you, your Securities Firm,
the Fund or the Transfer Agent.
Automatic Redemption. Correspondent Services Corporation [CSC] carries
securities accounts and performs clearing services for the Securities Firms and
has instituted an automatic redemption procedure applicable to Portfolio
shareholders. This procedure may be used to satisfy amounts due from you as a
result of purchases of securities or other transactions in your securities
account. Under this procedure, unless you notify your Securities Firm to the
contrary, your securities account will be scanned each business day prior to
12:00 noon, Eastern time, and after application of any cash balances in the
account, a sufficient number of Portfolio shares may be redeemed at the 12:00
noon, Eastern time, pricing that day to satisfy any amounts for which you are
obligated to make payment to your Securities Firm. Redemptions will be effected
on the business day preceding the date you are obligated to make such payment,
and your Securities Firm will receive the redemption proceeds on the day
following the redemption date.
- - --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
The Portfolio declares dividends from net investment income on each
day the Portfolio is open for business. Dividends usually are paid on or about
the fifteenth day of each month, and are automatically reinvested in additional
Retail Shares at net asset value or, at your option, paid in cash. The
Portfolio's earnings for Saturdays, Sundays and holidays are declared as
dividends on the preceding business day. Shares begin accruing dividends on the
day the purchase order is received in proper form by the Transfer Agent, if
received by 12:00 noon, New York time, on such day, and continue to earn
dividends through the day before a redemption order for such shares is processed
by the Transfer Agent. If you redeem all shares in your account at any time
during the month, all dividends to which you are entitled will be paid to you
along with the proceeds of the redemption. Dividends paid by each class of
Portfolio shares will be calculated at the same time and in the same manner and
will be of the same amount, except that the expenses attributable solely to a
class will be borne exclusively by such class.
Distributions from net realized securities gains, if any, are declared
and paid once a year, but the Portfolio may make distributions on a more
frequent basis to comply with the distribution requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), in all events in a manner
consistent with the provisions of the 1940 Act. Dividends and distributions
ordinarily are reinvested in additional Retail Shares at net asset value. You
may elect to receive dividends and distributions in cash by contacting your
Securities Firm. All expenses are accrued daily and deducted before declaration
of dividends to investors.
If you elect to receive distributions in cash and your distribution
checks (1) are returned to the Fund marked "undeliverable" or (2) remain
uncashed for six months, your cash election will be changed automatically and
your future dividend and capital gains distributions will be reinvested in
Portfolio shares at the net asset value determined as of the date of payment of
the distribution. In addition, any such undeliverable checks or checks that
remain uncashed for six months will be canceled and will be reinvested in
Portfolio shares at the net asset value determined as of the date of
cancellation.
Dividends derived from interest and distributions from any net
realized short-term securities gains generally are taxable to investors as
ordinary income, whether received in cash or reinvested in additional Portfolio
shares. Distributions from net realized long-term securities gains, if any,
generally are taxable as long-term capital gains regardless of how long
shareholders have held their shares and whether such distributions are received
in cash or reinvested in additional Portfolio shares. Dividends and
distributions may be subject to certain state and local taxes. No dividend will
qualify for the dividends-received deduction allowable to certain corporations.
Dividends derived from net investment income and distributions from
net realized short-term securities gains paid by the Portfolio to a foreign
investor generally are subject to U.S. nonresident withholding taxes at the rate
of 30%, unless the foreign investor claims the benefit of a lower rate specified
in a tax treaty. Distributions from net realized long-term securities gains paid
by the Portfolio to a foreign investor generally will not be subject to U.S.
nonresident withholding tax. However, such distributions may be subject to
backup withholding, as described below, unless the foreign investor certifies
his non-U.S. residency status.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends and distributions
from net realized securities gains of the Portfolio paid to a shareholder if
such shareholder fails to certify either that the Taxpayer Identification Number
furnished in connection with opening an account is correct, or that such
shareholder has not received notice from the Internal Revenue Service of being
subject to backup withholding as a result of a failure to properly report
taxable dividend or interest income on a Federal income tax return. Furthermore,
the Internal Revenue Service may notify the Fund to institute backup withholding
if the Internal Revenue Service determines a shareholder's Taxpayer
Identification Number is incorrect or if a shareholder has failed to properly
report taxable dividend and interest income on a Federal income tax return.
A Taxpayer Identification Number is either the Social Security number
or employer identification number of the record owner of the account. Any tax
withheld as a result of backup withholding does not constitute an additional tax
imposed on the record owner of the account, and may be claimed as a credit on
the record owner's Federal income tax return.
Notice as to the tax status of your dividends and distributions is
mailed to you annually from your Securities Firm. You also will be sent periodic
summaries of your account which will include information as to dividends and
distributions from securities gains, if any, paid during the year.
Management believes that the Portfolio has qualified for the fiscal
year ended December 31, 1995 as a "regulated investment company" under the Code.
The Portfolio intends to continue to so qualify so long as such qualification is
in the best interests of its shareholders. Such qualification relieves the
Portfolio of any liability for Federal income tax to the extent its earnings are
distributed in accordance with applicable provisions of the Code. The Code
subjects regulated investment companies, such as the Portfolio, to a
non-deductible 4% excise tax to the extent that such investment companies do not
distribute a very substantial portion of their taxable investment income and
capital gains, generally determined on a calendar year basis.
You should consult your tax adviser regarding specific questions as to
Federal, state or local taxes.
- - --------------------------------------------------------------------------------
General Information
The Fund was incorporated under Maryland law on March 6, 1990, and
commenced operations on August 28, 1990. The Fund is authorized to issue 11
billion shares of Common Stock (with 2 billion allocated to the Portfolio), par
value $.001 per share. The Portfolio's shares are classified into the Retail
Shares (1 billion shares) and Institutional Shares (1 billion shares).
Institutional Shares, which are described in a separate prospectus, are sold to
institutions and may not be purchased by individuals directly. Each share has
one vote and shareholders will vote in the aggregate and not by class except as
otherwise required by law.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Fund to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of Directors or the
appointment of auditors. However, pursuant to the Fund's By-Laws, the holders of
at least 10% of the shares outstanding and entitled to vote may require the Fund
to hold a special meeting of shareholders for purposes of removing a Director
from office or for any other purpose. Shareholders may remove a Director by the
affirmative vote of a majority of the Fund's outstanding voting shares. In
addition, the Board of Directors will call a meeting of shareholders for the
purpose of electing Directors if, at any time, less than a majority of the
Directors then holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into
separate portfolios, each of which is treated as a separate entity for certain
matters under the 1940 Act and for other purposes. A shareholder of one
portfolio is not deemed to be a shareholder of any other portfolio. For certain
matters Fund shareholders vote together as a group; as to others they vote
separately by portfolio. By this Prospectus, Retail Shares of the Portfolio are
being offered. From time to time, other portfolios may be established and sold
pursuant to other offering documents.
To date, 12 portfolios of shares have been authorized. The other
portfolios are not being offered by this Prospectus. All consideration received
by the Fund for shares of one of the portfolios and all assets in which such
consideration is invested, belong to that portfolio (subject only to the rights
of creditors of the Fund) and will be subject to the liabilities related
thereto. The income and expenses attributable to one portfolio (and as to
classes within a portfolio) are treated separately from those of the other
portfolios (and classes).
The Transfer Agent maintains a record of your ownership. Your
Securities Firm will send you confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
CORRESPONDENT CASH CORRESPONDENT CASH
R E S E R V E S R E S E R V E S
- - ---------------------------------------
(ART)
The Infinity Mutual Funds, Inc. PROSPECTUS
3435 Stelzer Road ------------------
Columbus, Ohio 43219-3035 MAY 1,
- - ---------------------------------------- 1996
Investment Adviser
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
1285 Avenue Of The Americas
New York, New York 10019
- - ---------------------------------------
Administrator
CONCORD HOLDING CORPORATION
3435 Stelzer Road
Columbus, Ohio 43219-3035
- - ---------------------------------------
Distributor
CONCORD FINANCIAL GROUP, INC.
125 West 55th Street
New York, New York 10019
- - ----------------------------------------
Custodian THE BANK OF NEW YORK 90 Washington Street New York, New York 10286
COICCR95RP (GRAPH)
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
CORRESPONDENT CASH RESERVES MONEY MARKET PORTFOLIO
INSTITUTIONAL SHARES AND RETAIL SHARES
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
MAY 1, 1996
This Statement of Additional Information, which is not a
prospectus, supplements and should be read in conjunction with the current
Prospectus for the Institutional Shares and Retail Shares, as the case may be,
of Correspondent Cash Reserves Money Market Portfolio (the "Portfolio") of The
Infinity Mutual Funds, Inc. (the "Fund"), dated May 1, 1996, as it may be
revised from time to time. To obtain a copy of the Portfolio's Prospectus for
the Institutional Shares or Retail Shares, as the case may be, please write to
the Fund at 3435 Stelzer Road, Columbus, Ohio 43219-3035. This Statement of
Additional Information relates only to the Portfolio and not to any of the
Fund's other portfolios.
Mitchell Hutchins Asset Management Inc. (the "Adviser") serves as the
Portfolio's investment adviser.
Concord Holding Corporation (the "Administrator") serves as the
Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned
subsidiary of the Administrator, serves as the distributor of the Portfolio's
shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies...........B-2
Management of the Fund.................................B-10
Management Arrangements................................B-13
Purchase and Redemption of Shares......................B-17
Determination of Net Asset Value.......................B-17
Yield Information......................................B-18
Portfolio Transactions.................................B-19
Information About the Portfolio........................B-20
Custodian, Transfer and Dividend Disbursing
Agent, Counsel and Independent Auditors..............B-20
Appendix...............................................B-22
Financial Statements...................................B-25
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Description
of the Portfolio."
Portfolio Securities. Domestic commercial banks organized under
Federal law are supervised and examined by the Comptroller of the Currency and
are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by the Portfolio are insured by the Bank Insurance Fund
administered by the FDIC (although such insurance may not be of material benefit
to the Portfolio, depending upon the principal amount of the CDs of each bank
held by the Portfolio) and are subject to Federal examination and to a
substantial body of Federal law and regulation. As a result of Federal and state
laws and regulations, domestic branches of domestic banks, among other things,
are generally required to maintain specified levels of reserves, and are subject
to other supervision and regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic and foreign branches of foreign
banks, such as CDs and time deposits ("TDs"), may be general obligations of the
parent banks in addition to the issuing branch, or may be limited by the terms
of a specific obligation or governmental regulation. Such obligations are
subject to different risks than are those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. Foreign branches and subsidiaries are not necessarily subject to the
same or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank. The Portfolio's investment in obligations of
foreign subsidiaries of domestic banks are subject, to the extent required by
the Investment Company Act of 1940, as amended (the "1940 Act"), to the
limitations on investing in the securities of other investment companies.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. In addition, Federal branches licensed by the Comptroller of the
Currency and branches licensed by certain states ("State Branches") may be
required to: (1) pledge to the regulator, by depositing assets with a designated
bank within the state, a certain percentage of their assets as fixed from time
to time by the appropriate regulatory authority; and (2) maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of Federal and State Branches generally
must be insured by the FDIC if such branches take deposits of less than
$100,000.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Adviser carefully evaluates such investments on a
case-by-case basis pursuant to procedures established by the Board of Directors.
The Portfolio may invest in short-term corporate obligations that are
originated, negotiated and structured by a syndicate of lenders ("Co-Lenders")
consisting of commercial banks, thrift institutions, insurance companies,
finance companies or other financial institutions one or more of which
administers the security on behalf of the syndicate (the "Agent Bank").
Co-Lenders may sell such securities to third parties called "Participants." The
Portfolio may invest in such securities either by participating as a Co-Lender
at origination or by acquiring an interest in the security from a Co-Lender or a
Participant (collectively, "participation interests"). Co-Lenders and
Participants interposed between the Fund and the corporate borrower (the
"Borrower"), together with Agent Banks, are referred to herein as "Intermediate
Participants." The Portfolio also may purchase a participation interest in a
portion of the rights of an Intermediate Participant, which would not establish
any direct relationship between the Portfolio and the Borrower. In such cases,
the Portfolio would be required to rely on the Intermediate Participant that
sold the participation interest not only for the enforcement of the Portfolio's
rights against the Borrower but also for the receipt and processing of payments
due to the Portfolio under the security. Because it may be necessary to assert
through an Intermediate Participant such rights as may exist against the
Borrower, in the event the Borrower fails to pay principal and interest when
due, the Portfolio may be subject to delays, expenses and risks that are greater
than those that would be involved if the Portfolio could enforce its rights
directly against the Borrower. Moreover, under the terms of a participation
interest, the Portfolio may be regarded as a creditor of the Intermediate
Participant (rather than of the Borrower), so that the Fund also may be subject
to the risk that the Intermediate Participant may become insolvent. Similar
risks may arise with respect to the Agent Bank if, for example, assets held by
the Agent Bank for the benefit of the Portfolio were determined by the
appropriate regulatory authority or court to be subject to the claims of the
Agent Bank's creditors. In such cases, the Portfolio might incur certain costs
and delays in realizing payment in connection with the participation interest or
suffer a loss of principal and/or interest. Further, in the event of the
bankruptcy or insolvency of the Borrower, the obligation of the Borrower to
repay the loan may be subject to certain defenses that can be asserted by such
Borrower as a result of improper conduct by the Agent Bank or Intermediate
Participant. In addition, insurance companies are affected by economic and
financial conditions and are subject to extensive government regulation,
including rate regulation. The property and casualty industry is cyclical, being
subject to dramatic swings in profitability which can be affected by natural
catastrophes and other disasters. Individual companies may be exposed to
material risks, including reserve inadequacy, latent health exposure and
inability to collect from their reinsurance carriers.
Under normal circumstances, and as a matter of fundamental policy, the
Portfolio will "concentrate" at least 25% of its assets in debt instruments
issued by domestic and foreign companies engaged in the banking industry,
including bank holding companies. Such investments may include CDs, TDs,
bankers' acceptances and obligations issued by bank holding companies, as well
as repurchase agreements entered into with banks (as distinct from non-bank
dealers) in accordance with the policies set forth in "Repurchase Agreements"
below. During periods when the Adviser determines that the Portfolio should be
in a temporary defensive position, the Portfolio may invest less than 25% of its
total assets in the banking industry; during such times the Portfolio's assets
will be invested in accordance with its other investment policies. The Adviser
may determine that the adoption of a temporary defensive position with respect
to issuers in the banking industry is appropriate on the basis of such factors
as political, economic, market or regulatory developments adversely affecting
that industry as compared to the industries of other issuers of securities
available for investment by the Portfolio.
Repurchase Agreements. The Portfolio may enter into repurchase
agreements. The Fund's custodian or sub-custodian employed in connection with
third-party repurchase transactions will have custody of, and will hold in a
segregated account, securities acquired by the Portfolio under a repurchase
agreement. In connection with its third-party repurchase transactions, the Fund
will employ only eligible sub-custodians which meet the requirements set forth
in Section 17(f) of the 1940 Act and the rules thereunder. Repurchase agreements
are considered by the staff of the Securities and Exchange Commission to be
loans by the Portfolio. In an attempt to reduce the risk of incurring a loss on
a repurchase agreement, the Portfolio will enter into repurchase agreements only
with domestic banks (including foreign branches and subsidiaries of domestic
banks) with total assets in excess of one billion dollars or primary government
securities dealers reporting to the Federal Reserve Bank of New York, with
respect to securities in which the Portfolio may invest or government securities
regardless of their remaining maturities, and will require that additional
securities be deposited with it if the value of the securities purchased should
decrease below resale price. The Adviser will monitor on an ongoing basis the
value of the collateral to assure that it always equals or exceeds the
repurchase price. The Portfolio will consider on an ongoing basis the
creditworthiness of the institutions with which it enters into repurchase
agreements.
Reverse Repurchase Agreements. The Portfolio may enter into reverse
repurchase agreements. The Portfolio will maintain in a segregated custodial
account cash, cash equivalents or U.S. Government securities or other high
quality liquid debt securities equal to the aggregate amount of its reverse
repurchase obligations, plus accrued interest, in certain cases, in accordance
with releases promulgated by the Securities and Exchange Commission. The
Securities and Exchange Commission views reverse repurchase agreement
transactions as collateralized borrowings, and, pursuant to the 1940 Act, the
Portfolio must 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 Portfolio may be required to sell some of its
portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time.
Lending Portfolio Securities. To a limited extent, the Portfolio may
lend its portfolio securities to brokers, dealers and other financial
institutions, provided it receives cash collateral which at all times is
maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, the Portfolio can
increase its income through the investment of the cash collateral. For the
purposes of this policy, the Fund considers collateral consisting of U.S.
Government securities or irrevocable letters of credit issued by banks whose
securities meet the standards for investment by the Portfolio to be the
equivalent of cash. Such loans may not exceed 33-1/3% of the Portfolio's total
assets. From time to time, the Fund may pay a part of the interest earned from
the investment of collateral received for securities loaned to the borrower or a
third party which is unaffiliated with the Fund, and which is acting as a
"placing broker," in an amount determined by the Board of Directors to be
reasonable and based solely on services rendered.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Portfolio must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the able
to terminate the loan at any time; (4) the Portfolio must receive reasonable
interest on the loan, as well as any interest or other distributions payable on
the loaned securities, and any increase in market value; and (5) the Portfolio
may pay only reasonable custodian fees in connection with the loan. These
conditions may be subject to future modification.
Illiquid Securities. The Portfolio will not invest more than 10% of
the value of its net assets in illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Portfolio has valued the securities and includes, among other things,
restricted securities other than those the Adviser has determined to be liquid
pursuant to guidelines established by the Fund's Board of Directors and
repurchase agreements maturing in more than seven days. Commercial paper issues
in which the Portfolio may invest include securities issued by major
corporations without registration under the Securities Act of 1933, as amended
("1933 Act"), in reliance on the exemption from such registration afforded by
Section 3(a)(3) thereof and commercial paper issued in reliance on the so-called
"private placement" exemption from registration which is afforded by Section
4(2) of the 1933 Act ("Section 4(2) paper"). Section 4(2) paper is restricted as
to disposition under the Federal securities laws in that any resale must
similarly be made in an exempt transaction. Section 4(2) paper ordinarily is
resold to other institutional investors through or with the assistance of
investment dealers who make a market in Section 4(2) paper, thus providing
liquidity.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
To facilitate the increased size and liquidity of the institutional
markets for unregistered securities, the Securities and Exchange Commission
adopted Rule 144A under the 1933 Act. Rule 144A establishes a "safe harbor" from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Section 4(2) paper that is issued by a
company that files reports under the Securities Exchange Act of 1934, as
amended, generally is eligible to be sold in reliance on the safe harbor of Rule
144A. Pursuant to Rule 144A, the institutional restricted securities markets may
provide both readily ascertainable values for restricted securities and the
ability to liquidate an investment in order to satisfy share redemption orders
on a timely basis. An insufficient number of qualified institutional buyers
interested in purchasing certain restricted securities held by the Portfolio,
however, could affect adversely the marketability of such portfolio securities
and the Portfolio might be unable to dispose of such securities promptly or at
reasonable prices. It is anticipated that the market for certain restricted
securities will expand further as a result of Rule 144A and the development of
automated systems for the trading, clearance and settlement of unregistered
securities, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
The Fund's Board of Directors has the ultimate responsibility for
determining whether specific securities are liquid or illiquid. The Fund's
Directors have delegated the function of making day-to-day determinations of
liquidity to the Adviser, pursuant to guidelines approved by the Board. The
Adviser takes into account a number of factors in reaching liquidity decisions,
including (1) the frequency of trades for the security, (2) the number of
dealers that make quotes for the security, (3) the number of dealers that have
undertaken to make a market in the security, (4) the number of other potential
purchasers and (5) the nature of the security and how trading is effected (e.g.,
the time needed to sell the security, how offers are solicited and the mechanics
of transfer). The Adviser will monitor the liquidity of restricted securities
held by the Portfolio and report periodically on such decisions to the Board of
Directors.
Forward Commitments. Securities purchased on a forward commitment or
when-issued basis are subject to changes in value (generally changing in the
same way, i.e., appreciating when interest rates decline and depreciating when
interest rates rise) based upon the public's perception of the creditworthiness
of the issuer and changes, real or anticipated, in the level of interest rates.
Securities purchased on a forward commitment or when- issued basis may expose
the Portfolio to risks because they may experience such fluctuations prior to
their actual delivery. Purchasing securities on a when-issued basis can involve
the additional risk that the yield available in the market when the delivery
takes place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the
Portfolio is fully or almost fully invested may result in greater potential
fluctuation in the value of the Portfolio's net assets and its net asset value
per share.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental
policies which apply to the Portfolio. These restrictions cannot be changed
without approval by the holders of a majority (as defined in the 1940 Act) of
the outstanding voting shares of the Portfolio. The Portfolio may not:
1. Purchase common stocks, preferred stocks, warrants or other equity
securities.
2. Borrow money, except (i) from banks for temporary or emergency (not
leveraging) purposes in an amount up to 15% of the value of the Portfolio's
total assets (including the amount borrowed) based on the lesser of cost or
market, less liabilities (not including the amount borrowed) at the time the
borrowing is made (while such borrowings exceed 5% of the value of the
Portfolio's total assets, the Portfolio will not make any additional
investments) and (ii) in connection with the entry into reverse repurchase
agreements. At no time may total borrowings exceed 33-1/3% of the value of the
Portfolio's total assets.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except (i) to secure borrowings for temporary or emergency purposes and (ii) in
connection with the purchase of securities on a forward commitment basis and the
entry into reverse repurchase agreements.
4. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act), other than in connection with the entry into certain reverse
repurchase agreements.
5. Sell securities short or purchase securities on margin.
6. Write or purchase put or call options or combinations thereof.
7. Act as underwriter of securities of other issuers. The Portfolio
may not enter into repurchase agreements providing for settlement in more than
seven days after notice or purchase securities which are illiquid, if, in the
aggregate, more than 10% of its net assets would be so invested.
8. Purchase or sell real estate, real estate investment trust
securities, commodities, or oil and gas interests.
9. Make loans to others, except through the purchase of debt
obligations and through repurchase agreements referred to in the Portfolio's
Prospectus, and except that the Portfolio may lend its portfolio securities in
an amount not to exceed 33-1/3% of the value of its total assets. Any loans of
portfolio securities will be made according to guidelines established by the
Securities and Exchange Commission and the Fund's Directors.
10. Invest in companies for the purpose of exercising control.
11. Invest in securities of other investment companies, except as they
may be acquired as part of a merger, consolidation or acquisition of assets.
12. Invest more than 5% of its assets in the obligations of any one
issuer, except that up to 25% of the value of the Portfolio's total assets may
be invested without regard to any such limitation (subject to provisions of Rule
2a-7), provided that not more than 10% of its assets may be invested in
securities issued or guaranteed by any single guarantor of obligations held by
the Portfolio. Notwithstanding the foregoing, to the extent required by the
rules of the Securities and Exchange Commission, the Portfolio will not invest
more than 5% of its assets in the obligations of any one bank.
13. Invest less than 25% of its total assets in securities issued by
banks or invest more than 25% of its assets in the securities of issuers in any
other industry, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Notwithstanding the foregoing, for temporary defensive
purposes the Portfolio may invest less than 25% of its assets in bank
obligations.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values or
assets will not constitute a violation of that restriction.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of Portfolio shares in certain states.
Should the Fund determine that a commitment is no longer in the best interests
of the Portfolio and its shareholders, the Fund reserves the right to revoke the
commitment by terminating the sale of Portfolio shares in the state involved.
MANAGEMENT OF THE FUND
Directors and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Director who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
Directors of the Fund
*WILLIAM B. BLUNDIN, Chairman of the Board of Directors. An
employee of the Administrator. Mr. Blundin also is an
officer of other investment companies administered by
the Administrator or its affiliates and President and
Chief Executive Officer of Vista Broker/Dealer
Services, Inc. and BNY Hamilton Distributors, Inc.,
registered broker/dealers. He is 58 years old and his
address is 125 West 55th Street, New York, New York
10019.
NORMA A. COLDWELL, Director. International Economist and Consultant;
Executive Vice President of Coldwell Financial Consultants;
Trustee and Treasurer of Meridian House International
(International Education and Cultural Group); Member of the
Board of Advisors of Meridian International Center and
Emerging Capital Markets, S.A. (Montevideo, Uruguay); formerly
Chief International Economist of Riggs National Bank,
Washington, D.C. She is 70 years old and her address is 3330
Southwestern Boulevard, Dallas, Texas 75225.
RICHARD H. FRANCIS, Director. Former Executive Vice President
and Chief Financial Officer of Pan American World
Airways, Inc. (currently, debtor-in-possession under
the U.S. Bankruptcy Code), March 1988 to October 1991;
Senior Vice President and Chief Financial Officer of
American Standard Inc., 1960 to March 1988. Mr.
Francis is a director of Allendale Mutual Insurance and
The Indonesia Fund, Inc. He is 63 years old and his
address is 40 Grosvenor Road, Short Hills, New Jersey
07078.
WILLIAM W. McINNES, Director. Private investor. From July 1978
to February 1993, he was Vice President--Finance and
Treasurer of Hospital Corp. of America. He is also a
director of Gulf South Medical Supply and Diversified
Trust Co. He is 47 years old and his address is 116
30th Avenue South, Nashville, Tennessee 37212.
ROBERT A. ROBINSON, Director. Private investor. Since 1991,
President Emeritus, and from 1968 to 1991, President of
The Church Pension Group, NYC. From 1956 to 1966,
Senior Vice President of Colonial Bank & Trust Co. He
is also a director of Mariner Institutional Funds,
Inc., Mariner Tax-Free Institutional Funds, Inc., UST
Master Funds, UST Master Tax Exempt Funds, H.B. and
F.H. Bugher Foundation, Morehouse-Barlow Co.
Publishers, The Canterbury Cathedral Trust in America,
The Living Church Foundation and Hoosac School. He is 70 years
old and his address is 2 Hathaway Common, New Canaan,
Connecticut 06840.
Officers of the Fund
GEORGE O. MARTINEZ, President and Secretary. Senior Vice President
and Director of Legal and Compliance Services with BISYS Fund
Services, Inc., an affiliate of the Administrator, since April
1995, and an officer of other investment companies
administered by the Administrator or its affiliates. Prior
thereto, he was Vice President and Associate General Counsel
with Alliance Capital Management, L.P. He is 36 years old and
his address is 3435 Stelzer Road, Columbus, Ohio 43219.
JEFFREY C. CUSICK, Vice President and Assistant Secretary. An employee
of BISYS Fund Services, Inc., since July 1995, and an officer
of other investment companies administered by the
Administrator or its affiliates. From September 1993 to July
1995, he was Assistant Vice President and, from 1989 to
September 1993, he was Manager--Client Services, of Federated
Administrative Services. He is 37 years old and his address is
3435 Stelzer Road, Columbus, Ohio 43219.
WILLIAM TOMKO, Vice President. An employee of BISYS Fund Services,
Inc. and an officer of other investment companies administer
by the Administrator or its affiliates. He is 37 years old
and his address is 3435 Stelzer Road, Columbus, Ohio 43219.
ANN E. BERGIN, Vice President. An employee of the Administrator
and an officer of other investment companies
administered by the Administrator or its affiliates.
She is 35 years old and her address is 125 West 55th
Street, New York, New York 10019.
MARTIN R. DEAN, Treasurer. An employee of BISYS Fund Services, Inc.,
since May 1994, and an officer of other investment companies
administered by the Administrator or its affiliates. Prior
thereto, he was a Senior Manager of KPMG Peat Marwick LLP. He
is 32 years old and his address is 3435 Stelzer Road,
Columbus, Ohio 43219.
ROBERT L. TUCH, Assistant Secretary. An employee of BISYS Fund
Services, Inc., since June 1991, and an officer of
other investment companies administered by the
Administrator or its affiliates. From July 1990 to
June 1991, he was Vice President and Associate General
Counsel with National Securities Research Corp. Prior
thereto, he was an Attorney with the Securities and Exchange
Commission. He is 44 years old and his address is 3435 Stelzer
Road, Columbus, Ohio 43219.
ALAINA METZ, Assistant Secretary. An employee of BISYS Fund
Services, Inc. and an officer of other investment
companies administered by the Administrator or its
affiliates. She is 28 years old and her address is
3435 Stelzer Road, Columbus, Ohio 43219.
For so long as the Portfolio's plan described in the section captioned
"Management Arrangements--Distribution Plan" remains in effect, the Directors of
the Fund who are not "interested persons" of the Fund, as defined in the 1940
Act, will be selected and nominated by the Directors who are not "interested
persons" of the Fund.
Directors and officers of the Fund, as a group, owned less than 1% of
the Portfolio's shares outstanding on April 1, 1996.
The Fund does not pay any remuneration to its officers and Directors
other than fees and expenses to those Directors who are not directors, officers
or employees of the Adviser or Administrator or any of their affiliates. The
aggregate amount of compensation paid to each such Director by the Fund for year
ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Total Compensation
Aggregate From Fund and Fund
Compensation from Complex Paid to
Name of Board Member Fund* Board Member*
- - ----------------------------------- ---------------------------- ----------------------------
<S> <C> <C>
Norma A. Coldwell $______ $______
Richard H. Francis $______ $______
William W. McInnis $______ $______
Robert A. Robinson $______ $______
- - ---------------------
</TABLE>
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $_____ for all Directors as a group.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Management
of the Portfolio."
Investment Advisory Agreement. The Adviser provides investment
advisory services pursuant to the Investment Advisory Agreement (the
"Agreement") dated October 30, 1990 with the Fund. The Agreement is subject to
annual approval by (i) the Fund's Board of Directors or (ii) vote of a majority
(as defined in the 1940 Act) of the outstanding voting securities of the
Portfolio, provided that in either event the continuance also is approved by a
majority of the Directors who are not "interested persons" (as defined in the
1940 Act) of the Fund or the Adviser, by vote cast in person at a meeting called
for the purpose of voting on such approval. The Board of Directors, including a
majority of the Directors who are not "interested persons" of any party to the
Agreement, last approved the Agreement at a meeting held on October 25, 1995.
Shareholders approved the Agreement on December 20, 1991. The Agreement is
terminable without penalty, on 60 days' notice, by the Fund's Board of Directors
or by vote of the holders of a majority of the Portfolio's shares, or, on not
less than 90 days' notice, by the Adviser. The Agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated
("PaineWebber"), which in turn is a wholly-owned subsidiary of Paine Webber
Group Inc. ("PW Group"), a publicly owned financial services holding company.
The Adviser provides investment advisory services in accordance with
the stated policies of the Portfolio, subject to the approval of the Fund's
Board of Directors. The Adviser provides the Portfolio with Investment Officers
who are authorized by the Board of Directors to execute purchases and sales of
securities. The Portfolio's Chief Investment Officers are Susan P. Messina and
Dennis L. McCauley. The Adviser also maintains a research department with a
professional staff of portfolio managers and securities analysts who provide
research services for the Portfolio as well as for other funds advised by the
Adviser. All purchases and sales are reported for the Board's review at the
meeting subsequent to such transactions.
As compensation for its services, the Portfolio has agreed to pay the
Adviser a monthly fee at the annual rate of .10 of 1% of the value of the
Portfolio's average daily net assets. For the fiscal years ended December 31,
1993, 1994 and 1995, the advisory fees paid to the Adviser amounted to $533,282,
$430,353 and $644,228, respectively. In addition, pursuant to the terms of a
Special Management Services Agreement among the Fund, the Adviser and the
Administrator described in the Portfolio's Prospectus, the Portfolio has agreed
to pay the Adviser and the Administrator each a monthly fee at the annual rate
of .05 of 1% of the value of the average daily net assets represented by the
Retail Shares. With respect to the Retail Shares only, the fee payable to the
Adviser under the agreement for such fiscal years amounted to $164,405, $189,112
and $306,186, respectively; however, pursuant to an undertaking, the Adviser
waived the fee in its entirety for the fiscal years ended December 31, 1993,
1994 and 1995.
Administration Agreement. The Administrator provides certain
administrative services pursuant to the Administration Agreement (the
"Administration Agreement") dated March 29, 1995, with the Fund. The
Administration Agreement will continue until December 31, 1997 and thereafter is
subject to annual approval by (i) the Fund's Board of Directors or (ii) vote of
a majority (as defined in the 1940 Act) of the outstanding voting securities of
the Portfolio, provided that in either event the continuance also is approved by
a majority of the Directors who are not "interested persons" (as defined in the
1940 Act) of the Fund or the Administrator, by vote cast in person at a meeting
called for the purpose of voting such approval. The Administration Agreement was
last approved by the Fund's Board of Directors, including a majority of the
Directors who are not "interested persons" of any party to the Administration
Agreement, at a meeting held on January 26, 1995. The Administration Agreement
is terminable without penalty, at any time if for cause, by the Fund's Board of
Directors or by vote of the holders of a majority of the Portfolio's outstanding
voting securities, or, on not less than 90 days' notice, by the Administrator.
The Administration Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
As compensation for its services, the Portfolio has agreed to pay the
Administrator a monthly fee at the annual rate of .10 of 1% of the value of the
Portfolio's average daily net assets. For the fiscal years ended December 31,
1993, 1994 and 1995, the Portfolio paid the Administrator $533,282, $430,353 and
$644,228, respectively. In addition, pursuant to the terms of the Special
Management Services Agreement described above, with respect to the Retail Shares
only, the fee payable to the Administrator under the agreement for such fiscal
years amounted to $164,405, $189,112 and $306,186, respectively; however,
pursuant to an undertaking, the Administrator waived the fee in its entirety for
the fiscal years ended December 31, 1993, 1994 and 1995.
Distribution Agreement. The Distributor acts as the exclusive
distributor of the Portfolio's shares on a best efforts basis pursuant to a
Distribution Agreement (the "Distribution Agreement") dated March 29, 1995, with
the Fund. Shares are sold on a continuous basis by the Distributor as agent,
although the Distributor is not obliged to sell any particular amount of shares.
No compensation is payable by the Portfolio to the Distributor for its
distribution services. The term and termination provisions of the Distribution
Agreement are substantially similar to those of the Administration Agreement
with the Administrator discussed above.
Distribution Plan. (Applicable only with respect to the Retail
Shares). Rule 12b-1 (the "Rule") adopted by the Securities and Exchange
Commission under the 1940 Act provides, among other things, that an investment
company may bear expenses of distributing its shares only pursuant to a plan
adopted in accordance with the Rule. Because some or all of the fees paid to
Securities Firms (as defined in the Portfolio's Prospectus) in connection with
services provided to holders of the Retail Shares could be deemed to be payment
of distribution expenses, the Fund's Directors have adopted such a plan (the
"Plan"). The Fund's Directors believe that there is a reasonable likelihood that
the Plan will benefit the Fund and the holders of the Retail Shares. In some
states, banks or other institutions effecting transactions in Portfolio shares
may be required to register as dealers pursuant to state law.
A quarterly report of the amounts expended under the Plan, and the
purposes for which such expenditures were incurred, must be made to the
Directors for their review. In addition, the Plan provides that it may not be
amended to increase materially the costs which the holders of the Retail Shares
may bear for distribution pursuant to the Plan without approval of the holders
of the Retail Shares and that other material amendments of the Plan must be
approved by the Board of Directors, and by the Directors who are neither
"interested persons" (as defined in the 1940 Act) of the Fund nor have any
direct or indirect financial interest in the operation of the Plan or in the
related Plan Agreement between the Fund and Correspondent Services Corporation
[CSC], by vote cast in person at a meeting called for the purpose of considering
such amendments. The Plan and the Plan Agreement are subject to annual approval
by such vote cast in person at a meeting called for the purpose of voting on the
Plan. The Plan and Plan Agreement were so approved on November 1, 1994. Holders
of the Portfolio's Retail Shares approved the Plan on December 20, 1991. The
Plan is terminable at any time by vote of a majority of the Directors who are
not "interested persons" and who have no direct or indirect financial interest
in the operation of the Plan or in the Plan Agreement or by vote of a majority
of the Retail Shares. The Plan Agreement is terminable without penalty, at any
time, by such vote of the Directors, upon not more than 60 days' written notice
to Correspondent Services Corporation [CSC] or by vote of the holders of a
majority of the Retail Shares. The Plan Agreement will terminate automatically
in the event of its assignment (as defined in the 1940 Act).
For the fiscal year ended December 31, 1995, with respect to the
Retail Shares only, the amount payable pursuant to the Plan to Correspondent
Services Corporation [CSC], an affiliate of the Adviser, amounted to $3,674,240;
however, pursuant to an undertaking, the amount was reduced by $489,900,
resulting in a net amount paid by the Portfolio on behalf of the Retail Shares
only of $3,184,340 pursuant to the Plan.
Expenses. All expenses incurred in the operation of the Fund are borne
by the Fund, except to the extent specifically assumed by others. The expenses
borne by the Fund include: organizational costs, taxes, interest, brokerage fees
and commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory fees,
administration fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, industry association fees, auditing
and legal expenses, costs of maintaining corporate existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, tele- phone and personnel expenses), costs of
calculating the net asset value of the Portfolio's shares, costs of
shareholders' reports and corporate meetings, costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders, and any extraordinary expenses.
Expenses attributable to the Portfolio are charged against the assets of the
Portfolio; other expenses of the Fund are allocated among the portfolios on the
basis determined by the Board of Directors, including, but not limited to,
proportionately in relation to the net assets of each portfolio.
The Adviser and Administrator have agreed that if in any fiscal year
the aggregate expenses of the Portfolio, exclusive of taxes, brokerage, interest
on borrowings and (with the prior written consent of the necessary state
securities commissions) extraordinary expenses, but including the advisory and
administration fees, exceed the expense limitation of any state having
jurisdiction over the Portfolio, the Fund may deduct from the payment to be made
to the Administrator under the Administration Agreement, or the Adviser and/or
Administrator will bear, such excess expense to the extent required by state
law. Such deduction or payment, if any, will be estimated daily, and reconciled
and effected or paid, as the case may be, on a monthly basis.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "How to Buy
Shares" and "How to Redeem Shares."
Terms of Purchase. The Fund reserves the right to reject any purchase
order and to change the amount of the minimum investment and subsequent
purchases in the Portfolio.
Suspension of Redemptions. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closing), (b) when
trading in the markets the Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Securities and Exchange Commission so
that disposal of the Portfolio's investments or determination of its net asset
value is not reasonably practicable, or (c) for such other periods as the
Securities and Exchange Commission by order may permit to protect the
Portfolio's shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "How to Buy
Shares."
Amortized Cost Pricing. The valuation of the Portfolio's investment
securities is based upon their amortized cost which does not take into account
unrealized capital gains or losses. This involves valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Portfolio would receive if it sold the
instrument.
The Board of Directors has established, as a particular responsibility
within the overall duty of care owed to the Portfolio's investors, procedures
reasonably designed to stabilize the Portfolio's price per share as computed for
the purpose of sales and redemptions at $1.00. Such procedures include review of
the Portfolio's investment holdings by the Board of Directors, at such intervals
as it deems appropriate, to determine whether the Portfolio's net asset value
calculated by using available market quotations or market equivalents deviates
from $1.00 per share based on amortized cost. In such review, investments for
which market quotations are readily available will be valued at the most recent
bid price or yield equivalent for such securities or for securities of
comparable maturity, quality and type, as obtained from one or more of the major
market makers for the securities to be valued. Other investments and assets will
be valued at fair value as determined in good faith by the Board of Directors.
The extent of any deviation between the Portfolio's net asset value
based upon available market quotations or market equivalents and $1.00 per share
based on amortized cost will be examined by the Board of Directors. If such
deviation exceeds 1/2 of 1%, the Board of Directors promptly will consider what
action, if any, will be initiated. In the event the Board of Directors
determines that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, it has agreed to
take such corrective action as it regards as necessary and appropriate,
including: selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding dividends
or paying distributions from capital or capital gains; redeeming shares in kind;
or establishing a net asset value per share by using available market quotations
or market equivalents.
New York Stock Exchange and Custodian Closings. The holidays (as
observed) on which the New York Stock Exchange and the Custodian are closed
currently are: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans
Day, Thanksgiving Day and Christmas Day.
YIELD INFORMATION
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "Yield
Information."
For the seven-day period ended December 31, 1995, the yield and
effective yield of the Portfolio's Institutional Shares was ____% and ____%,
respectively. For the same period, the yield and effective yield of the
Portfolio's Retail Shares, net of absorbed expenses, was ____% and ____%,
respectively. The yield and effective yield of the Portfolio's Retail Shares
without the absorption of certain expenses would have been ____% and ____%,
respectively, for the same period. Yield for the Institutional Shares and Retail
Shares is computed separately in accordance with a standardized method which
involves determining the net change in the value of a hypothetical pre-existing
Portfolio account having a balance of one share at the beginning of a seven
calendar day period for which yield is to be quoted, dividing the net change by
the value of the account at the beginning of the period to obtain the base
period return, and annualizing the results (i.e., multiplying the base period
return by 365/7). The net change in the value of the account reflects the value
of additional shares purchased with dividends declared on the original share and
any such additional shares and fees that may be charged to shareholder accounts,
in proportion to the length of the base period and the Portfolio's average
account size, but does not include realized gains and losses or unrealized
appreciation and depreciation. Effective annualized yield is computed by adding
1 to the base period return (calculated as described above), raising that sum to
a power equal to 365 divided by 7, and subtracting 1 from the result.
Yields will fluctuate and are not necessarily representative of future
results. The investor should remember that yield is a function of the type and
quality of the instruments held, their maturity and operating expenses. An
investor's principal in the Portfolio is not guaranteed. See "Determination of
Net Asset Value" for a discussion of the manner in which the Portfolio's price
per share is determined.
PORTFOLIO TRANSACTIONS
Portfolio securities ordinarily are purchased directly from the issuer
or an underwriter or a market maker for the securities. Usually no brokerage
commissions are paid for such purchases. Purchases from underwriters of
portfolio securities include a concession paid by the issuer to the underwriter
and the purchase price paid to market makers for the securities may include the
spread between the bid and asked price. No brokerage commissions have been paid
by the Portfolio to date.
Transactions are allocated to various dealers by the Portfolio's
investment personnel in their best judgment. The primary consideration is prompt
and effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected to act on an agency basis for
research, statistical or other services to enable the Adviser to supplement its
own research and analysis with the views and information of other securities
firms.
Research services furnished by brokers through which the Portfolio
effects securities transactions may be used by the Adviser in advising other
funds or accounts it advises and, conversely, research services furnished to the
Adviser by brokers in connection with other funds or accounts the Adviser
advises may be used by the Adviser in advising the Portfolio. Although it is not
possible to place a dollar value on these services, it is the opinion of the
Adviser that the receipt and study of such services should not reduce the
overall expenses of its research department.
INFORMATION ABOUT THE PORTFOLIO
The following information supplements and should be read in
conjunction with the section in the Portfolio's Prospectus entitled "General
Information."
Each Portfolio share has one vote and, when issued and paid
for in accordance with the terms of the offering, is fully paid and
non-assessable. Shares have no preemptive, subscription or conversion rights and
are freely transferable.
As of April 20, 1996, the following shareholders beneficially owned,
directly or indirectly, 5% or more of the Portfolio's outstanding Institutional
Shares:
Percent of Total
Institutional Shares
Name and Address Outstanding
Saxon & Co. 58.28%
F/B/O PNC Taxable Stiff Account
200 Stephans Drive
Lester, PA 19113
Saxon & Co. 41.72%
c/o PNC Bank
P.O. Box 7780-1888
Philadelphia, PA 19182
A shareholder who beneficially owns, directly or indirectly, more than
25% of the Portfolio's voting securities may be deemed a "control person" (as
defined in the 1940 Act) of the Portfolio.
The Portfolio will send annual and semi-annual financial statements to
all its shareholders.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
The Bank of New York, 90 Washington Street, New York, New York 10286,
acts as custodian of the Portfolio's investments. BISYS Fund Services Ohio,
Inc., an affiliate of the Administrator, 3435 Stelzer Road, Columbus, Ohio
43219, acts as the Fund's transfer and dividend disbursing agent (the "Transfer
Agent"). Under the transfer agency agreement with the Fund, the Transfer Agent
maintains shareholder account records for the Fund, handles certain
communications between shareholders and the Fund and pays dividends and
distributions payable by the Fund. For these services, the Transfer Agent
receives a monthly fee compiled on the basis of the number of shareholder
accounts it maintains for the Fund during the month, and is reimbursed for
certain out-of-pocket expenses. Neither The Bank of New York nor BISYS Fund
Services Ohio, Inc. has any part in determining the investment policies of the
Portfolio or which securities are to be purchased or sold by the Portfolio.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York
10004-2696, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of Common Stock being sold pursuant to the Portfolio's Prospectus.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154,
independent auditors, have been selected as the Portfolio's auditors.
<PAGE>
APPENDIX
Description of the two highest commercial paper, bond and other short-
and long-term rating categories assigned by Standard & Poor's Ratings Group
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch Investors Service,
L.P. ("Fitch"), Duff & Phelps Credit Rating Co. ("Duff"), IBCA Inc. and IBCA
Limited ("IBCA"), and Thomson BankWatch, Inc. ("BankWatch"):
Commercial Paper and Short-Term Ratings
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by leading market positions in well established industries, high rates of return
of funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issues rated Prime-2 (P-2) have a strong capacity for repayment of short-term
promissory obligations. This ordinarily will be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper
rating assigned by Fitch. Paper rated Fitch-1 is regarded as having the
strongest degree of assurance for timely payment. The rating Fitch-2 (Very Good
Grade) is the second highest commercial paper rating assigned by Fitch which
reflects an assurance of timely payment only slightly less in degree than the
strongest issues.
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
The designation A1 by IBCA indicates that the obligation is supported
by a very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. Obligations rated A2 are
supported by a strong capacity for timely repayment, although such capacity may
be susceptible to adverse changes in business, economic or financial conditions.
The rating TBW-1 is the highest short-term rating assigned by
BankWatch; the rating indicates that the degree of safety regarding timely
repayment of principal and interest is very strong. The rating TBW-2 is the
second highest short-term rating assigned by BankWatch; while the degree of
safety regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated TBW-1.
Bond and Long-Term Ratings
Bonds rated AAA are considered by S&P to be the highest grade
obligations and possess an extremely strong capacity to pay principal and
interest. Bonds rated AA by S&P are judged by S&P to have a very strong capacity
to pay principal and interest, and in the majority of instances, differ only in
small degrees from issues rated 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 edge." Bonds rated Aa by Moody's are judged by Moody's 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 Aaa bonds because
margins of protection may not be as large or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger. Moody's applies numerical modifiers
1, 2 and 3 in the Aa rating category. The modifier 1 indicates a ranking for the
security in the higher end of this rating category, the modifier 2 indicates a
mid-range ranking, and the modifier 3 indicates a ranking in the lower end of
the rating category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high
grade, broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured but
influenced as to rating by the lesser financial power of the enterprise and more
local type of market.
Bonds rated AAA by Duff are considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than U.S.
Treasury debt. Bonds rated AA are considered to be of high credit quality with
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions.
Obligations rated AAA by IBCA have the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly. Obligations
for which there is a very low expectation of investment risk are rated AA by
IBCA. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk albeit not very significantly.
International and U.S. Bank Ratings
An IBCA bank rating represents IBCA's current assessment of the
strength of the bank and whether such bank would receive support should it
experience difficulties. In its assessment of a bank, IBCA uses a dual rating
system comprised of Legal Ratings and Individual Ratings. In addition, IBCA
assigns banks Long- and Short-Term Ratings as used in the corporate ratings
discussed above. Legal Ratings, which range in gradation from 1 through 5,
address the question of whether the bank would receive support provided by
central banks or shareholders if it experienced difficulties, and such ratings
are considered by IBCA to be a prime factor in its assessment of credit risk.
Individual Ratings, which range in gradations from A through E, represent IBCA's
assessment of a bank's economic merits and address the question of how the bank
would be viewed if it were entirely independent and could not rely on support
from state authorities or its owners.
<PAGE>
FINANCIAL STATEMENTS
The Portfolios' Annual Report to Shareholders for the fiscal year
ended December 31, 1995 is a separate document supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing therein are incorporated by reference
in this Statement of Additional Information.
<PAGE>
PROSPECTUS MAY 1, 1996
THE INFINITY MUTUAL FUNDS, INC.
ValueStar Funds
PRIME MONEY MARKET PORTFOLIO
U.S. TREASURY MONEY MARKET PORTFOLIO
Investor Shares
- - --------------------------------------------------------------------------------
The Infinity Mutual Funds, Inc. (the "Fund") is an open-end, management
investment company, known as a series mutual fund. By this Prospectus, the Fund
is offering Investor Shares of two diversified money market portfolios (the
"Portfolios"), that seek to provide investors with as high a level of current
income as is consistent with the preservation of capital and the maintenance of
liquidity.
. The PRIME MONEY MARKET PORTFOLIO will invest in short-term money market
instruments consisting of securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, bank obligations, repurchase
agreements, commercial paper and other corporate obligations.
. The U.S. TREASURY MONEY MARKET PORTFOLIO will invest only in U.S. Treasury
securities and in other securities guaranteed as to principal and interest by
the U.S. Government, and repurchase agreements in respect thereof.
An investment in a Portfolio is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that each Portfolio will be able to
maintain a stable net asset value of $1.00 per share.
Each Portfolio's investment adviser is First American National Bank (the
"Adviser").
BISYS Fund Services Limited Partnership (the "Administrator") serves as each
Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), an affiliate of the
Administrator, serves as distributor of each Portfolio's shares.
Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, the Adviser or any other bank, and are not federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other governmental agency. Portfolio shares involve certain risks, including the
possible loss of principal.
------------------
This Prospectus sets forth concisely information about the Fund and the
Portfolios that an investor should know before investing. It should be read and
retained for future reference.
The Statement of Additional Information, dated May 1, 1996, which may be
revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, write to the Fund at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, or call 1-800-852-0045.
- - --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- - --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
-----------
Annual Operating Expenses........................................... 3
Financial Highlights................................................ 4
Yield Information................................................... 6
Description of the Portfolios....................................... 6
Management of the Portfolios........................................ 11
How to Buy Shares................................................... 14
How to Redeem Shares................................................ 16
Shareholder Privileges.............................................. 19
Dividends, Distributions and Taxes.................................. 20
General Information................................................. 22
Appendix............................................................ A-1
Distributed by: Investment Adviser:
Concord Financial Group, Inc. First American National Bank
3435 Stelzer Road 315 Deaderick Street
Columbus, Ohio 43219-3035 Nashville, Tennessee 37237
For information about opening an account and other Fund services call: (800)
824-3741
For voice recorded price and yield information call: (800) 852-0045
To execute purchases, redemptions and exchanges and for information about the
status of your account call: (800) 852-0045
<PAGE>
ANNUAL OPERATING EXPENSES*
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
Prime U.S. Treasury
Portfolio Portfolio
------------------------ ------------------------
Trust Investor Trust Investor
Shares Shares Shares Shares
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Management Fees....................................................... .25% .25% .25% .25%
Other Expenses (after expense reimbursement).......................... .40% .40% .25% .25%
----------- ----------- ----------- -----------
Total Portfolio Operating Expenses (after expense reimbursement)**.... .65% .65% .50% .50%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Example:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
1 Year...................................................... $ 7 $ 7 $ 5 $ 5
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
3 Years..................................................... $ 21 $ 21 $ 16 $ 16
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
5 Years..................................................... $ 36 $ 36 $ 28 $ 28
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
10 Years.................................................... $ 81 $ 81 $ 63 $ 63
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- - --------------------------------------------------------------------------------
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. Moreover, while the example assumes a 5% annual
return, each Portfolio's actual performance will vary and may result in an
actual return greater or less than 5%.
- - --------------------------------------------------------------------------------
The purpose of the foregoing table is to assist investors in understanding
the costs and expenses borne by a Portfolio, the payment of which will reduce
investors' annual return. The expenses noted above, without reimbursements,
would have been: Other Expenses, .65% and Total Portfolio Operating Expenses,
.90% for the Prime Portfolio; and Other Expenses, .50% and Total Portfolio
Operating Expenses, .75% for the U.S. Treasury Portfolio. For a further
description of the various costs and expenses incurred in a Portfolio's
operation, as well as expense reimbursement or waiver arrangements, see
"Management of the Portfolios."
- - ---------------
* Only Investor Shares are offered by this Prospectus. Trust Shares are offered
pursuant to a separate prospectus; if an investor is eligible and desires to
purchase Trust Shares, the investor must obtain and should review a copy of
the current prospectus for Trust Shares. As of the date of this Prospectus,
Trust shares have not been offered.
** Certain Service Organizations (as defined below) and other institutions also
may charge their clients direct fees for effecting transactions in Portfolio
shares and the Adviser, its affiliates and certain other institutions may
charge customary account and account transaction fees, which are not Fund
related, with respect to accounts through which or for which Portfolio shares
are purchased or redeemed; such fees are not reflected in the foregoing
table.
<PAGE>
FINANCIAL HIGHLIGHTS
Contained below for each Portfolio is per share operating performance data
for an Investor Share of common stock outstanding, total investment return,
ratios to average net assets and other supplemental data for each period
indicated. The information in the tables has been audited by KPMG Peat Marwick
LLP, the Portfolios' independent auditors, whose report thereon appears in the
Statement of Additional Information. Further financial data and related notes
are included in the Statement of Additional Information, available upon request.
VALUESTAR PRIME MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1995 1994*
------------- -------------
<S> <C> <C>
Net asset value, beginning of period..................................... $ 1.0000 $ 1.0000
------------- -------------
Income from investment operations:
Net investment income.................................................. 0.0538 0.0309
Net gains from investment operations................................... 0.0538 0.0309
------------- -------------
Dividends from net investment income..................................... (0.0538) (0.0309)
------------- -------------
Net asset value, end of period........................................... $ 1.0000 $ 1.0000
------------- -------------
------------- -------------
Total Return............................................................. 5.51% 3.13%+
Ratios/Supplemental Data:
Net assets, end of period (000s)....................................... $ 63,919 $ 82,351
Ratio of expenses to average net assets**.............................. 0.65% 0.63%++
Ratio of net investment income to average net assets**................. 5.37% 4.06%++
</TABLE>
- - ---------------
* For the period March 29, 1994 (commencement of operations) through December
31, 1994.
** Net of fee waivers which had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.25% and 0.30% (annualized) for the year ended
December 31, 1995 and period ended December 31, 1994, respectively.
+ Not annualized.
++ Annualized.
<PAGE>
VALUESTAR U.S. TREASURY MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1995 1994*
------------- -------------
<S> <C> <C>
Net asset value, beginning of period..................................... $ 1.0000 $ 1.0000
------------- -------------
Income from investment operations:
Net investment income.................................................. 0.0528 0.0297
------------- -------------
Net gains from investment operations................................... 0.0297 0.0528
------------- -------------
Dividends from net investment income..................................... (0.0528) (0.0297)
------------- -------------
Net asset value, end of period........................................... $ 1.0000 $ 1.0000
------------- -------------
------------- -------------
Total Return............................................................. 5.41% 3.01%+
Ratios/Supplemental Data:
Net assets, end of period (000s)....................................... $ 168,430 $ 139,715
Ratio of expenses to average net assets**.............................. 0.50% 0.54%++
Ratio of net investment income to average net assets**................. 5.28% 4.02%++
</TABLE>
- - ---------------
* For the period March 29, 1994 (commencement of operations) through December
31, 1994.
** Net of fee waivers which had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.25% and 0.29% (annualized) for the year ended
December 31, 1995 and period ended December 31, 1994, respectively.
+ Not annualized.
++ Annualized.
<PAGE>
YIELD INFORMATION
From time to time, each Portfolio will advertise its yield and effective yield.
Both yield figures are based on historical earnings and are not intended to
indicate future performance. It can be expected that these yields will fluctuate
substantially. The yield of the Portfolio refers to the income generated by an
investment in such Portfolio over a seven-day period (which period will be
stated in the advertisement). This income is then annualized. That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The effective yield is calculated similarly but, when annualized,
the income earned by an investment in the Portfolio is assumed to be reinvested.
The effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment. Each Portfolio's yield and
effective yield may reflect absorbed expenses pursuant to any undertaking that
may be in effect.
Yield information is useful in reviewing the Portfolio's performance, but
because yields will fluctuate, under certain conditions such information may not
provide a basis for comparison with domestic bank deposits, other investments
which pay a fixed yield for a stated period of time, or other investment
companies which may use a different method of computing yield.
Comparative performance information may be used from time to time in advertising
or marketing each Portfolio's shares, including data from Lipper Analytical
Services, Inc., Morningstar, Inc., Bank Rate MonitorTM, N. Palm Beach, Fla.
33408, IBC/Donoghue's Money Fund Report and other industry publications.
The fees paid pursuant to the Shareholder Services Plan will be borne by the
holders of the Investor Shares and not the Trust Shares. As a result, at any
given time, the yield of the Investor Class should be expected to be lower than
that of the Trust Class. Yield information for each class will be calculated
separately.
DESCRIPTION OF THE PORTFOLIOS
Investment Objectives
Each Portfolio seeks to provide investors with as high a level of current income
as is consistent with the preservation of capital and the maintenance of
liquidity. Each Portfolio's investment objective cannot be changed without
approval by the holders of a majority (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of such Portfolio's outstanding voting
shares. There can be no assurance that each Portfolio's investment objective
will be achieved. Securities in which each Portfolio will invest may not earn as
high a level of current income as long-term or lower quality securities which
generally have less liquidity, greater market risk and more fluctuation in
market value.
Management Policies
Each Portfolio seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, each Portfolio uses the amortized cost
method of valuing its securities pursuant to Rule 2a-7 under the 1940 Act,
certain requirements of which are summarized below.
In accordance with Rule 2a-7, each Portfolio will maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 13 months or less and invest only in U.S. dollar
denominated securities determined in accordance with procedures established by
the Fund's Board of Directors to present minimal credit risks and, with respect
to the Prime Portfolio, which are rated in one of the two highest rating
categories for debt obligations by at least two nationally recognized
statistical rating organizations (or one rating organization if the instrument
was rated by only one such organization) or, if unrated, are of comparable
quality as determined in accordance with procedures established by the Fund's
Board of Directors. The nationally recognized statistical rating organizations
currently rating instruments of the type the Prime Portfolio may purchase are
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat-ings Group
("S&P"), Duff & Phelps Credit Rating Co. ("Duff"), Fitch Investors Service, L.P.
("Fitch"), IBCA Limited and IBCA Inc. and Thomson BankWatch, Inc. and their
rating criteria are described in the "Appendix" to the Statement of Additional
Information. For further information regarding the amortized cost method of
valuing securities, see "Determination of Net Asset Value" in the Statement of
Additional Information. There can be no assurance that the Portfolios will be
able to maintain a stable net asset value of $1.00 per share.
Prime Portfolio--The Prime Portfolio will invest in U.S. dollar denominated
short-term money market obligations, including securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities, certificates of
deposit, time deposits and bankers' acceptances issued by domestic banks,
foreign branches of domestic banks, foreign subsidiaries of domestic banks, and
domestic and foreign branches of foreign banks, loan participation agreements,
guaranteed investment contracts, municipal obligations, repurchase agreements,
and high quality domestic and foreign commercial paper and other high quality
short-term corporate obligations, such as floating or variable rate U.S. dollar
denominated demand notes and bonds. The Prime Portfolio will invest in U.S.
dollar denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities, including obligations of supranational entities. The Prime
Portfolio will not invest more than 35% of the value of its total assets in
foreign securities. See "Appendix--Portfolio Securities." The Prime Portfolio
also may lend securities from its portfolio, enter into reverse repurchase
agreements and purchase restricted securities pursuant to Rule 144A under the
Securities Act of 1933, as amended, as described under "Appendix-- Investment
Practices." During normal market conditions, at least 25% of the Prime
Portfolio's assets will be invested in domestic and/or foreign bank obligations.
See "Risk Factors Related to the Prime Portfolio" below.
The Prime Portfolio will not invest more than 5% of its total assets in the
securities (including the securities collateralizing a repurchase agreement) of,
or subject to puts issued by, a single issuer, except that (i) the Prime
Portfolio may invest more than 5% of its total assets in a single issuer for a
period of up to three business days in certain limited circumstances, (ii) the
Prime Portfolio may invest in obligations issued or guaranteed by the U.S.
Government without any such limitation, and (iii) the limitation with respect to
puts does not apply to unconditional puts if no more than 10% of the Portfolio's
total assets is invested in securities issued or guaranteed by the issuer of the
unconditional put. Investments in rated securities not rated in the highest
category by at least two rating organizations (or one rating organization if the
instrument was rated by only one such organization), and unrated securities not
determined by the Fund's Board of Directors to be comparable to those rated in
the highest category, will be limited to 5% of the Prime Portfolio's total
assets, with the investment in any one such issuer being limited to no more than
the greater of 1% of the Prime Portfolio's total assets or $1,000,000. As to
each security, these percentages are measured at the time the Prime Portfolio
purchases the security.
U.S. Treasury Portfolio--The U.S. Treasury Portfolio will invest, as a
fundamental policy, at least 65% of the value of its total assets in U.S.
Treasury securities and repurchase agreements in respect thereof. The remainder
of its assets may be invested in other securities guaranteed as to principal and
interest by the U.S. Government and repurchase agreements in respect thereof.
See "Appendix--Portfolio Securities." The U.S. Treasury Portfolio also may lend
its portfolio securities, enter into reverse repurchase agreements and purchase
restricted securities pursuant to Rule 144A under the Securities Act of 1933, as
amended, as described under "Appendix--Investment Practices."
Instruments which are issued or guaranteed as to principal and interest by the
U.S. Government constitute direct obligations of the United States of America.
The U.S. Treasury Portfolio will not invest in securities issued or guaranteed
by U.S. Government agencies, instrumentalities or government-sponsored
enterprises that are not backed by the full faith and credit of the United
States. Dividends and distributions paid by the U.S. Treasury Portfolio that are
attributable to interest from direct obligations of the United States currently
are not subject to personal income tax in most states. However, dividends and
distributions attributable to interest from repurchase agreements may be subject
to state tax.
Certain Fundamental Policies--Each Portfolio may (i) borrow money in an amount
up to 33 1/3% of the value of its total assets and (ii) invest up to 25% of the
value of its total assets in the securities of issuers in a single industry,
provided there is no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. In
addition, the Prime Portfolio (i) may invest up to 5% of its total assets in the
obligations of any one issuer, except that up to 25% of the value of the Prime
Portfolio's total assets may be invested (subject to the provisions of Rule
2a-7), and obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities may be purchased, without regard to any such limitation and
(ii) will invest, except when the Prime Portfolio has adopted a temporary
defensive position, at least 25% of its total assets in securities issued by
banks, including foreign banks and branches. This paragraph describes
fundamental policies that cannot be changed as to a Portfolio without approval
by the holders of a majority (as defined in the 1940 Act) of such Portfolio's
outstanding voting shares. See "Investment Objectives and Management
Policies--Investment Restrictions" in the Statement of Additional Information.
Risk Factors Relating to the Prime Portfolio-- To the extent the Prime
Portfolio's investments are concentrated in the banking industry, it will have
correspondingly greater exposure to the risk factors which are characteristic of
such investments. Sustained increases in interest rates can adversely affect the
availability or liquidity and cost of capital funds for a bank's lending
activities, and a deterioration in general economic conditions could increase
the exposure to credit losses. In addition, the value of and the investment
return on the Prime Portfolio's shares will be affected by economic or
regulatory developments in or related to the banking industry, and competition
within the banking industry as well as with other types of financial
institutions. The Prime Portfolio, however, will seek to minimize its exposure
to such risks by investing only in debt securities which are determined to be of
high quality.
Since the Prime Portfolio may invest in securities issued by foreign governments
and any of their political subdivisions, agencies or instrumentalities, and by
foreign branches of domestic banks, foreign subsidiaries of domestic banks,
domestic and foreign branches of foreign banks, and commercial paper issued by
foreign issuers, it may be subject to additional investment risks with respect
to those securities that are different in some respects from those incurred by a
fund which invests only in debt obligations of U.S. domestic issuers. Such risks
include future political and economic developments, the possible imposition of
foreign withholding taxes on interest income payable on the securities, the
possible establishment of exchange controls, the possible seizure or
nationalization of foreign deposits, or the adoption of other foreign
governmental restrictions with might adversely affect the payment of principal
and interest on these securities.
Other Investment Considerations--Each Portfolio will attempt to increase yields
by trading to take advantage of short-term market variations. This policy is
expected to result in high portfolio turnover but should not adversely affect
the Portfolios since each Portfolio usually will not pay brokerage commissions
on purchases of short-term debt obligations. The value of the securities held by
a Portfolio will vary inversely to changes in prevailing interest rates. Thus,
if interest rates have increased from the time a security was purchased, such
security, if sold, might be sold at a price less than its cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its purchase cost. In
either instance, if the security is held to maturity, no gain or loss will be
realized. The value of U.S. Treasury securities also will be affected by the
supply and demand, as well as the perceived supply and demand, for such
securities.
Federal income tax law requires the holder of a zero coupon security or of
certain pay-in-kind bonds to accrue income with respect to these securities
prior to the receipt of cash payments. To maintain its qualification as a
regulated investment company and avoid liability for Federal income taxes, each
Portfolio that invests in such securities may be required to distribute such
income accrued with respect to these securities and may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
cash to satisfy these distribution requirements.
Investment decisions for each Portfolio are made independently from those of the
Fund's other portfolios and other investment companies or accounts managed by
the Adviser or Sub-Adviser. However, if such other entities desire to invest in,
or dispose of, the same securities as a Portfolio, available investments or
opportunities for sales will be allocated equitably to each of them. In some
cases, this procedure may adversely affect the size of the position obtained for
or disposed of by the Portfolio or the price paid or received by the Portfolio.
MANAGEMENT OF THE PORTFOLIOS
Board of Directors
The business affairs of the Fund are managed under the general supervision of
its Board of Directors. The Statement of Additional Information contains the
name and general business experience of each Director.
Investment Adviser
First American National Bank, located at First American Center, 315 Deaderick,
Nashville, Tennessee 37237, serves as each Portfolio's investment adviser. The
Adviser is a wholly-owned subsidiary of First American Corporation, a registered
bank holding company having assets as of December 31, 1995 of $9.7 billion.
First American National Bank provides personal trust, estate, employee benefit
trust, corporate trust and custody services to over 3,000 individual and
business clients and investment advisory services. The Adviser and its
affiliates, as of December 31, 1995, had approximately $4.4 billion under trust
and approximately $2.5 billion under management.
The Adviser and its affiliates deal, trade and invest for their own accounts and
for the accounts of clients which they manage in the types of securities in
which the Portfolios may invest and may have deposit, loan and commercial
banking relationships with the issuers of securities purchased by the Prime
Portfolio. The Adviser has informed the Fund that in making its investment
decisions it does not obtain or use material inside information in its or its
affiliates' possession.
The Adviser supervises and assists in the management of each Portfolio's affairs
under an Investment Advisory Agreement between the Adviser and the Fund, subject
to the overall authority of the Fund's Board of Directors in accordance with
Maryland law. All activities of the Adviser are conducted by persons who are
also officers of one or more of the Adviser's affiliates.
The Adviser has engaged Barnett Banks Trust Company, N.A. (the "Sub-Adviser"),
located at 9000 Southside Boulevard, Building 100, Jacksonville, Florida 32256,
to provide the day-to-day management of the Prime Portfolio's investments.
Under the terms of the Investment Advisory Agreement, the Fund has agreed to pay
the Adviser a monthly fee at the annual rate of .25 of 1% of the value of each
Portfolio's average daily net assets less, in the case of the Prime Portfolio,
any amount payable by the Fund to the Sub-Adviser. Pursuant to the
Sub-Investment Advisory Agreement among the Fund, the Advisory and the
Sub-Adviser, the Fund has agreed to pay the Sub-Adviser a monthly fee at the
annual rate of .15 of 1% of the value of the Prime Portfolio's average daily net
assets. For the fiscal year ended December 31, 1995, the Fund paid the Adviser a
monthly fee at the annual rate of .10 of 1% of the value of the Prime
Portfolio's and .25 of 1% of the value of the U.S. Treasury Portfolio's average
daily net assets. For such year, the Fund paid the Sub-Adviser at the annual
rate of .15 of 1% of the value of the Prime Portfolio's average daily net
assets.
From time to time, the Adviser and/or the Sub-Adviser may waive receipt of their
respective fees and/or voluntarily assume certain expenses of a Portfolio, which
would have the effect of lowering the overall expense ratio of that Portfolio
and increasing yield to its investors. The Portfolio will not pay the Adviser
and/or the Sub-Adviser at a later time for any amounts that may be waived, nor
will the Portfolio reimburse the Adviser and/or the Sub-Adviser for any amounts
that may be assumed.
Administrator
BISYS Fund Services Limited Partnership, located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as each Portfolio's administrator. The Administrator
currently provides administrative services or sub-administrative services to
other investment companies with over $60 billion in assets. The Administrator is
a wholly-owned subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator generally
assists in all aspects of the Fund's operations, other than providing investment
advice, subject to the overall authority of the Fund's Board of Directors in
accordance with Maryland law. In connection therewith, the Administrator
provides the Fund with office facilities, personnel, and certain clerical and
bookkeeping services (e.g., preparation of reports to shareholders and the
Securities and Exchange Commission and filing of Federal, state and local income
tax returns) that are not being furnished by The Bank of New York, the Fund's
Custodian.
For the fiscal year ended December 31, 1995, the Fund paid Concord Holding
Corporation, an affiliate of the Administrator and the Portfolios' predecessor
administra-tor, a monthly administration fee at the annual rate of .10 of 1% of
the value of each Portfolio's average daily net assets.
Distributor
Concord Financial Group, Inc., located at 125 West 55th Street, New York, New
York 10019, serves as the Fund's principal underwriter and distributor of each
Portfolio's shares. The Distributor, an affiliate of the Administrator, was
organized to distribute shares of mutual funds to institutional and retail
investors. The Distributor distributes the shares of other investment companies
with over $80 billion in assets. The Distributor is the Fund's sponsor.
The Distributor makes a continuous offering of each Portfolio's shares and bears
the costs and expenses of printing and distributing to prospective investors
copies of any prospectuses, statements of additional information and annual and
interim reports of each Portfolio (after such items have been prepared and set
in type by the Fund) which are used in connection with the offering of shares,
and the costs and expenses of preparing, printing and distributing any other
literature used by the Distributor in connection with the offering of such
Portfolio's shares for sale to the public.
Shareholder Services Plan
Under a shareholder services plan adopted by the Fund's Board of Directors (the
"Plan"), the Fund pays the Distributor for the provision of certain services to
the holders of Investor Shares at an annual rate of .25 of 1% of the value of
each Portfolio's average daily net assets represented by Investor Shares. The
services provided may include personal services relating to shareholder
accounts, such as answering shareholder inquiries regarding a Portfolio and
providing reports and other information, and services related to the maintenance
of such shareholder accounts. The fee payable for such services is intended to
be a "service fee" as defined in Article III, Section 26 of the NASD Rules of
Fair Practice. Under the Plan, the Distributor may make payments to certain
financial institutions, securities dealers and other industry professionals that
have entered into agreements with the Distributor ("Service Organizations") in
respect of these services. The Distributor determines the amounts to be paid to
Service Organizations. Service Organizations receive such fees in respect of the
average daily value of Investor Shares owned by their clients. From time to
time, the Distributor may defer or waive receipt of fees under the Plan while
retaining the ability to be paid by the Fund under the Plan thereafter. The fees
payable to the Distributor under the Plan are payable without regard to actual
expenses incurred.
The Fund understands that Service Organizations may charge fees to their clients
who are the beneficial owners of Investor Shares in connection with their client
accounts. These fees would be in addition to any amounts which may be received
by a Service Organization under its agreement with the Distributor. Each Service
Organization is required to disclose to its clients any compensation payable to
it by the Fund pursuant to the Plan and any other compensation payable by such
clients in connection with the investment of their assets in Portfolio shares.
Clients of Service Organizations should read this Prospectus in light of the
terms governing their accounts with such Service Organizations.
Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286, is the
Fund's Custodian. BISYS Fund Services Ohio, Inc., an affiliate of the
Administrator, located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, is the
Fund's Transfer and Dividend Disbursing Agent (the "Transfer Agent").
Expenses
All expenses incurred in the operation of the Fund are borne by the Fund, except
to the extent specifically assumed by others. The expenses borne by the Fund
include: organizational costs, taxes, interest, brokerage fees and commissions,
if any, fees of Directors who are not officers, directors, employees or holders
of 5% or more of the outstanding voting securities of the Adviser, Sub-Adviser
or Administrator, or any of their affiliates, Securities and Exchange Commission
fees, state Blue Sky qualification fees, advisory and administration fees,
charges of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, industry association fees, auditing and legal expenses,
costs of maintaining corporate existence, costs of independent pricing services,
costs of calculating the net asset value of each Portfolio's shares, costs of
shareholders' reports and corporate meetings, costs of preparing and printing
certain prospectuses and statements of additional information, and any
extraordinary expenses. Expenses attributable to a particular Portfolio are
charged against the assets of that Portfolio; other expenses of the Fund are
allocated among the Portfolios on the basis determined by the Board of
Directors, including, but not limited to, proportionately in relation to the net
assets of each Portfolio.
HOW TO BUY SHARES
General
Investor Shares may be purchased through a number of institutions, including the
Adviser and its affiliates such as AmeriStar Capital Markets Inc., Service
Organizations, and directly from the Distributor. When purchasing Portfolio
shares, you must specify the Portfolio being purchased and that the purchase is
for Investor Shares. The Adviser, its affiliates and Service Organizations may
receive different levels of compensation for selling different classes of
Portfolio shares. Stock certificates will not be issued. The Fund reserves the
right to reject any purchase order.
The minimum initial investment for each Portfolio is $1,000, and subsequent
investments must be at least $100. For full-time or part-time employees of the
Adviser or any of its affiliates, the minimum initial investment for each
Portfolio is $500, and subsequent investments must be at least $50. The Adviser,
its affiliates and Service Organizations may impose initial or subsequent
investment minimums which are higher or lower than those specified above and may
impose different minimums for different types of accounts or purchase
arrangements. In addition, purchases made in connection with certain shareholder
privileges may have different minimum investment requirements. See "Shareholder
Privileges."
Shares are sold on a continuous basis at the net asset value per share next
determined after an order in proper form and Federal Funds (monies of member
banks within the Federal Reserve System which are held on deposit at a Federal
Reserve Bank) are received by the Transfer Agent. See "Terms of Purchase" below.
If you do not remit Federal Funds, your payment must be converted into Federal
Funds. This usually occurs within one business day of receipt of a bank wire or
within two business days of receipt of a check drawn on a member bank of the
Federal Reserve System. Checks drawn on banks which are not members of the
Federal Reserve System may take considerably longer to convert into Federal
Funds. Prior to receipt of Federal Funds, your money will not be invested.
Procedures
You may purchase Portfolio shares by check or wire, or through TeleTrade or a
sweep program as described below. Investors purchasing shares through the
Adviser, its affiliates or Service Organizations should contact such entity
directly for appropriate instructions, as well as for information about
conditions pertaining to the account and any related fees.
Written Orders. For written orders, you may send your initial or subsequent
purchase order, together with the Fund's Account Application (which may be
obtained by calling 1-800-852-0045) for initial orders and your check or money
order payable to: The ValueStar Funds (Portfolio Name), to The ValueStar Funds,
c/o BISYS Fund Services, Inc., Department L-1686, Columbus, Ohio 43260-1686. For
subsequent investments, your Fund account number should appear on the check or
money order. All payments should be made in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. A charge will be imposed if a check
used for investment in your account does not clear.
Wire Orders. For wire orders, you must call the Transfer Agent at
1-800-852-0045. If a subsequent payment is being made, your Fund account number
should be included. Information on remitting funds in this manner, including any
related fees, may be obtained from your bank.
Subsequent investments also may be made by electronic transfer of funds from an
account maintained in a bank or other domestic financial institution that is an
Automated Clearing House member. For information on purchasing shares through
the Automatic Clearing House, you must call the Transfer Agent at
1-800-852-0045.
Automatically Through "Sweep" Programs. Certain investor accounts with the
Adviser, its affiliates and certain Service Organizations may be eligible for an
automatic investment privilege, commonly called a "sweep," under which amounts
in excess of a certain minimum held in these accounts will be invested
automatically in shares of a Portfolio at predetermined intervals at the next
determined net asset value. Investors desiring to use this privilege should
consult such entity at which the investor maintains his account to determine if
it is available and whether any conditions are imposed on its use. It is the
responsibility of the financial institution holding the investor's funds to
transmit such investor's order on a timely basis. The "sweep" program may be
modified or terminated at any time by the Fund.
TeleTrade. You may purchase Portfolio shares (minimum purchase $500, maximum
$50,000 per transaction) without charge by telephone for an existing Fund
account if you have checked the appropriate box and supplied the necessary
information on the Fund's Account Application. The proceeds will be transferred
between the bank account designated on the Account Application and your Fund
account. Only a bank account maintained in a domestic financial institution
which is an Automated Clearing House member may be so designated. TeleTrade
purchases are effected at the net asset value next determined after receipt of
an order in proper form by the Transfer Agent. See "Terms of Purchase" below.
TeleTrade may not be available to certain clients of the Adviser, its affiliates
and certain Service Organizations. The Fund may modify or terminate TeleTrade at
any time or charge a service fee upon notice to shareholders. No such fee
currently is contemplated. If you have selected TeleTrade, you may request such
a purchase of Portfolio shares by telephoning the Transfer Agent at 1-800-
852-0045.
Terms of Purchase
If your purchase order is received by the Transfer Agent by 2:00 p.m., Eastern
time, on a business day (which, as used herein, shall include each day the New
York Stock Exchange and the Fund's Custodian are open for business), shares will
be purchased as of 2:00 p.m., Eastern time, on such business day if payment is
received in, or is converted into, Federal Funds by 4:00 p.m., Eastern time, by
the Transfer Agent on that day. If your purchase order is received after 2:00
p.m., Eastern time, or if payment in Federal Funds is not received by 4:00 p.m.,
Eastern time, shares will be purchased as of 2:00 p.m., Eastern time, on the
business day on which Federal Funds are available. If you effect transactions in
shares of a Portfolio through the Adviser, its affiliates or a Service
Organization, it is such entity's responsibility to transmit orders so that they
will be received by the Transfer Agent in time to receive the next determined
net asset value as described above.
Each Portfolio's net asset value per share is determined as of 2:00 p.m.,
Eastern time, on each business day. Net asset value per Investor Share is
computed by dividing the value of the Portfolio's net assets attributable to
Investor Shares (i.e., the value of its assets less liabilities) by the total
number of Investor Shares of such Portfolio outstanding. See "Determination of
Net Asset Value" in the Statement of Additional Information.
Federal regulations require that an investor provide a certified TIN upon
opening or reopening an account. See "Dividends, Distributions and Taxes" and
the Fund's Account Application for further information concerning this
requirement. Failure to furnish a certified TIN to the Fund could subject the
investor to a $50 penalty imposed by the Internal Revenue Service ("IRS").
HOW TO REDEEM SHARES
General
An investor who has purchased shares through an account with the Adviser, its
affiliates or a Service Organization must redeem shares by following
instructions pertaining to such account. If such investors also are the
shareholders of record of those accounts on the books of the Transfer Agent,
they may redeem shares as described below under "Procedures." Such investors
wishing to use the other redemption methods described below must arrange with
the Adviser, its affiliates or the Service Organization for delivery of the
required application(s) to the Transfer Agent. It is the responsibility of the
Adviser, its affiliates or the Service Organization, as the case may be, to
transmit the redemption order to the Transfer Agent and credit the investor's
account with the redemption proceeds on a timely basis. Other investors may
redeem all or part of their shares in accordance with the procedures described
below.
When a request is received in proper form, the Fund will redeem the shares at
the next determined net asset value. The Fund ordinarily will make payment for
all shares redeemed within seven days after receipt by the Transfer Agent of a
redemption request in proper form, except as provided by the rules of the
Securities and Exchange Commission. However, if you have purchased Portfolio
shares by check or by TeleTrade and subsequently submit a redemption request by
mail, the redemption proceeds will not be transmitted to you until bank
clearance of the check or TeleTrade payment used for investment which may take
up to seven business days. The Fund will delay requests to redeem shares by wire
for a period of up to seven business days after receipt by the Transfer Agent of
the purchase check or TeleTrade order against which such redemption is
requested. This procedure does not apply to shares purchased by wire payment.
Prior to the time the redemption is effective, dividends on such shares will
accrue and be payable, and you will be entitled to exercise all other rights of
beneficial ownership.
The Fund imposes no charges when shares are redeemed. The Adviser, its
affiliates and Service Organizations may charge their clients a nominal fee for
effecting redemptions of Portfolio shares. The value of Portfolio shares
redeemed may be more or less than their original cost, depending upon the
Portfolio's then-current net asset value.
The Fund reserves the right to redeem your account at its option upon not less
than 45 days' written notice if your account's net asset value is $500 or less,
for reasons other than market conditions, and remains so during the notice
period.
Procedures
Written Orders. Written requests for redemption, indicating the name of the
Portfolio and that Investor Shares are being redeemed, with signature
appropriately guaranteed, if required, and otherwise in accordance with the
requirements listed below, should be mailed to The ValueStar Funds, c/o BISYS
Fund Services, Inc., Department L-1686, Columbus, Ohio 43260-1686.
Redemption by Check. If you desire to use check redemption, you should consult
the Adviser, its affiliates or your Service Organization to determine its
availability. At such entity's request, the Transfer Agent will provide you with
redemption checks. These checks can be made payable to the order of any person
in an amount not less than $500. The payee of the check may cash or deposit the
check. When a check is presented to the Transfer Agent for payment, the Transfer
Agent will present the check to the Fund as authority to redeem a sufficient
number of full and fractional shares in your account to cover the amount of the
check. This enables you to continue earning daily dividends until the check is
cleared. There currently is no charge for the use of checks; however, the
Transfer Agent may impose a charge for stopping payment of a check upon your
request, or if the check cannot be honored due to insufficient funds or other
valid reason. Shares for which stock certificates have been issued may not be
redeemed by check. The Fund or the Transfer Agent may modify or terminate the
check redemption privilege at any time upon notice to shareholders.
Wire Redemption Privilege. After appropriate prior authorization, you may
request by telephone or in writing that redemption proceeds be transmitted by
the Transfer Agent via Federal Funds wire transfer to your bank account.
Redemption requests must be in an amount of at least $1,000. The Fund reserves
the right to refuse any request for a wire transfer and may limit the amount
involved or the number of telephone redemption requests. This Privilege may be
modified or terminated at any time by the Transfer Agent or the Fund.
Automatically Through "Sweep" Programs. See Page 15.
TeleTrade. You may redeem Portfolio shares (minimum $500, maximum $50,000 per
transaction) without charge by telephone if you have checked the appropriate box
and supplied the necessary information on the Fund's Account Application. The
proceeds will be transferred between your Fund account and the bank account
designated on the Account Application.
Only a bank account maintained in a domestic financial institution which is an
Automated Clearing House member may be so designated. Redemption proceeds will
be on deposit in your account at an Automated Clearing House member bank
ordinarily two days after receipt of the redemption request. The Fund may modify
or terminate TeleTrade at any time or charge a service fee upon notice to
shareholders. No such fee currently is contemplated. If you have selected
TeleTrade, you may request such a redemption of Portfolio shares by telephoning
the Transfer Agent at 1-800-852-0045.
Redemption Requirements
Written redemption instructions, indicating the name of the Portfolio and that
Investor Shares are being redeemed, and duly endorsed share certificates, if
previously issued, must be received by the Transfer Agent in proper form and
signed exactly as the shares are registered. Except as noted below, all
signatures must be guaranteed. The Transfer Agent has adopted standards and
procedures pursuant to which signature-guarantees in proper form generally will
be accepted from domestic banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations, as well as from participants in the New York Stock
Exchange Medallion Signature Program, the Securities Transfer Agents Medallion
Program ("STAMP") and the Stock Exchanges Medallion Program.
Signature-guarantees may not be provided by notaries public. The signature
guarantee requirement will be waived if the following conditions apply: (1) the
redemption check is payable to the shareholder(s) of record; and (2) the
redemption check is mailed to the shareholder(s) at the address of record or the
proceeds are either mailed or wired to a financial institution account
previously designated. Redemption requests by corporate and fiduciary
shareholders must be accompanied by appropriate documentation establishing the
authority of the person seeking to act on behalf of the account. You may obtain,
from the Fund or the Transfer Agent, forms of resolutions and other
documentation which have been prepared in advance to assist compliance with the
Fund's procedures.
You may redeem or exchange Portfolio shares by telephone if you have checked the
appropriate box on the Fund's Account Application. By selecting a telephone
redemption or exchange privilege, an investor authorizes the Transfer Agent to
act on telephone instructions from any person representing himself or herself to
be the investor, or a representative of the investor's Service Organization, and
reasonably believed by the Transfer Agent to be genuine. The Fund will require
the Transfer Agent to employ reasonable procedures, such as requiring a form of
personal identification, to confirm that instructions are genuine and, if it
does not follow such procedures, the Fund or the Transfer Agent may be liable
for any losses due to unauthorized or fraudulent instructions. Neither the Fund
nor the Transfer Agent will be liable for following telephone instructions
reasonably believed to be genuine.
During times of drastic economic or market conditions, investors may experience
difficulty in contacting the Transfer Agent by telephone to request a redemption
or exchange of Portfolio shares. In such cases, investors should consider using
the other redemption procedures described herein. Use of these other redemption
procedures may result in the investor's redemption request being processed at a
later time than it would have been if telephone redemption had been used.
SHAREHOLDER PRIVILEGES
The services and privileges described under this heading may not be available to
certain clients of the Adviser, its affiliates and certain Service Organizations
and the Adviser, its affiliates and some Service Organizations may impose
certain conditions on their clients which are different from those described in
this Prospectus. Such investors should consult the Adviser, its affiliates or
their Service Organization in this regard.
Exchange Privilege
The Exchange Privilege enables you to purchase, in exchange for shares of a
Portfolio, shares of the other Portfolio offered by this Prospectus, or shares
of ValueStar Short-Intermediate Duration Bond Portfolio or ValueStar Tennessee
Tax Exempt Bond Portfolio, to the extent such shares are offered for sale in
your state of residence. If you desire to use this Privilege, you should consult
the Adviser, its affiliate where you maintain your account, your Service
Organization or the Distributor to determine if it is available and whether any
conditions are imposed on its use.
To use the Exchange Privilege, you or your Service Organization acting on your
behalf must give exchange instructions to the Transfer Agent in writing, or by
telephone, or in accordance with the instructions pertaining to your account at
the Adviser or its affiliates. If you previously established the Telephone
Exchange Privilege, you may telephone exchange instructions by calling
1-800-852-0045. See "How to Redeem Shares--Redemption Requirements." Before any
exchange into a Portfolio offered by another prospectus, you must obtain and
should review a copy of the current prospectus of the Portfolio into which the
exchange is being made. Prospectuses may be obtained from the Adviser, its
affiliates, certain Service Organizations or the Distributor. The shares being
exchanged must have a current value of at least $500; furthermore, when
establishing a new account by exchange, the shares being exchanged must have a
value of at least the minimum initial investment required for the Portfolio into
which the exchange is being made.
Shares will be exchanged at the next determined net asset value; however, a
sales load may be charged with respect to exchanges into a Portfolio sold with a
sales load. If you are exchanging into a Portfolio that charges a sales load,
you may qualify for share prices which do not include the sales load or which
reflect a reduced sales load, if the shares of the Portfolio from which you are
exchanging were: (a) purchased with a sales load, (b) acquired by a previous
exchange from shares purchased with a sales load, or (c) acquired through
reinvestment of dividends or distributions paid with respect to the foregoing
categories of shares. No fees currently are charged shareholders directly in
connection with exchanges although the Fund reserves the right, upon not less
than 60 days' written notice, to charge shareholders a nominal fee in accordance
with rules promulgated by the Securities and Exchange Commission. The Fund
reserves the right to reject any exchange request in whole or in part. The
Exchange Privilege may be modified or terminated at any time upon notice to
shareholders.
The exchange of shares of one Portfolio for shares of another is treated for
Federal income tax purposes as a sale of the shares given in exchange by the
shareholder and, therefore, an exchanging shareholder may realize a taxable gain
or loss.
Automatic Investment Plan
The Automatic Investment Plan permits you to purchase Portfolio shares (minimum
initial investment of $1,000 and minimum subsequent investments of $100 per
transaction) at regular intervals selected by you. Provided your bank or other
financial institution allows automatic withdrawals, Portfolio shares may be
purchased by transferring funds from the bank account designated by you. At your
option, the account designated will be debited in the specified amount, and
Portfolio shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only an account maintained at a
domestic financial institution which is an Automated Clearing House member may
be so designated. This service enables you to make regularly scheduled
investments and may provide you with a convenient way to invest for long-term
financial goals. You should be aware, however, that periodic investment plans do
not guarantee a profit and will not protect an investor against loss in a
declining market. To establish an Automatic Investment Plan account, you must
check the appropriate box and supply the necessary information on the Account
Application. You may obtain the necessary applications from the Distributor. You
may cancel your participation in the Automatic Investment Plan or change the
amount of purchase at any time by mailing written notification to The ValueStar
Funds, c/o BISYS Fund Services, Inc., Department L-1686, Columbus, Ohio
43260-1686, and such notification will be effective three business days
following receipt. The Fund may modify or terminate the Automatic Investment
Plan at any time or charge a service fee. No such fee currently is contemplated.
Automatic Withdrawal Plan
The Automatic Withdrawal Plan permits you to request withdrawal of a specified
dollar amount (minimum of $50) on either a monthly, quarterly, semi-annual or
annual basis if you have a $5,000 minimum account. The automatic withdrawal will
be made on the first or fifteenth day, at your option, of the period selected.
To participate in the Automatic Withdrawal Plan, you must check the appropriate
box and supply the necessary information on the Account Application. The
Automatic Withdrawal Plan may be ended at any time by the investor, the Fund or
the Transfer Agent.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Portfolio declares dividends from net investment income on each day that
the Portfolio is open for business. Dividends usually are paid on the last
calendar day of each month, and are automatically reinvested in additional
Portfolio shares at net asset value or, at your option, paid in cash. Each
Portfolio's earnings for Saturdays, Sundays and holidays are declared as
dividends on the preceding business day. Shares begin accruing dividends on the
day the purchase order is received in proper form by the Transfer Agent, and
continue to earn dividends through the day before a redemption order for such
shares is processed by the Transfer Agent. Dividends paid by each class of
shares of a Portfolio will be calculated at the same time and in the same manner
and will be of the same amount regardless of class, except that the expenses
attributable solely to a class will be borne exclusively by such class. If you
redeem all shares in your account at any time during the month, all dividends to
which you are entitled will be paid to you along with the proceeds of the
redemption.
If you elect to receive distributions in cash and your distribution checks (1)
are returned to the Fund marked as "undeliverable" or (2) remain uncashed for
six months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in Portfolio shares
at the net asset value determined as of the date of payment of the distribution.
In addition, any such undeliverable checks or checks that remain uncashed for
six months will be canceled and will be reinvested in Portfolio shares at the
net asset value determined as of the date of cancellation.
Distributions from net realized securities gains, if any, are declared and paid
once a year, but each Portfolio may make distributions on a more frequent basis
to comply with the distribution requirements of the Internal Revenue Code of
1986, as amended (the "Code"), in all events in a manner consistent with the
provisions of the 1940 Act. You may choose whether to receive distributions in
cash or to reinvest in additional Investor Shares at net asset value. All
expenses are accrued daily and deducted before declaration of dividends to
investors.
Dividends derived from interest and distributions from any net realized
short-term securities gains are generally taxable to investors as ordinary
income, whether received in cash or reinvested in additional Portfolio shares.
Distributions from net realized long-term securities gains, if any, generally
are taxable as long-term capital gains regardless of how long shareholders have
held their shares and whether such distributions are received in cash or
reinvested in additional Portfolio shares. Dividends and distributions may be
subject to certain state and local taxes. No dividend will qualify for the
dividends-received deduction allowable to certain corporations.
Dividends paid by a Portfolio derived from net investment income and
distributions from net realized short-term securities gains paid by such
Portfolio to a foreign investor generally are subject to U.S. nonresident
withholding taxes at the rate of 30%, unless the investor claims the benefit of
a lower rate specified in a tax treaty. Distributions from net realized
long-term securities gains paid by a Portfolio to a foreign investor generally
will not be subject to U.S. nonresident withholding tax. However, such
distributions may be subject to backup withholding, as described below, unless
the foreign investor certifies his non-U.S. residency status.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends and distributions
from net realized securities gains paid to a shareholder if such shareholder
fails to certify either that the TIN furnished in connection with opening an
account is correct, or that such shareholder has not received notice from the
IRS of being subject to backup withholding as a result of a failure to properly
report taxable dividend or interest income on a Federal income tax return.
Furthermore, the IRS may notify the Fund to institute backup withholding if the
IRS determines a shareholder's TIN is incorrect or if a shareholder has failed
to properly report taxable dividend and interest income on a Federal income tax
return.
A TIN is either the Social Security number or employer identification number of
the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner of
the account, and may be claimed as a credit on the record owner's Federal income
tax return.
Notice as to the tax status of your dividends and distributions will be mailed
to you annually. You also will receive periodic summaries of your account which
will include information as to income dividends and distributions from
securities gains, if any, paid during the year.
Dividends and distributions attributable to interest from direct obligations of
the United States and paid by a Portfolio to individuals currently are not
subject to tax in most states. Dividends and distributions attributable to
interest from other securities in which the Portfolios may invest may be subject
to state tax. The Fund will provide shareholders with a statement which sets
forth the percentage of dividends and distributions paid by the U.S. Treasury
Portfolio that is attributable to interest income from direct obligations of the
United States.
Management of the Fund believes that each Portfolio qualified for the fiscal
year ended December 31, 1995 as a "regulated investment company" under the Code.
Each Portfolio intends to continue to so qualify if such qualification is in the
best interests of its shareholders. Such qualification relieves the Portfolio of
any liability for Federal income tax to the extent its earnings are distributed
in accordance with applicable provisions of the Code. In addition, each
Portfolio is subject to a non-deductible 4% excise tax, measured with respect to
certain undistributed amounts of taxable investment income and capital gains.
You should consult your tax adviser regarding specific questions as to Federal,
state or local taxes.
GENERAL INFORMATION
The Fund was incorporated under Maryland law on March 6, 1990, and commenced
operations on August 28, 1990.
The Fund is authorized to issue eleven billion shares of Common Stock (with 750
million shares allocated to each Portfolio), par value $.001 per share. Each
Portfolio's shares are classified into Investor Shares (375 million) and Trust
Shares (375 million). Trust Shares, which are described in a separate
prospectus, are sold only to clients of the Adviser for their qualified trust,
custody and/or agency accounts and to clients of the Adviser's affiliated and
correspondent banks and other affiliated and non-affiliated institutions for
their similar accounts maintained at such affiliates or institutions. Each share
has one vote and shareholders will vote in the aggregate and not by class except
as otherwise required by law. Only holders of the Investor Shares, however, will
be entitled to vote on matters submitted to shareholders pertaining to the
Shareholder Services Plan.
Unless otherwise required by the 1940 Act, ordinarily it will not be necessary
for the Fund to hold annual meetings of shareholders. As a result, shareholders
may not consider each year the election of Directors or the appointment of
auditors. However, pursuant to the Fund's By-Laws, the holders of at least 10%
of the shares outstanding and entitled to vote may require the Fund to hold a
special meeting of shareholders for purposes of removing a Director from office
or for any other purpose. Shareholders may remove a Director by the affirmative
vote of a majority of the Fund's outstanding voting shares. In addition, the
Board of Directors will call a meeting of shareholders for the purpose of
electing Directors if, at any time, less than a majority of the Directors then
holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios, each of which is treated as a separate entity for certain matters
under the 1940 Act, and for other purposes. A shareholder of one portfolio is
not deemed to be a shareholder of any other portfolio. For certain matters Fund
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, Investor Shares of two of the Fund's ValueStar
Portfolios are being offered--Prime Money Market Portfolio and U.S. Treasury
Money Market Portfolio, each of which is a diversified money market fund. From
time to time, other portfolios may be established and sold pursuant to other
offering documents. See
To date, 12 portfolios have been authorized. The other portfolios are not being
offered by this Prospectus. All consideration received by the Fund for shares of
one of the portfolios, and all assets in which such consideration is invested,
belong to that portfolio (subject only to the rights of creditors of the Fund)
and will be subject to the liabilities related thereto. The income and expenses
attributable to one portfolio (and as to classes within a portfolio) are treated
separately from those of the other portfolios (and classes).
The Transfer Agent maintains a record of each investor's ownership and sends
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
<PAGE>
APPENDIX
Portfolio Securities
To the extent set forth in this Prospectus, each Portfolio may invest in the
securities described below.
U.S. Treasury Securities--Each Portfolio may invest in U.S. Treasury securities
which include Treasury Bills, Treasury Notes and Treasury Bonds that differ in
their interest rates, maturities and times of issuance. Treasury Bills have
initial maturities of one year or less; Treasury Notes have initial maturities
of one to ten years; and Treasury Bonds generally have initial maturities of
greater than ten years.
U.S. Government Securities--In addition to U.S. Treasury securities, the Prime
Portfolio and, to a limited extent, the U.S. Treasury Portfolio may invest in
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. Interest
may fluctuate based on generally recognized reference rates or the relationship
of rates. While the U.S. Government provides financial support to such U.S.
Government sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. Each Portfolio
will invest in such securities only when it is satisfied that the credit risk
with respect to the issuer is minimal.
Zero Coupon and Stripped Securities--Each Portfolio may invest in zero coupon
U.S. Treasury securities, which are Treasury Notes and Bonds that have been
stripped of their unmatured interest coupons, the coupons themselves and
receipts or certificates representing interests in such stripped debt
obligations and coupons. A zero coupon security pays no interest to its holder
during its life and is sold at a discount to its face value at maturity. The
amount of the discount fluctuates with the market price of the security. The
market prices of zero coupon securities generally are more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to a greater degree to changes in interest rates than non-zero coupon
securities having similar maturities and credit qualities.
Repurchase Agreements--Each Portfolio may enter into repurchase agreements,
which involve the acquisition by a Portfolio of an underlying debt instrument,
subject to an obligation of the seller to repurchase, and such Portfolio to
resell, the instrument at a fixed price usually not more than one week after its
purchase. Certain costs may be incurred by a Portfolio in connection with the
sale of the securities if the seller does not repurchase them in accordance with
the repurchase agreement. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the securities, realization on the securities by
the Portfolio may be delayed or limited.
Foreign Government Obligations; Securities of Supranational Entities--The Prime
Portfolio may invest in obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Sub-Adviser to be of comparable
quality to the other obligations in which the Prime Portfolio may invest. Such
securities also include debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of the
Prime Portfolio's assets invested in securities issued by foreign governments
will vary depending on the relative yields of such securities, the economic and
financial markets of the countries in which the investments are made and the
interest rate climate of such countries. See "Description of the
Portfolios--Risk Factors Relating to the Prime Portfolio."
Bank Obligations--The Prime Portfolio will invest in bank obligations (other
than those issued by the Adviser or its affiliates), including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. See "Description
of the Portfolios--Risk Factors Relating to the Prime Portfolio." Certificates
of deposit are negotiable certificates evidencing the obligation of a bank to
repay funds deposited with it for a specified period of time. Time deposits are
non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Time deposits which may be held by the
Prime Portfolio will not benefit from insurance from the Bank Insurance Fund or
the Savings Association Insurance Fund administered by the Federal Deposit
Insurance Corporation. Bankers' acceptances are credit instruments evidencing
the obligation of a bank to pay a draft drawn on it by a customer. These
instruments reflect the obligation both of the bank and of the drawer to pay the
face amount of the instrument upon maturity. The other short-term obligations
may include uninsured, direct obligations, bearing fixed, floating or variable
interest rates.
Commercial Paper and other Short-Term Corporate Obligations--The Prime Portfolio
may invest in commercial paper, which consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The commercial paper
purchased by the Prime Portfolio will consist only of direct obligations issued
by domestic and foreign entities. The other corporate obligations in which the
Prime Portfolio may invest consist of high quality, U.S. dollar denominated
short-term bonds and notes (including variable amount master demand notes)
issued by domestic and foreign corporations.
Floating and Variable Rate Obligations-- The Prime Portfolio also may purchase
floating and variable rate demand notes and bonds, which are obligations
ordinarily having stated maturities in excess of 13 months, but which permit the
holder to demand payment of principal at any time, or at specified intervals not
exceeding 13 months, in each case upon not more than 30 days' notice. Variable
rate demand notes include master demand notes which are obligations that permit
the Prime Portfolio to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Prime Portfolio, as
lender, and the borrower. The interest rates on these notes fluctuate from time
to time. The issuer of such obligations normally has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders of such obligations. The interest rate on a floating rate
demand obligation is based on a known lending rate, such as a bank's prime rate,
and is adjusted automatically each time such rate is adjusted. The interest rate
on a variable rate demand obligation is adjusted automatically at specified
intervals. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because these obligations
are direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Prime Portfolio's
right to redeem is dependent on the ability of the borrower to pay principal and
interest on demand. Such obligations frequently are not rated by credit rating
agencies and, if not so rated, the Prime Portfolio may invest in them only if
the Sub-Adviser, acting upon delegated authority from the Fund's Board of
Directors, determines that at the time of investment the obligations are of
comparable quality to the other obligations in which the Prime Portfolio may
invest. The Sub-Adviser, on behalf of the Prime Portfolio, will consider on an
ongoing basis the creditworthiness of the issuers of the floating and variable
rate demand obligations held by the Portfolio. The Prime Portfolio will not
invest more than 10% of the value of its net assets in floating or variable rate
demand obligations as to which it cannot exercise the demand feature on not more
than seven days' notice if the Sub-Adviser determines, acting upon delegated
authority from, and procedures established by, the Fund's Board of Directors,
that there is no secondary market available for these obligations, and in other
securities that are illiquid.
Notes--The Prime Portfolio also may purchase unsecured promissory notes
("Notes") which are not readily marketable and have not been registered under
the Securities Act of 1933, provided such investments are consistent with its
investment objective. The Portfolio will invest no more than 10% of its net
assets in such Notes and in other securities that are illiquid.
Participation Interests and Trust Receipts-- The Prime Portfolio may purchase
from financial institutions and trusts created by such institutions
participation interests and trust receipts in securities in which it may invest
and may enter into loan participation agreements. See "Investment Objectives and
Management Policies--Portfolio Securities" in the Statement of Additional
Information. A participation interest or receipt gives the Prime Portfolio an
undivided interest in the security in the proportion that the Prime Portfolio's
participation interest or receipt bears to the total principal amount of the
security. These instruments may have fixed, floating or variable rates of
interest with remaining maturities of 13 months or less. If the instrument is
unrated, or has been given a rating below that which is permissible for purchase
by the Prime Portfolio, the instrument will be backed by an irrevocable letter
of credit or guarantee of a bank or other entity the debt securities of which
are rated high quality, or the payment obligation otherwise will be
collateralized by U.S. Government securities, or, in the case of unrated
instruments, the Sub-Adviser, acting upon delegated authority from the Fund's
Board of Directors, must have determined that the instrument is of comparable
quality to those instruments in which the Prime Portfolio may invest.
Participation interests or trust receipts with a rating below high quality that
are backed by an irrevocable letter of credit or guarantee as described above
will be purchased only if the Sub-Adviser, acting as described above, determines
after an analysis of, among other factors, the creditworthiness of the guarantor
that such instrument is high quality, and if the rating agency did not include
the letter of credit or guarantee in its determination of the instrument's
rating. If the rating of a participation interest or trust receipt is reduced
subsequent to its purchase by the Prime Portfolio, the Sub-Adviser will
consider, in accordance with procedures established by the Board of Directors,
all circumstances deemed relevant in determining whether the Prime Portfolio
should continue to hold the instrument. The guarantor of a participation
interest or trust receipt will be treated as a separate issuer. For certain
participation interests and trust receipts, the Prime Portfolio will have the
unconditional right to demand payment, on not more than seven days' notice, for
all or any part of the Prime Portfolio's interest in the security, plus accrued
interest. As to these instruments, the Prime Portfolio intends to exercise its
right to demand payment only upon a default under the terms of the security, as
needed to provide liquidity to meet redemptions, or to maintain or improve the
quality of its investment portfolio. Not more than 10% of the value of the Prime
Portfolio's net assets will be invested in participation interests and trust
receipts that do not have this demand feature, and in other securities that are
illiquid.
Guaranteed Investment Contracts--The Prime Portfolio may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Pursuant to such a contract, the Prime Portfolio would
make cash contributions to a deposit fund of the insurance company's general
account. The insurance company would then credit to the Prime Portfolio on a
monthly basis interest which is based on an index (in most cases the Salomon
Brothers CD Index), but is guaranteed not to be less than a certain minimum
rate. The Portfolio will not invest more than 10% of the value of its net assets
in GICs and in other illiquid securities. The Prime Portfolio currently does not
expect to invest more than 5% of its net assets in GICs.
Municipal Obligations--The Prime Portfolio may make limited investments (up to
5% of its net assets) in municipal obligations when their yield on a pre-tax
basis is comparable to that of taxable money market instruments. Municipal
obligations are debt obligations issued by states, territories and possessions
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, or multistate agencies or
authorities. While in general, municipal obligations are tax exempt securities
having relatively low yields as compared to taxable, non-municipal obligations
of similar quality, certain issues of municipal obligations, both taxable and
non-taxable, offer yields comparable and in some cases greater than the yields
available on other permissible investments. Municipal obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities. Municipal obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from the general taxing
power. Industrial development bonds, in most cases, are revenue bonds and
generally do not carry the pledge of the credit of the issuing municipality, but
generally are guaranteed by the corporate entity on whose behalf they are
issued.
Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Municipal obligations include
municipal lease/purchase agreements which are similar to installment purchase
contracts for property or equipment issued by municipalities. Municipal
obligations bear fixed, floating or variable rates of interest. Municipal
obligations may be in the form of custodial receipts that give the Prime
Portfolio the right to receive specific future interest or principal payments on
securities held in trust or a special custody account. Certain municipal
obligations are subject to redemption at a date earlier than their stated
maturity pursuant to call options, which may be separated from the related
municipal obligation and purchased and sold separately. Dividends received by
shareholders of the Prime Portfolio which are attributable to interest income
received by it from municipal obligations generally will be subject to Federal
income tax. The Prime Portfolio currently intends to invest no more than 5% of
its net assets in municipal obligations. However, this percentage may be varied
from time to time without shareholder approval.
Investment Practices
Lending Portfolio Securities--From time to time, each Portfolio may lend
securities from its investment portfolio to brokers, dealers and other financial
institutions needing to borrow securities to complete certain transactions. Such
loans may not exceed 33 1/3% of the value of the relevant Portfolio's total
assets. In connection with such loans, each Portfolio will receive collateral
consisting of cash or U.S. Government securities which will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. Each Portfolio can increase its income through the investment
of such collateral. Each Portfolio continues to be entitled to payments in
amounts equal to the interest and other distributions payable on the loaned
security and receives interest on the amount of the loan. Such loans will be
terminable at any time upon specified notice. A Portfolio might experience risk
of loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with such Portfolio.
Reverse Repurchase Agreements--Each Portfolio may enter into reverse repurchase
agreements with banks, brokers or dealers. Reverse repurchase agreements involve
the transfer by the Portfolio of an underlying debt instrument in return for
cash proceeds based on a percentage of the value of the security. Each Portfolio
retains the right to receive interest and principal payments on the security.
The Portfolio will use the proceeds of reverse repurchase agreements only to
make investments which generally either mature or have a demand feature to
resell to the issuer at a date simultaneous with or prior to the expiration of
the reverse repurchase agreement. At an agreed upon future date, the Portfolio
repurchases the security at principal plus accrued interest. In certain types of
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based on the prevailing overnight repurchase rate. As a
result of these transactions, each Portfolio may be exposed to greater potential
fluctuations in the value of its assets and its net asset value per share.
Interest costs on the money borrowed may exceed the return received on the
securities purchased. The Fund's Directors have considered the risks to each
Portfolio and its shareholders which may result from the entry into reverse
repurchase agreements and have determined that the entry into such agreements is
consistent with each Portfolio's investment objective and management policies.
When-Issued Securities--Each Portfolio may purchase money market securities on a
when-issued or forward commitment basis, which means that delivery and payment
for such securities ordinarily take place within 45 days after the date of the
commitment to purchase. The payment obligation and the interest rate that will
be received on the securities are fixed at the time the buyer enters into the
commitment. A Portfolio will make commitments to purchase such securities only
with the intention of actually acquiring the securities, but such Portfolio may
sell these securities before the settlement date if it is deemed advisable. A
Portfolio will not accrue income in respect of a security purchased on a forward
commitment basis prior to its stated delivery date.
Illiquid Securities--Each Portfolio may invest up to 10% of the value of its net
assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with its investment objective. Such
securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, participation interests and trust receipts that are not subject to the
demand feature described above, floating and variable rate demand obligations as
to which the Portfolio cannot exercise the related demand feature described
above on not more than seven days' notice and as to which there is no secondary
market and repurchase agreements providing for settlement in more than seven
days after notice. As to these securities, the Portfolio is subject to a risk
that should the Portfolio desire to sell them when a ready buyer is not
available at a price the Portfolio deems representative of their value, the
value of the Portfolio's net assets could be adversely affected.
Borrowing Money--As a fundamental policy, each Portfolio is permitted to borrow
money in an amount up to 33 1/3% of the value of its total assets. However, each
Portfolio currently intends to borrow money only (a) for temporary or emergency
(not leveraging) purposes or (b) in connection with the entry into reverse
repurchase agreements, in an amount up to 33 1/3% of the value of its total
assets (including the amount borrowed) valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the borrowing
is made. While borrowings exceed 5% of a Portfolio's total assets, such
Portfolio will not make any investments.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
VALUESTAR PRIME
MONEY MARKET PORTFOLIO
VALUESTAR U.S. TREASURY
MONEY MARKET PORTFOLIO
- - -----------------------------
Prospectus
May 1, 1996
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR GUARANTEED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. MONEY
MARKET MUTUAL FUND SHARES INVOLVE CERTAIN RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
ValueStar Funds
PRIME MONEY MARKET PORTFOLIO
U.S. TREASURY MONEY MARKET PORTFOLIO
TRUST SHARES AND INVESTOR SHARES
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
MAY 1, 1996
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of the
ValueStar Prime Money Market Portfolio and U.S. Treasury Money Market Portfolio
(the "Portfolios") of The Infinity Mutual Funds, Inc. (the "Fund"), dated May 1,
1996, as it may be revised from time to time. To obtain a copy of the
Portfolios' Prospectus, please write to the Fund at 3435 Stelzer Road, Columbus,
Ohio 43219-3035. This Statement of Additional Information relates only to the
Portfolios and not to any of the Fund's other portfolios.
First American National Bank (the "Adviser") serves as each
Portfolio's investment adviser. Barnett Banks and Trust Company,
N.A. (the "Sub-Adviser") serves as the Prime Portfolio's sub-
investment adviser.
BISYS Fund Services Limited Partnership (the "Administrator") serves as
each Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), an
affiliate of the Administrator, serves as the distributor of each
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objectives and Management Policies............... B-2
Management of the Fund...................................... B-9
Management Arrangements..................................... B-12
Purchase and Redemption of Shares........................... B-16
Determination of Net Asset Value............................ B-18
Yield Information........................................... B-19
Portfolio Transactions...................................... B-20
Information About the Portfolios............................ B-21
Custodian, Transfer and Dividend Disbursing
Agent, Counsel and Independent Auditors................... B-22
Appendix.................................................... B-23
Financial Statements........................................ B-26
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "Description
of the Portfolios."
Portfolio Securities. (Prime Portfolio only). Domestic
commercial banks organized under Federal law are supervised and examined by the
Comptroller of the Currency and are required to be members of the Federal
Reserve System and to have their deposits insured by the Federal Deposit
Insurance Corporation (the "FDIC"). Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks
whose certificates of deposit ("CDs") may be purchased by the Portfolio are
insured by the Bank Insurance Fund administered by the FDIC (although such
insurance may not be of material benefit to the Prime Portfolio, depending upon
the principal amount of the CDs of each bank held by such Portfolio) and are
subject to Federal examination and to a substantial body of Federal law and
regulation. As a result of Federal and state laws and regulations, domestic
branches of domestic banks, among other things, are generally required to
maintain specified levels of reserves, and are subject to other supervision and
regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic and foreign branches of foreign
banks, such as CDs and time deposits ("TDs"), may be general obligations of the
parent banks in addition to the issuing branch, or may be limited by the terms
of a specific obligation or governmental regulation. Such obligations are
subject to different risks than are those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. Foreign branches and subsidiaries are not necessarily subject to the
same or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank. If a domestic bank with deposits insured by the
FDIC becomes insolvent, unsecured deposits and other general obligations of such
bank's foreign branches will be subordinated to the receivership expenses of the
FDIC and such bank's domestic deposits and would be subject to the loss of
principal to a greater extent than such bank's domestic branch deposits. The
Prime Portfolio's investment in obligations of foreign subsidiaries of domestic
banks are subject, to the extent required by the Investment Company Act of 1940,
as amended (the "1940 Act"), to the limitations on investing in the securities
of other investment companies.
Obligations of United States branches of foreign banks may be
general obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. In addition, Federal branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may be required to: (1) pledge to the regulator, by depositing assets
with a designated bank within the state, a certain percentage of their assets as
fixed from time to time by the appropriate regulatory authority; and (2)
maintain assets within the state in an amount equal to a specified percentage of
the aggregate amount of liabilities of the foreign bank payable at or through
all of its agencies or branches within the state. The deposits of Federal and
State Branches generally must be insured by the FDIC if such branches take
deposits of less than $100,000.
In view of the foregoing factors associated with the purchase
of CDs and TDs issued by foreign branches of domestic banks, by foreign
subsidiaries of domestic banks, by foreign branches of foreign banks or by
domestic branches of foreign banks, the Sub-Adviser carefully evaluates such
investments on a case-by-case basis pursuant to procedures established by the
Fund's Board of Directors.
The Prime Portfolio may invest in short-term U.S. dollar
denominated corporate obligations that are originated, negotiated and structured
by a syndicate of lenders ("Co-Lenders") consisting of commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions one or more of which administers the security on behalf of the
syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third
parties called "Participants." The Prime Portfolio may invest in such securities
either by participating as a Co-Lender at origination or by acquiring an
interest in the security from a Co- Lender or a Participant (collectively,
"participation interests"). Co-Lenders and Participants interposed between the
Fund and the corporate borrower (the "Borrower"), together with Agent Banks, are
referred herein as "Intermediate Participants." The Prime Portfolio also may
purchase a participation interest in a portion of the rights of an Intermediate
Participant, which would not establish any direct relationship between the Prime
Portfolio and the Borrower. In such cases, the Prime Portfolio would be required
to rely on the Intermediate Participant that sold the participation interest not
only for the enforcement of the Prime Portfolio's rights against the Borrower
but also for the receipt and processing of payments due to the Prime Portfolio
under the security. Because it may be necessary to assert through an
Intermediate Participant such rights as may exist against the Borrower, in the
event the Borrower fails to pay principal and interest when due, the Prime
Portfolio may be subject to delays, expenses and risks that are greater than
those that would be involved if the Portfolio could enforce its rights directly
against the Borrower. Moreover, under the terms of a participation interest, the
Prime Portfolio may be regarded as a creditor of the Intermediate Participant
(rather than of the Borrower), so that the Fund may also be subject to the risk
that the Intermediate Participant may become insolvent. Similar risks may arise
with respect to the Agent Bank if, for example, assets held by the Agent Bank
for the benefit of the Prime Portfolio were determined by the appropriate
regulatory authority or court to be subject to the claims of the Agent Bank's
creditors. In such cases, the Prime Portfolio might incur certain costs and
delays in realizing payment in connection with the participation interest or
suffer a loss of principal and/or interest. Further, in the event of the
bankruptcy or insolvency of the Borrower, the obligation of the Borrower to
repay the loan may be subject to certain defenses that can be asserted by such
Borrower as a result of improper conduct by the Agent Bank or Intermediate
Participant.
Under normal circumstances, and as a matter of fundamental
policy, the Prime Portfolio will "concentrate" at least 25% of its assets in
debt instruments issued by domestic and foreign companies engaged in the banking
industry, including bank holding companies. Such investments may include CDs,
TDs, bankers' acceptances and obligations issued by bank holding companies, as
well as repurchase agreements entered into with banks (as distinct from non-bank
dealers) in accordance with the policies set forth in "Repurchase Agreements"
below. During periods when the Sub-Adviser determines that the Prime Portfolio
should be in a temporary defensive position, the Portfolio may invest less than
25% of its total assets in the banking industry; during such times the Prime
Portfolio's assets will be invested in accordance with its other investment
policies. The Sub-Adviser may determine that the adoption of a temporary
defensive position with respect to issuers in the banking industry is
appropriate on the basis of such factors as political, economic, market or
regulatory developments adversely affecting that industry as compared to the
industries of other issuers of securities available for investment by the Prime
Portfolio.
Investment Company Securities. (Both Portfolios). Each Portfolio
may invest in securities issued by other investment companies which principally
invest in securities of the type in which such Portfolio invests. Under the 1940
Act, each Portfolio's investments in such securities, subject to certain
exceptions, currently are limited to (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Portfolio's net assets with respect to anyone
investment company and (iii) 10% of the Portfolio's net assets in the aggregate.
Investments in the securities of other investment companies may involve
duplication of advisory fees and certain other expenses.
Repurchase Agreements. (Both Portfolios). Each Portfolio may
enter into repurchase agreements. The Fund's custodian or sub-custodian employed
in connection with third-party repurchase transactions will have custody of, and
will hold in a segregated account, securities acquired by a Portfolio under a
repurchase agreement. In connection with its third-party repurchase
transactions, the Fund will employ only eligible sub-custodians which meet the
requirements set forth in Section 17(f) of the 1940 Act and the rules
thereunder. Repurchase agreements are considered by the staff of the Securities
and Exchange Commission to be loans by the Portfolio entering into them. In an
attempt to reduce the risk of incurring a loss on a repurchase agreement, each
Portfolio will enter into repurchase agreements only with domestic banks
(including foreign branches and subsidiaries of domestic banks) with total
assets in excess of one billion dollars or primary government securities dealers
reporting to the Federal Reserve Bank of New York, with respect to securities in
which such Portfolio may invest or government securities regardless of their
remaining maturities, and will require that additional securities be deposited
with it if the value of the securities purchased should decrease below resale
price. The Adviser and, with respect to the Prime Portfolio, the Sub-Adviser
will monitor on an ongoing basis the value of the collateral to assure that it
always equals or exceeds the repurchase price. Each Portfolio will consider on
an ongoing basis the creditworthiness of the institutions with which it enters
into repurchase agreements.
Reverse Repurchase Agreements. (Both Portfolios). Each Portfolio
may enter into reverse repurchase agreements. Each Portfolio will maintain in a
segregated custodial account cash, cash equivalents or U.S. Government
securities or, except for the U.S. Treasury Portfolio, other high quality liquid
debt securities equal to the aggregate amount of its reverse repurchase
obligations, plus accrued interest, in certain cases, in accordance with
releases promulgated by the Securities and Exchange Commission. The Securities
and Exchange Commission views reverse repurchase agreement transactions as
collateralized borrowings, and, pursuant to the 1940 Act, each Portfolio must
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 Portfolio may be required to sell some of its portfolio holdings
within three days to reduce the debt and restore the 300% asset coverage, even
though it may be disadvantageous from an investment standpoint to sell
securities at that time.
Illiquid Securities. Where a substantial market of qualified
institutional buyers has developed for certain restricted securities purchased
by a Portfolio pursuant to Rule 144A under the Securities Act of 1933, as
amended, the Fund intends to treat such securities as liquid securities in
accordance with procedures approved by the Fund's Board. Because it is not
possible to predict with assurance how the market for specific restricted
securities sold pursuant to Rule 144A will develop, the Fund's Board has
directed the Adviser and the Sub-Adviser to monitor carefully each Portfolio's
investments in such securities with particular regard to trading activity,
availability of reliable price information and other relevant information. To
the extent that, for a period of time, qualified institutional buyers cease
purchasing restricted securities pursuant to Rule 144A, the Portfolio's
investing in such securities may have the effect of increasing the level of
illiquidity in its investment portfolio during such period.
Forward Commitments. Securities purchased on a forward commitment
or when-issued basis are subject to changes in value (generally changing in the
same way, i.e., appreciating when interest rates decline and depreciating when
interest rates rise) based upon the public's perception of the creditworthiness
of the issuer and changes, real or anticipated, in the level of interest
rates. Securities purchased on a forward commitment or when-issued basis may
expose the Portfolio to risks because they may experience such fluctuations
prior to their actual delivery. Purchasing securities on a when-issued basis can
involve the additional risk that the yield available in the market when the
delivery takes place actually may be higher than that obtained in the
transaction itself. Purchasing securities on a forward commitment or when-
issued basis when the Portfolio is fully or almost fully invested may result in
greater potential fluctuation in the value of the Portfolio's net assets and its
net asset value per share.
Lending Portfolio Securities. (Both Portfolios). To a limited
extent, each Portfolio may lend its portfolio securities to brokers, dealers and
other financial institutions, provided it receives cash collateral which at all
times is maintained in an amount equal to at least 100% of the current market
value of the securities loaned. By lending its portfolio securities, each
Portfolio can increase its income through the investment of the cash collateral.
For the purposes of this policy, the Fund considers collateral consisting of
U.S. Government securities to be the equivalent of cash. Such loans may not
exceed 33-1/3% of the Portfolio's total assets. From time to time, the Fund may
pay a part of the interest earned from the investment of collateral received for
securities loaned to the borrower or a third party which is unaffiliated with
the Fund, and which is acting as a "placing broker," in an amount determined by
the Board of Directors to be reasonable and based solely on services rendered.
The Securities and Exchange Commission currently requires that
the following conditions must be met whenever portfolio securities are loaned:
(1) the Portfolio must receive at least 100% cash collateral from the borrower;
(2) the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Portfolio must be
able to terminate the loan at any time; (4) the Portfolio must receive
reasonable interest on the loan, as well as any interest or other distributions
payable on the loaned securities, and any increase in market value; and (5) the
Portfolio may pay only reasonable custodian fees in connection with the loan.
These conditions may be subject to future modification.
Investment Restrictions. Each Portfolio has adopted investment
restrictions numbered 1 through 7 as fundamental policies and the Prime
Portfolio has adopted investment restrictions numbered 13 and 14 and the U.S.
Treasury Portfolio has adopted investment restriction number 15 as additional
fundamental policies. These restrictions cannot be changed, as to a Portfolio,
without approval by the holders of a majority (as defined in the 1940 Act) of
the outstanding voting shares of such Portfolio. Investment restrictions
numbered 8 through 12 are not fundamental policies and may be changed by vote of
a majority of the Fund's Directors at any time. Neither Portfolio may:
1. Invest in commodities, except that each Portfolio may
purchase and sell options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes.
2. Purchase, hold or deal in real estate, or oil, gas or
other mineral leases or exploration or development programs, but each Portfolio
may purchase and sell securities that are secured by real estate or issued by
companies that invest or deal in real estate.
3. Borrow money, except that the Portfolio may borrow up to
33-1/3% of its total assets. For purposes of this investment restriction, a
Portfolio entry into options, forward contracts, futures contracts, including
those relating to indexes, and options on futures contracts or indexes shall not
constitute borrowing.
4. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Portfolio
may lend its securities in an amount not to exceed 33-1/3% of the value of its
total assets. Any loans of portfolio securities will be made according to
guidelines established by the Securities and Exchange Commission and the Fund's
Board of Directors.
5. Act as an underwriter of securities of other issuers,
except to the extent the Fund may be deemed an underwriter under the Securities
Act of 1933, as amended, by virtue of disposing of portfolio securities.
6. Issue any senior security (as such term is defined
in Section 18(f) of the 1940 Act). The Portfolio's investments
permitted under Investment Restriction Nos. 1, 3, 9 and 10 are not
considered senior securities for purposes of this investment
restriction.
7. Purchase securities on margin, but each Portfolio may make
margin deposits in connection with transactions in options, forward contracts,
futures contracts, including those relating to indexes, and options on futures
contracts or indexes.
8. Invest in the securities of a company for the purpose of
exercising management or control, but each Portfolio will vote the securities it
owns in its portfolio as a shareholder in accordance with its views.
9. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with writing covered put and call
options and the purchase of securities on a when-issued or forward commitment
basis and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
10. Purchase, sell or write puts, calls or combinations
thereof, except as described in the Portfolio's Prospectus and this
Statement of Additional Information.
11. Enter into repurchase agreements providing for settlement
in more than seven days after notice or purchase securities which are illiquid,
if, in the aggregate, more than 10% of the value of the Portfolio's net assets
would be so invested.
12. Invest in securities of other investment companies,
except to the extent permitted under the 1940 Act.
The following investment restrictions numbered 13 and 14 apply
only to the Prime Portfolio. The Prime Portfolio may not:
13. Invest more than 5% of its assets in the obligations of
any one issuer, except that up to 25% of the value of the Prime Portfolio's
total assets may be invested without regard to any such limitation, provided
that not more than 10% of its assets may be invested in securities issued or
guaranteed by any single guarantor of obligations held by the Prime Portfolio.
14. Invest less than 25% of its total assets in securities
issued by banks or invest more than 25% of its assets in the securities of
issuers in any other industry, provided that there shall be no limitation on the
purchase of obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Notwithstanding the foregoing, for temporary
defensive purposes the Prime Portfolio may invest less than 25% of its assets in
bank obligations.
The following investment restriction number 15 applies
only to the U.S. Treasury Portfolio. The U.S. Treasury Portfolio
may not:
15. Invest more than 25% of its total assets in the
securities of issuers in any single industry, provided that there
shall be no such limitation on investments in obligations issued or
guaranteed by the U.S. Government.
If a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a change
in values or assets will not constitute a violation of that restriction.
The Fund may make commitments more restrictive than the
restrictions listed above so as to permit the sale of shares of a Portfolio in
certain states. Should the Fund determine that a commitment is no longer in the
best interest of the Portfolio, and its shareholders, the Fund reserves the
right to revoke the commitment by terminating the sale of such Portfolio's
shares in the state involved.
MANAGEMENT OF THE FUND
Directors and officers of the Fund, together with information
as to their principal business occupations during at least the last five years,
are shown below. Each Director who is an "interested person" of the Fund, as
defined in the 1940 Act, is indicated by an asterisk.
Directors of the Fund
*WILLIAM B. BLUNDIN, Chairman of the Board of Directors. An employee of
Concord Holding Corporation, an affiliate of the
Administrator. Mr. Blundin also is an officer of other
investment companies administered by the Administrator or its
affiliates and President and Chief Executive Officer of Vista
Broker/Dealer Services, Inc. and BNY Hamilton Distributors,
Inc., registered broker/dealers. He is 58 years old and his
address is 125 West 55th Street, New York, New York 10019.
NORMA A. COLDWELL, Director. International Economist and Consultant;
Executive Vice President of Coldwell Financial Consultants;
Trustee and Treasurer of Meridian House International
(International Education and Cultural Group); Member of the
Board of Advisors of Meridian International Center and
Emerging Capital Markets, S.A. (Montevideo, Uruguay);
formerly, Chief International Economist of Riggs National
Bank, Washington, D.C. She is 70 years old and her address is
3330 Southwestern Boulevard, Dallas, Texas 75225.
RICHARD H. FRANCIS, Director. Former Executive Vice President
and Chief Financial Officer of Pan American World
Airways, Inc. (currently, debtor-in-possession under the
U.S. Bankruptcy Code), March 1988 to October 1991; Senior
Vice President and Chief Financial Officer of American
Standard Inc., 1960 to March 1988. Mr. Francis is a
director of Allendale Mutual Insurance and The Indonesia
Fund, Inc. He is 63 years old and his address is 40
Grosvenor Road, Short Hills, New Jersey 07078.
WILLIAM W. McINNES, Director. Private investor. From July 1978
to February 1993, he was Vice-President--Finance and
Treasurer of Hospital Corp. of America. He is also a
director of Gulf South Medical Supply and Diversified
Trust Co. He is 47 years old and his address is 116 30th
Avenue South, Nashville, Tennessee 37212.
ROBERT A. ROBINSON, Director. Private investor. Since 1991,
President Emeritus, and from 1968 to 1991, President of The
Church Pension Group, NYC. From 1956 to 1966, Senior Vice
President of Colonial Bank & Trust Co. He is also a
director of Mariner Institutional Funds, Inc., Mariner Tax-
Free Institutional Funds, Inc., UST Master Funds, UST
Master Tax Exempt Funds, H.B. and F.H. Bugher Foundation,
Morehouse-Barlow Co. Publishers, The Canterbury Cathedral
Trust in America, The Living Church Foundation and Hoosac
School. He is 70 years old and his address is 2 Hathaway
Common, New Canaan, Connecticut 06840.
Officers of the Fund
GEORGE O. MARTINEZ, President and Secretary. Senior Vice President
and Director of Legal and Compliance Services with BISYS
Fund Services, Inc., the Administrator's general partner,
since April 1995, and an officer of other investment
companies administered by the Administrator or its affiliates.
Prior thereto, he was Vice President and Associate General
Counsel with Alliance Capital Management, L.P. He is 36 years
old and his address is 3435 Stelzer Road, Columbus, Ohio
43219.
JEFFREY C. CUSICK, Vice President and Assistant Secretary. An employee
of BISYS Fund Services, Inc., since July 1995, and an officer
of other investment companies administered by the
Administrator or its affiliates. From September 1993 to July
1995, he was Assistant Vice President and, from 1989 to
September 1993, he was Manager--Client Services, of Federated
Administrative Services. He is 37 years old and his address is
3435 Stelzer Road, Columbus, Ohio 43219.
WILLIAM TOMKO, Vice President. An employee of BISYS Fund Services,
Inc. and an officer of other investment companies
administered by the Administrator or its affiliates. He is
37 years old and his address is 3435 Stelzer Road,
Columbus, Ohio 43219.
ANN E. BERGIN, Vice President. An employee of Concord Holding
Corporation, an affiliate of the Administrator, and an
officer of other investment companies administered by the
Administrator or its affiliates. She is 35 years old and
her address is 125 West 55th Street, New York, New York
10019.
MARTIN R. DEAN, Treasurer. An employee of BISYS Fund Services, Inc.,
since May 1994, and an officer of other investment companies
administered by the Administrator or its affiliates. Prior
thereto, he was a Senior Manager of KPMG Peat Marwick LLP. He
is 32 years old and his address is 3435 Stelzer Road,
Columbus, Ohio 43219.
ROBERT L. TUCH, Assistant Secretary. An employee of BISYS Fund
Services, Inc., since June 1991, and an officer of other
investment companies administered by the Administrator or its
affiliates. From July 1990 to June 1991, he was Vice President
and Associate General Counsel with National Securities
Research Corp. Prior thereto, he was an Attorney with the
Securities and Exchange Commission. He is 44 years old and his
address is 3435 Stelzer Road, Columbus, Ohio 43219.
ALAINA METZ, Assistant Secretary. An employee of BISYS Fund
Services, Inc. and an officer of other investment companies
administered by the Administrator or its affiliates. She
is 28 years old and her address is 3435 Stelzer Road,
Columbus, Ohio 43219.
For so long as the Shareholder Services Plan described in the
section captioned "Management Arrangements--Shareholder Services Plan" remains
in effect, the Directors of the Fund who are not "interested persons" of the
Fund, as defined in the 1940 Act, will be selected and nominated by the
Directors who are not "interested persons" of the Fund.
Directors and officers of the Fund, as a group, owned less
than 1% of either Portfolio's shares of common stock outstanding on April 1,
1996.
The Fund does not pay any remuneration to its officers and
Directors other than fees and expenses to those Directors who are not directors,
officers or employees of the Adviser or Administrator or any of their
affiliates. The aggregate amount of compensation paid to each such Director by
the Fund for year ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Total Compensation
Aggregate From Fund and
Name of Board Compensation from Fund Complex Paid
Member Fund* to Board Member*
<S> <C> <C>
Norma A. Coldwell $______ $______
Richard H. Francis $______ $______
William W. McInnes $______ $______
Robert A. Robinson $______ $______
- - ------------------------------
</TABLE>
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $_______ for all Directors as a group.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "Management
of the Portfolios."
Investment Advisory Agreement. The Adviser provides investment
advisory services pursuant to the Investment Advisory Agreement (the
"Agreement") dated February 15, 1994 with the Fund. As to each Portfolio, the
Agreement is subject to annual approval by (i) the Fund's Board of Directors or
(ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of such Portfolio, provided that in either event the continuance also
is approved by a majority of the Board of Directors who are not "interested
persons" (as defined in the 1940 Act) of the Fund or the Adviser, by vote cast
in person at a meeting called for the purpose of voting on such approval. The
Agreement was last approved by the Fund's Board of Directors, including a
majority of the directors who are not "interested persons" of any party to the
Agreement, at a meeting held on October 25, 1995. As to each Portfolio, the
Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board
of Directors or by vote of the holders of a majority of such Portfolio's shares,
or, on not less than 90 days' notice, by the Adviser. The Agreement will
terminate automatically, as to the relevant Portfolio, in the event of its
assignment (as defined in the 1940 Act).
As compensation for the Adviser's services, the Fund has agreed
to pay the Adviser a monthly investment advisory fee at the annual rate of .25
of 1% of the value of each Portfolio's average daily net assets less, in the
case of the Prime Portfolio, any amount payable by the Fund to the Sub-Adviser.
For the period March 29, 1994 (commencement of operations of each Portfolio)
through December 31, 1994, and for the fiscal year ended December 31, 1995,
$50,754 and $64,959, respectively, was payable by the Prime Portfolio and
$183,801 and $358,127, respectively, was payable by the U.S. Treasury Portfolio
pursuant to the Agreement. The Adviser waived $7,046 and $19,089 of such fees
payable for the period ended December 31, 1994 by the Prime Portfolio and U.S.
Treasury Portfolio, respectively, resulting in net fees being paid to the
Adviser of $43,708 by the Prime Portfolio and $164,712 by the U.S. Treasury
Portfolio during the fiscal period ended December 31, 1994.
Sub-Investment Advisory Agreement. The Adviser has engaged the
Sub-Adviser to provide investment advisory assistance and day-to-day management
of the Prime Portfolio's investments pursuant to the Sub-Investment Advisory
Agreement (the "Sub-Advisory Agreement") among the Fund, the Adviser and the
Sub-Adviser dated February 15, 1994. The fees payable to the Sub-Adviser for its
services are paid by the Fund. The Sub-Advisory Agreement is subject to annual
approval by (a) the Fund's Board of Directors or (b) vote of a majority (as
defined in the 1940 Act) of the Prime Portfolio's outstanding voting securities,
provided that in either event the continuance also is approved by a majority of
the Fund's Directors who are not "interested persons" (as defined in the 1940
Act) of any party to the Sub-Advisory Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Sub- Advisory
Agreement was last approved by the Fund's Board of Directors who are not
"interested persons" of any party to the Sub-Advisory Agreement, at a meeting
held on October 25, 1995. The Sub-Advisory Agreement may be terminated without
penalty (i) by the Fund's Board of Directors or by vote of the holders of a
majority of the Prime Portfolio's shares, upon written notice to the
Sub-Adviser, (ii) by the Adviser (but only upon the approval of the Fund's Board
of Directors) upon 60 days' written notice to the Sub-Adviser, or (iii) by the
Sub-Adviser upon not less than 90 days' written notice to the Fund and the
Adviser. The Sub-Advisory Agreement also will terminate automatically in the
event of its assignment (as defined in the 1940 Act). In addition, if the Fund's
Agreement with the Adviser is terminated for any reason (whether by the Fund, by
the Adviser or by operation of law), the Sub-Advisory Agreement will terminate
upon the effective date of such termination of the Investment Advisory
Agreement.
The Sub-Adviser provides investment advisory services in
accordance with the stated policies of the Prime Portfolio, subject to the
approval of the Fund's Board of Directors. The Sub-Adviser provides the Prime
Portfolio with investment personnel who are authorized by the Board of Directors
to execute purchases and sales of securities. The Sub-Adviser also maintains a
research department with a professional staff of portfolio managers and
securities analysts who provide research services for the Prime Portfolio as
well as for other funds advised by the Sub-Adviser. All purchases and sales are
reported for the Board's review at the meeting subsequent to such transactions.
As compensation for the Sub-Adviser's services, the Fund has
agreed to pay the Sub-Adviser a monthly sub-investment advisory fee at the
annual rate of .15 of 1% of the value of the Prime Portfolio's average daily net
assets. For the period March 29, 1994 (commencement of operations of the Prime
Portfolio) through December 31, 1994 and for the fiscal year ended December 31,
1995, $76,130 and $97,438, respectively, was payable by the Prime Portfolio
pursuant to the Sub-Advisory Agreement. The Sub-Adviser waived $10,274 of such
fee payable for the period ended December 31, 1994, resulting in a net fee being
paid to the Sub-Adviser of $65,856 by the Prime Portfolio during the fiscal
period ended December 31, 1994.
Administration Agreement. The Administrator provides certain
administrative services pursuant to the Administration Agreement (the
"Administration Agreement") dated April 25, 1996 with the Fund. As to each
Portfolio, the Administration Agreement will continue until April 25, 2001 and
thereafter is subject to annual approval by (i) the Fund's Board of Directors or
(ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of such Portfolio, provided that in either event the continuance also
is approved by a majority of the Directors who are not "interested persons" (as
defined in the 1940 Act) of the Fund or the Administrator, by vote cast in
person at a meeting called for the purpose of voting such approval. The
Administration Agreement was last approved by the Fund's Board of Directors,
including a majority of the Directors who are not "interested persons" of any
party to the Administration Agreement, at a meeting held on April 25, 1996. As
to each Portfolio, the Administration Agreement is terminable without penalty,
at any time if for cause, by the Fund's Board of Directors or by vote of the
holders of a majority of such Portfolio's outstanding voting securities, or, on
not less than 90 days' notice, by the Administrator. The Administration
Agreement will terminate automatically, as to the relevant Portfolio, in the
event of its assignment (as defined in the 1940 Act).
As compensation for the Administrator's services, the Fund has
agreed to pay the Administrator a monthly administration fee at the annual rate
of .10 of 1% of the value of each Portfolio's average daily net assets. For the
period March 29, 1994 (commencement of operations of each Portfolio) through
December 31, 1994 and for the fiscal year ended December 31, 1995, $50,754 and
$64,959, respectively, was payable to Concord Holding Corporation, an affiliate
of the Administrator and the Portfolios' administrator during such periods, by
the Prime Portfolio and $73,520 and $143,251, respectively, was payable to
Concord Holding Corporation as administrator by the U.S. Treasury Portfolio
pursuant to an Administration Agreement with Concord Holding Corporation which
was terminated on April 25, 1996. Concord Holding Corporation waived $7,046 and
$7,767 of such fees payable for the period ended December 31, 1994 by the Prime
Portfolio and U.S. Treasury Portfolio, respectively, resulting in net fees being
paid to Concord Holding Corporation of $43,708 by the Prime Portfolio and
$65,753 by the U.S. Treasury Portfolio during the fiscal period ended December
31, 1994.
Distribution Agreement. The Distributor acts as the exclusive
distributor of each Portfolio's shares on a best efforts basis pursuant to a
Distribution Agreement (the "Distribution Agreement") dated March 29, 1995 with
the Fund. Shares are sold on a continuous basis by the Distributor as agent,
although the Distributor is not obliged to sell any particular amount of shares.
No compensation is payable by the Fund to the Distributor for its distribution
services.
Shareholder Services Plan. (Applicable only with respect to
the Investor Shares). The Fund's Directors have adopted a shareholder services
plan (the "Plan") with respect to the Investor Shares pursuant to which each
Portfolio pays the Distributor for the provision of certain services to the
holders of Investor Shares at an annual rate of .25% of the value of each
Portfolio's Investor Shares. The Fund's Directors believe that there is a
reasonable likelihood that the Plan will benefit each Portfolio and the holders
of its Investor Shares. In some states, certain institutions effecting
transactions in Investor Shares may be required to register as dealers pursuant
to state law.
A quarterly report of the amounts expended under the Plan, and
the purposes for which such expenditures were incurred, must be made to the
Directors for their review. In addition, the Plan provides that material
amendments of the Plan must be approved by the Board of Directors, and by the
Directors who are neither "interested persons" (as defined in the 1940 Act) of
the Fund nor have any direct or indirect financial interest in the operation of
the Plan or in the related Plan agreements, by vote cast in person at a meeting
called for the purpose of considering such amendments. The Plan and related
agreements are subject to annual approval by such vote of the Directors cast in
person at a meeting called for the purpose of voting on the Plan. The Plan was
last so approved on October 25, 1995. The Plan is terminable at any time by vote
of a majority of the Directors who are not "interested persons" and who have no
direct or indirect financial interest in the operation of the Plan or in the
Plan agreements. A Plan agreement is terminable without penalty, at any time, by
such vote of the Directors. A Plan agreement will terminate automatically in the
event of its assignment (as defined in the 1940 Act).
For the fiscal year ended December 31, 1995, the Distributor
waived receipt of $162,474 payable by the Prime Portfolio and $358,053 payable
by the U.S. Treasury Portfolio with respect to Investor Shares pursuant to the
Plan.
Expenses. All expenses incurred in the operation of the Fund
are borne by the Fund, except to the extent specifically assumed by others. The
expenses borne by the Fund include: organizational costs, taxes, interest,
brokerage fees and commissions, if any, fees of Directors who are not officers,
directors, employees or holders of 5% or more of the outstanding voting
securities of the Adviser, Sub- Adviser or Administrator or any of their
affiliates, Securities and Exchange Commission fees, state Blue Sky
qualification fees, advisory and administration fees, charges of custodians,
transfer and dividend disbursing agents' fees, certain insurance premiums,
industry association fees, auditing and legal expenses, costs of maintaining
corporate existence, costs of independent pricing services, costs attributable
to investor services (including, without limitation, telephone and personnel
expenses), costs of calculating the net asset value of each Portfolio's shares,
costs of shareholders' reports and corporate meetings, costs of preparing and
printing certain prospectuses and statements of additional information, and any
the assets of that Portfolio; other expenses of the Fund are allocated among the
Portfolios on the basis determined by the Board of Directors, including, but not
limited to, proportionately in relation to the net assets of each Portfolio.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "How to Buy
Shares" and "How to Redeem Shares."
Terms of Purchase. The Fund reserves the right to reject any
purchase order and to change the amount of the minimum investment and subsequent
purchases in the Portfolios.
"Sweep" Program. Each Portfolio's shares may be purchased
through the "sweep" program established by certain financial institutions under
which a portion of their customers' accounts may be automatically invested in
the Portfolio. The customer becomes the beneficial owner of specific shares of
the Portfolio which may be purchased, redeemed and held by the financial
institution in accordance with the customer's instructions and may fully
exercise all rights as a shareholder. The shares will be held by Supervised
Service Company, Inc. (the "Transfer Agent") in book-entry form. A statement
with regard to the customer's shares is generally supplied to the customer
monthly, and confirmations of all transactions for the account of the customer
ordinarily are available to the customer promptly on request. In addition, each
customer is sent proxies, periodic reports and other information from the Fund
with regard to shares of the Portfolios. The customer's shares are fully
assignable and may be encumbered by the customer. The "sweep" agreement can be
terminated by the customer at any time, without affecting its beneficial
ownership of the shares.
To obtain the benefits of this service, a customer typically
is required to maintain a minimum balance subject to a monthly maintenance fee,
or a higher minimum balance for which no monthly fee would be imposed. In either
case, a penalty fee is imposed if the minimum should not be maintained. In
general, the automatic investment in a Portfolio's shares occurs on the same day
that withdrawals are made by the financial institution, at the next determined
net asset value after the order is received.
All agreements which relate to the service are with the
financial institution. Neither the Distributor nor the Fund is a party to any of
those agreements and no part of the compensation received by the financial
institution flows to the Fund or to the Distributor or to any of their
affiliates, either directly or indirectly. Further information concerning this
program and any related charges or fees is provided by the financial institution
prior to any purchase of a Portfolio's shares. Any fees charged by the financial
institution effectively reduces the Portfolio's yield for those customers.
Using Federal Funds. The Transfer Agent or the Fund may
attempt to notify the investor upon receipt of checks drawn on banks that are
not members of the Federal Reserve System as to the possible delay in conversion
into Federal Funds and may attempt to arrange for a better means of transmitting
the money.
Reopening an Account. An investor may reopen an account with a
minimum investment of $100 without filing a new Account Application during the
calendar year the account is closed or during the following calendar year,
provided the information on the old Account Application is still applicable.
Stock Certificates; Signatures. Any certificate representing
Portfolio shares to be redeemed must be submitted with the redemption request.
Written redemption requests must be signed by each shareholder, including each
holder of a joint account, and each signature must be guaranteed. Signatures on
endorsed certificates submitted for redemption also must be guaranteed. The
Fund's Transfer Agent has adopted standards and procedures pursuant to which
signature-guarantees in proper form generally will be accepted from domestic
banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations,
as well as from participants in the New York Stock Exchange Medallion Signature
Program, the Securities Transfer Agents Medallion Program ("STAMP") and the
Stock Exchanges Medallion Program. Signature-guarantees may not be provided by
notaries public. If the signature is guaranteed by a broker or dealer, such
broker or dealer must be a member of a clearing corporation and maintain net
capital of at least $100,000. Guarantees must be signed by an authorized
signatory of the guarantor and "Signature-Guaranteed" must appear with the
signature.
Redemption Commitment. Each Portfolio has committed itself to
pay in cash all redemption requests by any shareholder of record, limited in
amount during any 90-day period to the lesser of $250,000 or 1% of the value of
such Portfolio's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of Directors reserves the right to make payments in whole or in part in
securities or other assets in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in the same
manner as the Portfolio is valued. If the recipient sold such securities,
brokerage charges would be incurred.
Suspension of Redemptions. The right of redemption may be
suspended or the date of payment postponed (a) during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closing), (b) when trading in the markets the Portfolio normally utilizes is
restricted, or when an emergency exists as determined by the Securities and
Exchange Commission so that disposal of the Portfolio's investments or
determination of its net asset value is not reasonably practicable, or (c) for
such other periods as the Securities and Exchange Commission by order may permit
to protect the Portfolio's shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "How to Buy
Shares."
Amortized Cost Pricing. The valuation of each Portfolio's
investment securities is based upon their amortized cost which does not take
into account unrealized capital gains or losses. This involves valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Portfolio
would receive if it sold the instrument.
The Board of Directors has agreed, as a particular
responsibility within the overall duty of care owed to the Portfolios'
investors, to establish procedures reasonably designed to stabilize each
Portfolio's price per share as computed for the purpose of sales and redemptions
at $1.00. Such procedures include review of each Portfolio's investment holdings
by the Board of Directors, at such intervals as it deems appropriate, to
determine whether such Portfolio's net asset value calculated by using available
market quotations or market equivalents deviates from $1.00 per share based on
amortized cost. In such review, investments for which market quotations are
readily available will be valued at the most recent bid price or yield data for
such securities or for securities of comparable maturity, quality and type, as
obtained from one or more of the major market makers for the securities to be
valued. Other investments and assets will be valued at fair value as determined
in good faith by the Board of Directors.
The extent of any deviation between a Portfolio's net asset
value based upon available market quotations or market equivalents and $1.00 per
share based on amortized cost will be examined by the Board of Directors. If
such deviation exceeds 1/2 of 1%, the Board of Directors promptly will consider
what action, if any, will be initiated. In the event the Board of Directors
determines that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, it has agreed to
take such corrective action as it regards as necessary and appropriate,
including: selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding dividends
or paying distributions from capital or capital gains; redeeming shares in kind;
or establishing a net asset value per share by using available market quotations
or market equivalents.
New York Stock Exchange and Custodian Closings. The holidays
(as observed) on which the New York Stock Exchange and the Custodian are closed
currently are: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans
Day, Thanksgiving Day and Christmas Day.
YIELD INFORMATION
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "Yield
Information."
For the seven-day period ended December 31, 1995, the Prime
Portfolio's yield was ____% and its effective yield was ____%. The U.S. Treasury
Portfolio's yield for such period was ____% and its effective yield was ____%.
These yield figures reflect the absorption of certain expenses and/or waiver of
fees, without which the yield and effective yield for the seven-day period ended
December 31, 1995 would have been ____% and ____%, respectively, for the Prime
Portfolio and ____% and ____%, respectively, for the U.S. Treasury Portfolio.
Yield will be computed in accordance with a standardized method which involves
determining the net change in the value of a hypothetical pre-existing Portfolio
account having a balance of one share at the beginning of a seven calendar day
period for which yield is to be quoted, dividing the net change by the value of
the account at the beginning of the period to obtain the base period return, and
annualizing the results (i.e., multiplying the base period return by 365/7). The
net change in the value of the account reflects the value of additional shares
purchased with dividends declared on the original share and any such additional
shares and fees that may be charged to shareholder accounts, in proportion to
the length of the base period and the Portfolio's average account size, but does
not include realized gains and losses or unrealized appreciation and
depreciation. Effective annualized yield is computed by adding 1 to the base
period return (calculated as described above), raising that sum to a power equal
to 365 divided by 7, and subtracting 1 from the result.
Yields will fluctuate and are not necessarily representative
of future results. The investor should remember that yield is a function of the
type and quality of the instruments held, their maturity and operating expenses.
An investor's principal in the Portfolio is not guaranteed. See "Determination
of Net Asset Value" for a discussion of the manner in which each Portfolio's
price per share is determined.
From time to time, advertising materials for a Portfolio may
refer to or discuss current or past business, political, economic or financial
conditions, such as U.S. monetary or fiscal policies and actual or proposed tax
legislation. In addition, from time to time, advertising materials for a
Portfolio may include information concerning retirement and investing for
retirement, average life expectancy and pension and social security benefits.
PORTFOLIO TRANSACTIONS
Portfolio securities ordinarily are purchased directly from the
issuer or an underwriter or a market maker for the securities. Usually no
brokerage commissions are paid for such purchases. Purchases from underwriters
of portfolio securities include a concession paid by the issuer to the
underwriter and the purchase price paid to market makers for the securities may
include the spread between the bid and asked price. No brokerage commissions
have been paid by either Portfolio to date.
Transactions are allocated to various dealers by each
Portfolio's investment personnel in their best judgment. The primary
consideration is prompt and effective execution of orders at the most favorable
price. Subject to that primary consideration, dealers may be selected to act on
an agency basis for research, statistical or other services to enable the
Adviser and/or Sub-Adviser to supplement their own research and analysis with
the views and information of other securities firms.
To the extent any research services are furnished by brokers
through which each Portfolio effects securities transactions, the Adviser and,
with respect to the Prime Portfolio, the Sub-Adviser may use such information in
advising other funds or accounts they advise and, conversely, to the extent any
research services are furnished to the Adviser and/or Sub-Adviser by brokers in
connection with other funds or accounts the Adviser or Sub-Advisers advise, the
Adviser and/or Sub-Adviser also may use such information in advising the
Portfolios. Although it is not possible to place a dollar value on these
services, if they are provided, it is the opinion of each Adviser that the
receipt and study of any such services should not reduce the overall expenses of
its research department.
INFORMATION ABOUT THE PORTFOLIOS
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "General
Information."
Each Portfolio share has one vote and, when issued and paid
for in accordance with the terms of the offering, is fully paid and
non-assessable. Shares have no preemptive, subscription or conversion rights and
are freely transferable.
Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted under the provisions of the 1940 Act or applicable
state law or otherwise, to the holders of the outstanding voting securities of
an investment company, such as the Fund, will not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by such matter. Rule 18f-2 further
provides that a portfolio shall be deemed to be affected by a matter unless it
is clear that the interests of each portfolio in the matter are identical or
that the matter does not affect any interest of such portfolio. However, the
Rule exempts the election of directors from the separate voting requirements of
the Rule.
Each Portfolio will send annual and semi-annual financial
statements to all its shareholders.
As of April 20, 1996, the following shareholders beneficially
owned, directly or indirectly, 5% or more of the indicated Portfolio's
outstanding shares:
Percent of
Total Investor
Name and Address Shares Outstanding
PRIME PORTFOLIO:
First American Trust Company 99.12%
Attn: Cash Management
800 First American Center
Nashville, TN 37237
U.S. TREASURY PORTFOLIO:
First American Trust Company 99.05%
Attn: Cash Management
800 First American Center
Nashville, TN 37237
A shareholder who beneficially owns, directly or indirectly,
more than 25% of a Portfolio's voting securities may be deemed a "control
person" (as defined in the 1940 Act) of the Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
The Bank of New York, 90 Washington Street, New York, New
York 10286, acts as custodian of each Portfolio's investments. BISYS Fund
Services Ohio, Inc., an affiliate of the Administrator, 3435 Stelzer Road,
Columbus, Ohio 43219, acts as the Fund's transfer and dividend disbursing agent
(the "Transfer Agent"). Under the transfer agency agreement with the Fund, the
Transfer Agent maintains shareholder account records for the Fund, handles
certain communications between shareholders and the Fund and pays dividends and
distributions payable by the Fund. For these services, the Transfer Agent
receives a monthly fee compiled on the basis of the number of shareholder
accounts it maintains for the Fund during the month, and is reimbursed for
certain out-of-pocket expenses. Neither The Bank of New York nor BISYS Fund
Services Ohio, Inc. has any part in determining the investment policies of
either Portfolio or which securities are to be purchased or sold by a Portfolio.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New
York 10004-2696, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of Common Stock being sold pursuant to the Portfolios' Prospectus.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York
10154, independent auditors, have been selected as each Portfolio's auditors.
<PAGE>
APPENDIX
Description of the two highest commercial paper, bond and other
short- and long-term rating categories assigned by Standard & Poor's Ratings
Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch Investors
Service, L.P. ("Fitch"), Duff & Phelps Credit Rating Co. ("Duff"), IBCA Inc. and
IBCA Limited ("IBCA"), and Thomson BankWatch, Inc. ("BankWatch"):
Commercial Paper and Short-Term Ratings
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper
rating assigned by Moody's. Issuers of P-1 paper must have a superior capacity
for repayment of short-term promissory obligations, and ordinarily will be
evidenced by leading market positions in well established industries, high rates
of return of funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and well
established access to a range of financial markets and assured sources of
alternate liquidity. Issues rated Prime-2 (P-2) have a strong capacity for
repayment of short-term promissory obligations. This ordinarily will be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial
paper rating assigned by Fitch. Paper rated Fitch-1 is regarded as having the
strongest degree of assurance for timely payment. The rating Fitch-2 (Very Good
Grade) is the second highest commercial paper rating assigned by Fitch which
reflects an assurance of timely payment only slightly less in degree than the
strongest issues.
The rating Duff-1 is the highest commercial paper rating
assigned by Duff. Paper rated Duff-1 is regarded as having very high certainty
of timely payment with excellent liquidity factors which are supported by ample
asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as
having good certainty of timely payment, good access to capital markets and
sound liquidity factors and company fundamentals. Risk factors are small.
The designation A1 by IBCA indicates that the obligation is
supported by a very strong capacity for timely repayment. Those obligations
rated A1+ are supported by the highest capacity for timely repayment.
Obligations rated A2 are supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
The rating TBW-1 is the highest short-term obligation rating
assigned by BankWatch. Obligations rated TBW-1 are regarded as having the
strongest capacity for timely repayment. Obligations rated TBW-2 are supported
by a strong capacity for timely repayment, although the degree of safety is not
as high as for issues rated TBW-1.
Bond and Long-Term Ratings
Bonds rated AAA are considered by S&P to be the highest grade
obligations and possess an extremely strong capacity to pay principal and
interest. Bonds rated AA by S&P are judged by S&P to have a very strong capacity
to pay principal and interest, and in the majority of instances, differ only in
small degrees from issues rated AAA.
Bonds 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 edge." Bonds rated Aa by Moody's are judged by Moody's 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 Aaa bonds because
margins of protection may not be as large or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger. Moody's applies numerical modifiers
1, 2 and 3 in the Aa rating category. The modifier 1 indicates a ranking for the
security in the higher end of this rating category, the modifier 2 indicates a
mid-range ranking, and the modifier 3 indicates a ranking in the lower end of
the rating category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly
high grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions and liable to but slight market fluctuation other than
through changes in the money rate. The prime feature of an AAA bond is a showing
of earnings several times or many times interest requirements, with such
stability of applicable earnings that safety is beyond reasonable question
whatever changes occur in conditions. Bonds rated AA by Fitch are judged by
Fitch to be of safety virtually beyond question and are readily salable, whose
merits are not unlike those of the AAA class, but whose margin of safety is less
strikingly broad. The issue may be the obligation of a small company, strongly
secured but influenced as to rating by the lesser financial power of the
enterprise and more local type of market.
Bonds rated AAA are judged by Duff to be of the highest credit
quality with negligible risk factors; only slightly more than U.S. Treasury
debt. Bonds rated AA are judged by Duff to be of high credit quality with strong
protection factors. Risk is modest but may vary slightly from time to time
because of economic conditions.
Obligations rated AAA by IBCA have the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly. Obligations
for which there is a very low expectation of investment risk are rated AA by
IBCA. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk albeit not very significantly.
International and U.S. Bank Ratings
An IBCA bank rating represents IBCA's current assessment of
the strength of the bank and whether such bank would receive support should it
experience difficulties. In its assessment of a bank, IBCA uses a dual rating
system comprised of Legal Ratings and Individual Ratings. In addition, IBCA
assigns banks Long- and Short-Term Ratings as used in the corporate ratings
discussed above. Legal Ratings, which range in gradation from 1 through 5,
address the question of whether the bank would receive support provided by
central banks or shareholders if it experienced difficulties, and such ratings
are considered by IBCA to be a prime factor in its assessment of credit risk.
Individual Ratings, which range in gradations from A through E, represent IBCA's
assessment of a bank's economic merits and address the question of how the bank
would be viewed if it were entirely independent and could not rely on support
from state authorities or its owners.
In addition to its ratings of short-term obligations,
BankWatch assigns a rating to each issuer it rates, in gradations of A through
E. BankWatch examines all segments of the organization, including, where
applicable, the holding company, member banks or associations, and other
subsidiaries. In those instances where financial disclosure is incomplete or
untimely, a qualified rating (QR) is assigned to the institution. BankWatch also
assigns, in the case of foreign banks, a country rating which represents an
assessment of the overall political and economic stability of the country in
which the bank is domiciled.
<PAGE>
FINANCIAL STATEMENTS
The Portfolios' Annual Report to Shareholders for the fiscal year
ended December 31, 1995 is a separate document supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing therein are incorporated by reference
in this Statement of Additional Information.
<PAGE>
PROSPECTUS MAY 1, 1996
THE INFINITY MUTUAL FUNDS, INC.
ValueStar Funds
CAPITAL GROWTH PORTFOLIO
SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
INVESTMENT GRADE BOND PORTFOLIO
TENNESSEE TAX EXEMPT BOND PORTFOLIO
Investor Shares
The Infinity Mutual Funds, Inc. (the "Fund") is an open-end, management
investment company, known as a series fund. By this Prospectus, the Fund is
offering Investor Shares of four of its ValueStar Funds (the "Portfolios"),
each with a different investment objective:
The CAPITAL GROWTH PORTFOLIO seeks to provide investors with capital growth.
This Portfolio will invest primarily in the equity securities of domestic
issuers.
The SHORT-INTERMEDIATE DURATION BOND PORTFOLIO seeks to provide investors
with current income without assuming undue risk. This Portfolio will invest
primarily in investment grade, U.S. dollar denominated fixed-income
securities of domestic and foreign issuers. Under normal market conditions,
the Short-Intermediate Duration Bond Portfolio will invest in a portfolio of
securities that has a duration of under four years.
The INVESTMENT GRADE BOND PORTFOLIO seeks to provide investors with current
income without assuming undue risk. This Portfolio will invest primarily in
investment grade, U.S. dollar denominated fixed-income securities of
domestic and foreign issuers. Under normal market conditions, the Investment
Grade Bond Portfolio will invest in a portfolio of securities, except when
maintaining a temporary defensive position, that has a duration of 50% to
150% of that of the Merrill Lynch Corporate Government Master Index.
The TENNESSEE TAX EXEMPT BOND PORTFOLIO seeks to provide investors with
current income exempt from Federal and Tennessee income taxes without
assuming undue risk. This Portfolio will invest primarily in investment
grade Tennessee Municipal Obligations without regard to maturity.
Each Portfolio's investment adviser is First American National Bank (the
"Adviser").
BISYS Fund Services Limited Partnership (the "Administrator") serves as
each Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), an affiliate of the
Administrator, serves as distributor of each Portfolio's shares.
Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, the Adviser or any other bank, and are not federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other governmental agency. Portfolio shares involve certain risks, including
the possible loss of principal. Each Portfolio's share price and investment
return fluctuate and are not guaranteed.
This Prospectus sets forth concisely information about the Fund and the
Portfolios that an investor should know before investing. It should be read and
retained for future reference.
The Statement of Additional Information, dated May 1, 1996, which may be
revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors.
It has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. For a free copy, write to the Fund at 3435
Stelzer Road, Columbus, Ohio 43219-3035, or call 1-800-852-0045.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
-----------
Fee Table............................................. 3
Financial Highlights.................................. 5
Description of the Portfolios......................... 7
Management of the Portfolios.......................... 14
How to Buy Shares..................................... 17
How to Redeem Shares.................................. 20
Shareholder Privileges................................ 22
Dividends, Distributions and Taxes.................... 25
Performance Information............................... 27
General Information................................... 29
Appendix.............................................. A-1
Distributed by: Investment Adviser:
Concord Financial Group, Inc. First American National Bank
125 West 55th Street 315 Deaderick Street
New York, New York 10019 Nashville, Tennessee 37237
For information about opening an account and other Fund services call:
(800) 824-3741 For voice recorded price and yield information call: (800)
852-0045 To execute purchases, redemptions and exchanges and for information
about the status of your account call: (800) 852-0045
FEE TABLE*
<TABLE>
<CAPTION>
Short- Intermediate
Capital Investment
Growth Duration Grade
Portfolio Bond Portfolio Bond Portfolio
------------------------ ------------------------ ------------------------
Trust Investor Trust Investor Trust Investor
Shares Shares Shares Shares Shares Shares
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses Maximum
Sales Load Imposed on Purchases (as a
percentage of offering price)............. None 3.0% None 3.0% None 3.0%
Annual Operating Expenses (as a percentage
of average daily net assets)
Management Fees............................. .65% .65% .50% .50% .50% .50%
12b-1 Fees (after expense reimbursement).... None .00% None .00% None .00%
Other Expenses (after expense
reimbursement).............................. % % .37% .37% % %
Total Portfolio Operating Expenses (after
expense reimbursement)**.................... % % .87% .87% % %
Example:
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return and (2)
redemption at the end of each time
period:
1 Year................................. $ $ $ $ $ $
3 Years................................ $ $ $ $ $ $
5 Years................................ $ $ $ $ $ $
10 Years............................... $ $ $ $ $ $
</TABLE>
Tennessee
Tax Exempt
Bond Portfolio
------------------------
Trust Investor
Shares Shares
----------- -----------
Shareholder Transaction Expenses Maximum
Sales Load Imposed on Purchases (as a
percentage of offering price)............. None 3.0%
Annual Operating Expenses (as a percentage
of average daily net assets)
Management Fees............................. .50% .50%
12b-1 Fees (after expense reimbursement).... None .00%
Other Expenses (after expense
reimbursement).............................. .37% .37%
Total Portfolio Operating Expenses (after
expense reimbursement)**.................... .87% .87%
Example:
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return and (2)
redemption at the end of each time
period:
1 Year................................. $ $
3 Years................................ $ $
5 Years................................ $ $
10 Years............................... $ $
- - ---------------
* Only Investor Shares are offered by this Prospectus. Trust Shares are
offered pursuant to a separate prospectus; if an investor is eligible and
desires to purchase Trust Shares, the investor must obtain and should review
a copy of the current prospectus for Trust Shares. As of the date of this
Prospectus, Trust Shares have not been offered.
** Certain Service Organizations (as defined below) and other institutions also
may charge their clients direct fees for effecting transactions in Portfolio
shares and the Adviser, its affiliates and certain other institutions may
charge customary account and account transaction fees, which are not Fund
related, with respect to accounts through which or for which Portfolio
shares are purchased or redeemed; such fees are not reflected in the
foregoing table.
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. Moreover, while the example assumes a 5% annual
return, each Portfolio's actual performance will vary and may result in an
actual return greater or less than 5%.
The purpose of the foregoing table is to assist investors in understanding
the costs and expenses borne by the Portfolios and investors, the payment of
which will reduce investors' annual return. Other Expenses for the Capital
Growth Portfolio and Investment Grade Bond Portfolio are based on estimated
amounts for the current fiscal year. The expenses noted above, without
reimbursements, would have been: 126-1 Fees, .25% for each Portfolio and Total
Portfolio Operating Expenses, 1.12% for each of the Short-Intermediate Duration
Bond Portfolio and Tennessee Tax Exempt Bond Portfolio and ____% for the Capital
Growth Portfolio and ___% for the Investment Grade Bond Portfolio. Long-term
investors in Investor Shares could pay more in 12b-1 fees than the economic
equivalent of paying a front-end sales charge. For a further description of the
various costs and expenses incurred in a Portfolio's operation, as well as
expense reimbursement or waiver arrangements, see "Management of the
Portfolios."
FINANCIAL HIGHLIGHTS
Contained below for the Short-Intermediate Duration Bond Portfolio and
Tennessee Tax Exempt Bond Portfolio is per share operating performance data for
an Investor Share of common stock outstanding, total investment return, ratios
to average net assets and other supplemental data for each period indicated.
The information in the tables has been audited by KPMG Peat Marwick LLP, the
Portfolios' independent auditors, whose report thereon appears in the Statement
of Additional Information. Further financial data and related notes are
included in the Statement of Additional Information, available upon request. No
financial information is available for the Capital Growth Portfolio or
Investment Grade Bond Portfolio, which had not commenced operations as of the
date of the Prospectus.
VALUESTAR SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1995 1994*
------------- -------------
<S> <C> <C>
Net asset value, beginning of period....................................... $ 9.66 $ 10.00
------------- -------------
Income from investment operations:
Net investment income.................................................... 0.59 0.38
Net realized and unrealized gains (losses) on securities transactions.... 0.47 (0.34)
------------- -------------
Net gains from investment operations..................................... 1.06 0.04
Dividends from net investment income....................................... (0.59) (0.38)
------------- -------------
Net change in net asset value.............................................. 0.47 (0.34)
------------- -------------
Net asset value, end of period............................................. $ 10.13 $ 9.66
------------- -------------
------------- -------------
Total Return (excluding sales charge)...................................... 11.20% 0.42%+
Ratios/Supplemental Data:
Net assets, end of period (000s)......................................... $ 103,382 $ 93,189
Ratio of expenses to average net assets.................................. 0.87% 0.83%++
Ratio of net investment income to average net assets..................... 5.89% 5.27%++
Decrease reflected in above expense ratios due to fee waivers............ 0.25% 0.45%++
Portfolio turnover....................................................... 28% 6%
- - ---------------
* For the period March 28, 1994 (commencement of operations) through December
31, 1994.
+ The total return figure listed is not annualized.
++ Annualized.
</TABLE>
VALUESTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1995 1994*
------------- -------------
<S> <C> <C>
Net asset value, beginning of period.................................... $ 9.40 $ 10.00
------------- -------------
Income from investment operations:
Net investment income................................................. 0.45 0.34
Net realized and unrealized gains (losses) on securities
transactions............................................................ 0.79 (0.60)
------------- -------------
Net gains (losses) from investment operations......................... 1.24 (0.26)
Dividends from net investment operations................................ (0.45) (0.34)
------------- -------------
Net change in net asset value........................................... 0.79 (0.60)
------------- -------------
Net asset value, end of period.......................................... $ 10.19 $ 9.40
------------- -------------
------------- -------------
Total Return (excluding sales charge)................................... 13.40% (2.63)%+
Ratios/Supplemental Data:
Net assets, end of period (000s)...................................... $ 94,143 $ 86,127
Ratio of expenses to average net assets............................... 0.87% 0.82%++
Ratio of net investment income to average net assets.................. 4.52% 4.61%++
Decrease reflected in above expense ratios due to fee waivers........... 0.25% 0.36%++
Portfolio turnover.................................................... 188% 41%
- - ---------------
* For the period March 28, 1994 (commencement of operations) through December
31, 1994.
+ The total return figure listed is not annualized.
++ Annualized.
</TABLE>
Further information about performance is contained in the Portfolios'
annual report, which may be obtained without charge by writing to the address
or calling the number set forth on the cover page of this Prospectus.
DESCRIPTION OF THE PORTFOLIOS
Investment Objectives
Each Portfolio's investment objective is set forth on the cover page of
this Prospectus. The differences in objectives and policies among the Portfolios
determine the types of securities in which each Portfolio invests and can be
expected to affect the degree of risk to which each Portfolio is subject and
each Portfolio's yield or return. Each Portfolio's investment objective cannot
be changed without approval by the holders of a majority (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of such Portfolio's
outstanding voting shares. There can be no assurance that each Portfolio's
investment objective will be achieved.
Management Policies
Capital Growth Portfolio--The Capital Growth Portfolio will invest
primarily in the equity securities of domestic issuers. The Capital Growth
Portfolio, under normal circumstances, will invest primarily in securities of
companies with relatively large capitalizations (generally) greater than $500
million) that the Adviser believes offer opportunities for capital appreciation
and growth of earnings. The equity securities in which the Portfolio may invest
consist of common stocks, preferred stocks and convertible securities, including
those in the form of American Depositary Receipts and Standard & Poor's
Depositary Receipts, as well as warrants to purchase such securities. The
Portfolio also may invest in debt securities of domestic and foreign issuers
when the Adviser believes that such securities offer opportunities on capital
growth. The Portfolio may invest up to 10% of the value of its total assets in
foreign securities which are not publicly traded in the United States. See
"Appendix--Portfolio Securities."
At least 65% of the value of the Capital Growth Portfolio's total assets
invested in debt securities must consist of debt securities which are rated no
lower than Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard
& Poor's Ratings Group ("S&P"), Fitch Investors Service, L.P. ("Fitch") or Duff
& Phelps Credit Rating Co. ("Duff") or, if unrated, deemed to be of comparable
quality by the Adviser. The remainder of such assets may be invested in debt
securities which are rated no lower than Ba by Moody's and BB by S&P, Fitch and
Duff or, if unrated, deemed to be of comparable quality by the Adviser. Debt
securities rated Ba by Moody's and BB by S&P, Fitch and Duff are considered
speculative grade debt and the payment of principal and interest may be affected
at any time by adverse economic changes. See " Investment Considerations and
Risk Factors--Lower Rated Securities" below, and "Appendix" in the Statement of
Additional Information.
The Capital Growth Portfolio may invest, in anticipation of otherwise
investing cash positions, in money market instruments of the type described
under "Appendix--Portfolio Securities--Money Market Instruments." Under normal
market conditions, the Portfolio does not expect to have a substantial portion
of its assets invested in money market instruments. However, when the Adviser
determines that adverse market conditions exist, the Portfolio may adopt a
temporary defensive posture and invest entirely in money market instruments.
The Capital Growth Portfolio also may engage in various investment
techniques such as options and futures transactions and lending portfolio
securities, each of which involves risk. For a discussion of these investment
techniques and their related risks, see "Investment Considerations and Risk
Factors" below, and "Appendix--Investment Techniques." The Portfolio also may
invest, to a limited extent, in securities issued by other investment companies
which principally invest in securities of the type in which the Capital Growth
Portfolio invests.
Short-Intermediate Duration Bond Portfolio-- The Short-Intermediate
Duration Bond Portfolio invests at least 65% of the value of its total assets
(except when maintaining a temporary defensive position) in bonds, debentures
and other debt instruments. The Portfolio invests in a broad range of investment
grade, U.S. dollar denominated fixed-income securities of domestic and foreign
issuers. These debt securities include bonds, debentures, notes, money market
instruments (including foreign bank obligations, such as time deposits,
certificates of deposit and bankers' acceptances, commercial paper and other
short-term corporate debt obligations, and repurchase agreements),
mortgage-related securities (including interest-only and principal-only stripped
mortgage-backed securities), asset-backed securities, municipal obligations and
convertible debt obligations. The issuers may include foreign corporations,
partnerships, trusts or similar entities, and governments or their political
subdivisions, agencies or instrumentalities. Under normal market conditions, the
Short-Intermediate Duration Bond Portfolio will invest in a portfolio of
securities that has a duration of under four years.
The maturity of any single instrument held by the Short-Intermediate
Duration Bond Portfolio is not limited. The duration of the Portfolio, however,
under normal circumstances, will not exceed four years. The Adviser will seek to
maintain a duration ranging between one year and four years depending upon
market conditions. Under normal circumstances, the dollar-weighted average life
of the Portfolio's investment securities will be longer than one year and less
than five years. As a measure of a fixed-income security's cash flow, duration
is an alternative to the concept of "term to maturity" in assessing the price
volatility associated with changes in interest rates. Generally, the longer the
duration, the more volatility an investor should expect. For example, the market
price of a bond with a duration of two years would be expected to decline 2% if
interest rates rose 1%. Conversely, the market price of the same bond would be
expected to increase 2% if interest rates fell 1%. The market price of a bond
with a duration of four years would be expected to increase or decline twice as
much as the market price of a bond with a two-year duration. Duration is a way
of measuring a security's maturity in terms of the average time required to
receive the present value of all interest and principal payments as opposed to
its term to maturity. The maturity of a security measures only the time until
final payment is due; it does not take account of the pattern of a security's
cash flows over time, which would include how cash flow is affected by
prepayments and by changes in interest rates. Incorporating a security's yield,
coupon interest payments, final maturity and option features into one measure,
duration is computed by determining the weighted average maturity of a bond's
cash flows, where the present values of the cash flows serve as weights. In
computing the duration of the Short-Intermediate Duration Bond Portfolio, the
Adviser will estimate the duration of obligations that are subject to prepayment
or redemption by the issuer, taking into account the influence of interest rates
on prepayments and coupon flows. This method of computing duration is known as
option-adjusted duration.
The securities in which the Short-Intermediate Duration Bond Portfolio will
invest will consist only of those which, at the time of purchase, are rated no
lower than Baa by Moody's or BBB by S&P, Fitch or Duff, or, if unrated, deemed
to be of comparable quality by the Adviser. Obligations rated BBB by S&P and
Fitch and Baa by Moody's are considered investment grade obligations; those
rated BBB by S&P and Fitch are regarded as having an adequate capacity to pay
principal and interest, while those rated Baa by
Moody's are considered medium grade obligations which lack outstanding
investment characteristics and have speculative characteristics. See "Investment
Considerations and Risk Factors--Fixed-Income Securities" below, and "Appendix"
in the Statement of Additional Information.
When management believes it advisable for temporary defensive purposes, the
Portfolio may invest in the U.S. dollar denominated money market instruments of
the type described under "Appendix--Portfolio Securities--Money Market
Instruments."
The Short-Intermediate Duration Bond Portfolio also may lend securities
from its portfolio as described under "Appendix--Investment Techniques--Lending
Portfolio Securities." The Short-Intermediate Duration Bond Portfolio also may
invest, to a limited extent, in securities issued by other investment companies
which principally invest in securities of the type in which the Portfolio
invests.
Investment Grade Bond Portfolio--The Investment Grade Bond Portfolio's
management policies are identical to those of the Short-Interme- diate Duration
Bond Portfolio, except that, under normal market conditions, the Investment
Grade Bond Portfolio will invest in a portfolio of securities that has a
duration of 50% to 150% of that of the Merrill Lynch Corporate Government Master
Index.
The Merrill Lynch Corporate Government Master Index is comprised of
government and investment grade corporate fixed-rate couponbearing securities
with an outstanding par value of $25 million or more, with maturities equal to
or greater than one year. As of January 31, 1996, the securities comprising the
Merrill Lynch Corporate Government Master Index had a duration of approximately
5.653 years.
Tennessee Tax Exempt Bond Portfolio--The Tennessee Tax Exempt Bond
Portfolio will invest, as a fundamental policy, at least 80% of the value of its
net assets (except when maintaining a temporary defensive position) in Municipal
Obligations. Under normal circumstances, at least 65% of the value of the
Portfolio's total assets will be invested in bonds, deben-tures, and other debt
securities of the State of Tennessee, its political subdivisions, authorities
and corporations, the interest from which is, in the opinion of bond counsel to
the issuer, exempt from Federal and Tennessee personal income taxes
(collectively, "Tennessee Municipal Obligations"). The remainder of the
Portfolio's assets may be invested in securities that are not Tennessee
Municipal Obligations and therefore may be subject to Tennessee income tax. See
"Investment Considerations and Risk Factors-- Investing in Tennessee Municipal
Obligations" below, and "Dividends, Distributions and Taxes." The Portfolio
intends to invest in such securities when their return to investors, taking into
account applicable Tennessee income taxes, would be greater than comparably
rated Tennessee Municipal Obligations. In addition, to the extent acceptable
Tennessee Municipal Obligations are at any time unavailable for investment by
the Portfolio, the Portfolio will invest temporarily in other debt securities
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from Federal income tax ("Municipal Obligations"). See "Investment
Considerations and Risk Factors--Investing in Municipal Obligations" below, and
"Appendix--Portfolio Securities--Municipal Obligations."
The average dollar-weighted credit rating of the Municipal Obligations held
by the Tennessee Tax Exempt Bond Portfolio will be at least A- by Moody's, S&P
or Fitch. To further limit risk, each Municipal Obligation in which the
Portfolio may invest must be rated, in the case of bonds, at least Baa by
Moody's or at least BBB by S&P or Fitch. The Portfolio may invest in short-term
Municipal Obligations which are rated in the two highest rating categories by
Moody's, S&P or Fitch. Municipal Obligations rated Baa by Moody's or BBB by
S&P or Fitch are considered investment grade obligations which lack outstanding
investment characteristics and may have speculative characteristics as well. The
average dollar-weighted portfolio credit rating will be measured on the basis of
the dollar value of the Municipal Obligations purchased and their credit rating
without reference to rating subcategories. The Tennessee Tax Exempt Bond
Portfolio will not invest in Municipal Obligations that are unrated and no more
than 5% of its total assets will consist of Municipal Obligations which, after
purchase by the Portfolio, have become unrated. See "Investment Considerations
and Risk Factors--Fixed- Income Securities" below, and "Appendix" in the
Statement of Additional Information.
The Portfolio may invest no more than 10% of the value of its total assets
in industrial development bonds which, although issued by industrial development
authorities, may be backed only by the assets and revenues of the
non-governmental users. Interest on Municipal Obligations (including certain
industrial development bonds) which are specified private activity bonds, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"), issued
after August 7, 1986, while exempt from Federal income tax, is a preference item
for the purpose of the alternative minimum tax. Where a regulated investment
company receives such interest, a proportionate share of any exempt-interest
dividend paid by the investment company may be treated as such a preference item
to shareholders. The Tennessee Tax Exempt Bond Portfolio will invest no more
than 10% of the value of its net assets in Municipal Obligations the interest
from which gives rise to a preference item for the purpose of the alternative
minimum tax. The Tennessee Tax Exempt Bond Portfolio will invest in the
aggregate, except for temporary defensive purposes, no more than 20% of the
value of its net assets in securities subject to Federal income tax.
The Tennessee Tax Exempt Bond Portfolio may purchase tender option bonds
and similar securities. A tender option bond is a Municipal Obligation
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate, that has been coupled with the
agreement of a third party which grants the security holder the option, at
periodic intervals, to tender the Municipal Obligation to the third party and
receive the face value thereof. See "Appendix--Portfolio Securities--Tender
Option Bonds."
From time to time, on a temporary basis other than for temporary defensive
purposes (but not to exceed 20% of the value of the Portfolio's net assets) or
for temporary defensive purposes, the Portfolio may invest in taxable money
market instruments having, at the time of purchase, a quality rating in the two
highest grades of Moody's, S&P or Fitch or, if unrated, deemed to be of
comparable quality by the Adviser. Dividends paid by the Portfolio that are
attributable to income earned by it from these securities will be taxable to
investors. See "Dividends, Distributions and Taxes." Except for temporary
defensive purposes, at no time will more than 20% of the value of the
Portfolio's net assets be invested in taxable money market instruments and
Municipal Obligations the interest from which gives rise to a preference for the
purpose of the alternative minimum tax. When the Portfolio has adopted a
temporary defensive position, including when acceptable Tennessee Municipal
Obligations are unavailable for investment by the Portfolio, in excess of 35% of
the Portfolio's total assets may be invested in securities that are not exempt
from Tennessee State income tax. Under normal market conditions, the Fund
anticipates that not more than 5% of the value of the Portfolio's total assets
will be invested in any one category of these securities. Money market
instruments are more fully described under the "Appendix--Portfolio
Securities--Money Market Instruments."
The Tennessee Tax Exempt Bond Portfolio also may engage in various
investment techniques such as options and futures transactions and lending
portfolio securities, each of which involves risk and may give rise to taxable
income. For a discussion of these investment techniques and their related risks,
see "Investment Considerations and Risk Factors" below, and
"Appendix--Investment Techniques." The Tennessee Tax Exempt Bond Portfolio also
may invest, to a limited extent, in securities issued by other investment
companies which principally invest in securities of the type in which the
Tennessee Tax Exempt Bond Portfolio invests.
Investment Considerations and Risk Factors
General--Since each Portfolio will pursue different types of investments,
the risks of investing will vary depending on the Portfolio selected for
investment. Before selecting a Portfolio in which to invest, the investor should
assess the risks associated with the types of investments made by the Portfolio.
The net asset value per share of each Portfolio is not fixed and should be
expected to fluctuate. Investors should consider each Portfolio as a supplement
to an overall investment program and should invest only if they are willing to
undertake the risks involved.
Investment Techniques--Each Portfolio may engage in various investment
techniques the use of which involves risk. Investors in the Tennessee Tax Exempt
Bond Portfolio should be aware that the use of these techniques may give rise to
taxable income. See "Appendix--Investment Techniques." Using these techniques
may produce higher than normal portfolio turnover for a Portfolio and may affect
the degree to which its net asset value fluctuates.
Portfolio turnover may vary from year to year, as well as within a year.
Under normal market conditions, the portfolio turnover rate of each Portfolio
generally will not exceed 100%. Higher portfolio turnover rates are likely to
result in comparatively greater brokerage commissions or transaction costs.
A Portfolio's ability to engage in certain short-term transactions may be
limited by the requirement that, to qualify as a regulated investment company,
it must earn less than 30% of its gross income from the disposition of
securities held for less than three months. This 30% test limits the extent to
which a Portfolio may sell securities held for less than three months, effect
short sales of securities held for less than three months, write options
expiring in less than three months and invest in certain futures contracts,
among other strategies. However, portfolio turnover will not otherwise be a
limiting factor in making investment decisions.
Equity Securities--(Capital Growth Portfolio) Equity securities fluctuate
in value, often based on factors unrelated to the value of the issuer of the
securities, and that fluctuations can be pronounced. Changes in the value of the
investment securities of the Capital Growth Portfolio will result in changes in
the value of such Portfolio's shares and thus its total return to investors.
Fixed-Income Securities--(All Portfolios) Even though interest-bearing
securities are investments which promise a stable stream of income, the prices
of such securities are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations.
The values of fixed-income securities also may be affected by changes in
the credit rating or financial condition of the issuing entities. Once the
rating of a security purchased by a Portfolio has been adversely changed, such
Portfolio will consider all circumstances deemed relevant in determining whether
to continue to hold the security. With respect to the Short-Intermediate
Duration Bond Portfolio and Investment Grade
Bond Portfolio, not more than 10% of the value of either Portfolio's total
assets may consist of securities which have been downgraded below investment
grade by Moody's, S&P and Fitch. Certain securities purchased by a Portfolio,
such as those rated Baa by Moody's and BBB by S&P, Fitch and Duff, may be
subject to such risk with respect to the issuing entity and to greater market
fluctuations than certain lower yielding, higher rated fixed-income securities.
See "Appendix--Portfolio Securities--Ratings" below, and "Appendix" in the
Statement of Additional Information.
No assurance can be given as to the liquidity of the market for certain
mortgage-backed securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities, which may be purchased by the Capital
Growth Portfolio, Short-Intermediate Duration Bond Portfolio and Investment
Grade Bond Portfolio. Determination as to the liquidity of interest-only and
principal-only fixed mortgage-backed securities issued by the U.S. Government or
its agencies and instrumentalities will be made in accordance with guidelines
established by the Fund's Board of Directors. In accordance with such
guidelines, the Adviser will monitor investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information. The Fund intends to treat other
stripped mortgage-backed securities as illiquid securities. See
"Appendix--Portfolio Securities--Illiquid Securities."
Federal income tax law requires the holder of a zero coupon security or of
certain pay-in-kind bonds to accrue income with respect to these securities
prior to the receipt of cash payments. A Portfolio investing in such securities
may be required to distribute such income accrued with respect to these
securities and may have to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution
requirements.
Investing in Municipal Obligations--(Tennessee Tax Exempt Bond Portfolio)
The Tennessee Tax Exempt Bond Portfolio may invest more than 25% of the value of
its total assets in Municipal Obligations which are related in such a way that
an economic, business or political development or change affecting one such
security also would affect the other securities; for example, securities the
interest upon which is paid from revenues of similar types of projects. As a
result, the Portfolio may be subject to greater risk as compared to a fund that
does not follow this practice.
Certain provisions in the Code relating to the issuance of Municipal
Obligations may reduce the volume of Municipal Obligations qualifying for
Federal tax exemption. One effect of these provisions could be to increase the
cost of the Municipal Obligations available for purchase by the Tennessee Tax
Exempt Bond Portfolio and thus reduce its available yield. Investors should
consult their tax advisers concerning the effect of these provisions on an
investment in the Tennessee Tax Exempt Bond Portfolio. Proposals that may
restrict or eliminate the income tax exemption for interest on Municipal
Obligations may be introduced in the future. If any such proposal were enacted
that would reduce the availability of Municipal Obligations for investment by
the Tennessee Tax Exempt Bond Portfolio so as to adversely affect its
shareholders, the Fund would reevaluate such Portfolio's investment objective
and policies and submit possible changes in the Portfolio's structure to
shareholders for their consideration. If legislation were enacted that would
treat a type of Municipal Obligation as taxable, the Tennessee Tax Exempt Bond
Portfolio would treat such security as a permissible taxable investment within
the applicable limits set forth herein.
Investing in Tennessee Municipal Obligations-- (Tennessee Tax Exempt Bond
Portfolio) Investors in the Tennessee Tax Exempt Bond Portfolio should consider
carefully the special risks inherent in the Portfolio's investment in Tennessee
Municipal Obligations. These risks result from the financial condition of the
State of Tennessee. Tennessee has historically had a sound financial position.
The State, however, encountered budgetary problems during the 1995 fiscal year
requiring supplemental appropriations and the use of one-time reserves to close
an estimated $250 million deficit caused by cost overruns in several major
programs. Due principally to inaccurate funding assumptions with respect to the
TennCare program, the State's program to replace Medicaid, the State completed
its fiscal year ended June 30, 1995 with an estimated budget deficit of $125
million. Investors in the Tennessee Tax Exempt Bond Portfolio should obtain and
review a copy of the Portfolios' Statement of Additional Information which sets
forth other considerations.
Investing in Foreign Securities--(Capital Growth Portfolio,
Short-Intermediate Duration Bond Portfolio and Investment Grade Bond Portfolio)
Foreign securities markets generally are not as developed or efficient as those
in the United States. Securities of some foreign issuers are less liquid and
more volatile than securities of comparable U.S. issuers. Similarly, volume and
liquidity in most foreign securities markets are less than in the United States
and, at times, volatility of price can be greater than in the United States.
Because evidences of ownership of such securities usually are held outside
the United States, a Portfolio's investment in foreign securities will be
subject to additional risks which include possible adverse political and
economic developments, seizure or nationalization of foreign deposits and
adoption of governmental restrictions that might adversely affect the payment of
principal, interest and dividends on the foreign securities or restrict the
payment of principal, interest and dividends to investors located outside the
country of the issuers, whether from currency blockage or otherwise.
Since foreign securities may be purchased by the Capital Growth Portfolio
with and be payable in currencies of foreign countries, the value of these
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations. Some currency
exchange costs may be incurred when the Capital Growth Portfolio changes
investments from one country to another.
Use of Derivatives--Each Portfolio may invest in derivatives
("Derivatives"). These are financial instruments which derive their performance,
at least in part, from the performance of an underlying asset, index or interest
rate. The Derivatives a Portfolio may use include, with respect to the Capital
Growth Portfolio and Tennessee Tax Exempt Bond Portfolio, options and futures,
and, with respect to the Capital Growth Portfolio, Short-Intermediate Duration
Bond Portfolio and Investment Grade Bond Portfolio, mortgage-related securities
and asset-backed securities. While Derivatives can be used effectively in
furtherance of the Portfolio's investment objective, under certain market
conditions, they can increase the volatility of the Portfolio's net asset value,
can decrease the liquidity of the Portfolio's investments and make more
difficult the accurate pricing of the Portfolio's investments.
Lower Rated Securities--(Capital Growth Port- folio) The Capital Growth
Portfolio may invest, to a limited extent, in higher yielding (and, therefore,
higher risk) debt securities rated Ba by Moody's or BB by S&P, Fitch or Duff
(com-monly known as junk bonds). They generally are not meant for short-term
investing and may be subject to certain risks with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
fixed-income securities. The retail secondary market for these securities may be
less liquid than that of higher rated securities; adverse conditions could make
it difficult at times for the Capital Growth Portfolio to sell certain
securities or could result in lower prices than those used in calculating the
Capital Growth Portfolio's net asset value. See "Appendix--Portfolio
Securities--Ratings."
Non-Diversified Status--The classification of each Portfolio as a
"non-diversified" investment company means that the proportion of a Portfolio's
assets that may be invested in the securities of a single issuer is not limited
by the 1940 Act. A "diversified" investment company is required by the 1940 Act
generally, with respect to 75% of its total assets, to invest not more than 5%
of such assets in the securities of a single issuer. Since a relatively high
percentage of each Portfolio's assets may be invested in the securities of a
limited number of issuers, some of which may be within the same industry, the
Portfolio's investments may be more sensitive to changes in the market value of
a single issuer or industry. However, to meet Federal tax requirements, at the
close of each quarter no Portfolio may have more than 25% of its total assets
invested in any one issuer and, with respect to 50% of total assets, more than
5% of its total assets invested in any one issuer. These limitations do not
apply to U.S. Government securities or the securities of other regulated
investment companies.
Simultaneous Investments--Investment decisions for each Portfolio are made
independently from those of the other investment companies, investment advisory
accounts, custodial accounts, individual trust accounts and commingled funds
that may be advised by the Adviser. However, if such other investment companies
or managed accounts desire to invest in, or dispose of, the same securities as
the Portfolio, available investments or opportunities for sales will be
allocated equitably to each of them. In some cases, this procedure may adversely
affect the size of the position obtained for or disposed of by a Portfolio or
the price paid or received by a Portfolio.
MANAGEMENT OF THE PORTFOLIOS
Board of Directors
The business affairs of the Fund are managed under the general supervision
of its Board of Directors. The Statement of Additional Information contains the
name and general business experience of each Director.
Investment Adviser
First American National Bank, located at First American Center, 315
Deaderick Street, Nashville, Tennessee 37237, serves as each Portfolio's
investment adviser. The Adviser is a wholly-owned subsidiary of First American
Corporation, a registered bank holding company having assets as of December 31,
1995 of $9.7 billion. First American National Bank provides personal trust,
estate, employee benefit trust, corporate trust and custody services to over
3,000 individual and business clients and investment advisory services. The
Adviser, as of December 31, 1995 had approximately $4.4 billion under trust and
approximately $2.5 billion under management.
The Adviser and its affiliates deal, trade and invest for their own
accounts and for the accounts of clients which they manage in the types of
securities in which the Portfolios may invest and may have deposit, loan and
commercial banking relationships with the issuers of securities purchased by a
Portfolio. The Adviser has informed the Fund that in making its investment
decisions it does not obtain or use material inside information in its or its
affiliates' possession.
The Adviser supervises and assists in the overall management of each
Portfolio's affairs under an Investment Advisory Agreement between the Adviser
and the Fund, subject to the overall authority of the Fund's Board of Directors
in accordance with Maryland law. The primary portfolio manager for each
Portfolio is as follows: for the Capital Growth Portfolio, Charles E. Winger,
Jr., who has been a Trust Officer of the Adviser since 1988; for the
Short-Intermediate Duration Bond Portfolio and Investment Grade Bond Portfolio,
Donald F. Turk, who has been a Trust Officer of the Adviser since 1980; and for
the Tennessee Tax Exempt Bond Portfolio, Sharon S. Brown, who has been a Trust
Officer of the Adviser since 1988. The Adviser also provides research services
for the Portfolios through a professional staff of portfolio managers and
securities analysts. All activities of the Adviser are conducted by persons who
are also officers of one or more of the Adviser's affiliates.
Under the terms of the Investment Advisory Agreement, the Fund has agreed
to pay the Adviser a monthly fee at the annual rate of .65 of 1% of the value of
the Capital Growth Portfolio's average daily net assets and .50 of 1% of the
value of each other Portfolio's average net assets. For the fiscal year ended
December 31, 1995, the Fund paid the Adviser a monthly fee at the annual rate of
.50 of 1% of the value of Short-Intermediate Duration Bond Portfolio's and the
Tennessee Tax Exempt Bond Portfolio's average daily net assets.
From time to time, the Adviser may waive receipt of its fees and/or
voluntarily assume certain expenses of a Portfolio, which would have the effect
of lowering the overall expense ratio of that Portfolio and increasing yield to
its investors. The Portfolio will not pay the Adviser at a later time for any
amounts it may waive, nor will the Portfolio reimburse the Adviser for any
amounts it may assume.
Administrator
BISYS Fund Services Limited Partnership, located at 3435 Stelzer Road,
Columbus, Ohio 43219- 3035, serves as each Portfolio's administrator. The
Administrator currently provides administrative services or sub-administrative
services to other investment companies with over $60 billion in assets. The
Administrator is a wholly-owned subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator
generally assists in all aspects of the Fund's operations, other than providing
investment advice, subject to the overall authority of the Fund's Board of
Directors in accordance with Maryland law. In connection therewith, the
Administrator provides the Fund with office facilities, personnel, and certain
clerical and bookkeeping services (e.g., preparation of reports to shareholders
and the Securities and Exchange Commission and filing of Federal, state and
local income tax returns) that are not being furnished by The Bank of New York,
the Fund's Custodian.
Under the terms of the Administration Agreement, the Fund has agreed to pay
the Administrator a monthly fee at the annual rate of .15 of 1% of the value of
each Portfolio's average daily net assets. For the fiscal year ended December
31, 1995, the Fund paid Concord Holding Corporation, an affiliate of the
Administrator and the Portfolio's predecessor administrator, at the annual rate
of .15 of 1% of the value of Short-Intermediate Duration Bond Portfolio's and
the Tennessee Tax Exempt Bond Portfolio's average daily net assets.
Distributor
Concord Financial Group, Inc., located at 124 West 55th Street, New York,
New York 10019, serves as the Fund's principal underwriter and distributor of
the Portfolio's shares. The Distributor, a wholly-owned subsidiary of the
Administrator, was organized to distribute shares of mutual funds to
institutional and retail investors. The Distributor distributes the shares of
other investment companies with over $80 billion in assets. The Distributor is
the Fund's sponsor.
The Distributor makes a continuous offering of each Portfolio's shares and
bears the costs and expenses of printing and distributing to prospective
investors copies of any prospectuses, statements of additional information and
annual and interim reports of each Portfolio (after such items have been
prepared and set in type by the Fund) which are used in connection with the
offering of shares, and the costs and expenses of preparing, printing and
distributing any other literature used by the Distributor in connection with the
offering of such Portfolio's shares for sale to the public.
Distribution Plan
Under a plan adopted by the Fund's Board of Directors pursuant to Rule
12b-1 under the 1940 Act (the "Distribution Plan"), each Portfolio pays the
Distributor for advertising, marketing and distributing Investor Shares at an
annual rate of .25 of 1% of the value of the average daily net assets of such
class of shares. Under the Distribution Plan, the Distributor may make payments
to certain financial institutions, securities dealers and other industry
professionals that have entered into agreements with the Distributor ("Service
Organizations") in respect of these services. The Distributor determines the
amounts to be paid to Service Organizations. Service Organizations receive such
fees in respect of the average daily value of Investor Shares owned by their
clients. From time to time, the Distributor may defer or waive receipt of fees
under the Distribution Plan while retaining the ability to be paid by the Fund
under the Distribution Plan thereafter. The fees payable to the Distributor
under the Distribution Plan for advertising, marketing and distributing Investor
Shares are payable without regard to actual expenses incurred.
The Fund understands that Service Organizations may charge fees to their
clients who are the beneficial owners of Investor Shares in connection with
their client accounts. These fees would be in addition to any amounts which may
be received by a Service Organization under its agreement with the Distributor.
Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286, is
the Fund's Custodian. BISYS Fund Services Ohio, Inc., an affiliate of the
Administrator, located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, is the
Fund's Transfer and Dividend Disbursing Agent (the "Transfer Agent").
Expenses
All expenses incurred in the operation of the Fund are borne by the Fund,
except to the extent specifically assumed by others. The expenses borne by the
Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator, or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory and administration
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, industry association fees, auditing and legal
expenses, costs of maintaining corporate existence, costs of independent pricing
services, costs of calculating the net asset value of each Portfolio's shares,
costs of shareholders' reports and corporate meetings, costs of preparing and
printing certain prospectuses and statements of additional information, and any
extraordinary expenses. Expenses attributable to a particular Portfolio are
charged against the assets of that Portfolio; other expenses of the Fund are
allocated among the Portfolios on the basis determined by the Board of
Directors, including, but not limited to, proportionately in relation to the net
assets of each Portfolio.
HOW TO BUY SHARES
General
Investor Shares may be purchased through a number of institutions,
including the Adviser and its affiliates such as AmeriStar Capital Markets Inc.,
Service Organizations, and directly from the Distributor. When purchasing
Portfolio shares, you must specify the Portfolio being purchased and that the
purchase is for Investor Shares. The Adviser, its affiliates and Service
Organizations may receive different levels of compensation for selling different
classes of Portfolio shares. Stock certificates will not be issued. It is not
recommended that the Tennessee Tax Exempt Bond Portfolio be used as a vehicle
for Keogh, IRA and other qualified plans, because such plans are otherwise
entitled to tax deferred benefits. The Fund reserves the right to reject any
purchase order.
The minimum initial investment for each Portfolio is $1,000, and subsequent
investments must be at least $100. For full-time or part-time employees of the
Adviser or any of its affiliates, the minimum initial investment for each
Portfolio is $500, and subsequent investments must be at least $50. The Adviser,
its affiliates and Service Organizations may impose initial or subsequent
investment minimums which are higher or lower than those specified above and may
impose different minimums for different types of accounts or purchase
arrangements. In addition, purchases made in connection with certain shareholder
privileges may have different minimum investment requirements. See "Shareholder
Privileges."
You may purchase Portfolio shares by check or wire, or through TeleTrade as
described below. Investors purchasing shares through the Adviser, its affiliates
or Service Organizations should contact such entity directly for appropriate
instructions, as well as for information about conditions pertaining to the
account and any related fees.
For written orders, you may send your initial or subsequent purchase order,
together with the Fund's Account Application (which may be obtained by calling
1-800-852-0045) for initial orders and your check or money order payable to: The
ValueStar Funds (Portfolio Name), to The ValueStar Funds, c/o BISYS Fund
Services, Inc., Department L-1686, Columbus, Ohio 43260-1686. For subsequent
investments, your Fund account number should appear on the check or money order.
All payments should be made in U.S. dollars and, to avoid fees and delays,
should be drawn only on U.S. banks. A charge will be imposed if a check used for
investment in your account does not clear.
For wire orders, you must call the Transfer Agent at 1-800-852-0045. If a
subsequent payment is being made, your Fund account number should be included.
Information on remitting funds in this manner, including any related fees, may
be obtained from your bank.
Subsequent investments also may be made by electronic transfer of funds
from an account maintained in a bank or other domestic financial institution
that is an Automated Clearing House member. For information on purchasing shares
through the Automated Clearing House, you must call the Transfer Agent at
1-800-852-0045.
Portfolio shares are sold on a continuous basis. Net asset value per share
is determined as of the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m., Eastern time), on each day the New York Stock
Exchange is open for business. Net asset value per Investor Share is computed by
dividing the value of the Portfolio's net assets attributable to such shares
(i.e., the value of its assets less liabilities) by the total number of Investor
Shares of such Portfolio outstanding. The Portfolio's investments are valued
each business day generally by using available market quotations or at fair
value which may be determined by one or more pricing services approved by the
Board of Directors. Each pricing service's procedures are reviewed under the
general supervision of the Board of Directors. For further information regarding
the methods employed in valuing the Portfolios' investments, see "Determination
of Net Asset Value" in the Statement of Additional Information.
If an order is received by the Transfer Agent by the close of trading on
the floor of the New York Stock Exchange on a business day, Portfolio shares
will be purchased at the public offering price determined as of such time on
that day. Otherwise, Portfolio shares will be purchased at the public offering
price determined as of the close of trading on the floor of the New York Stock
Exchange on the next business day, except where Investor Shares are purchased
through a dealer as provided below.
Orders for the purchase of Investor Shares received by dealers by the close
of trading on the floor of the New York Stock Exchange on any business day and
transmitted to the Transfer Agent by the close of its business day (normally
5:15 p.m., Eastern time) will be based on the public offering price per share
determined as of the close of trading on the floor of the New York Stock
Exchange on that day. Otherwise, the orders will be based on the next determined
public offering price. It is the dealer's responsibility to transmit orders so
that they will be received by the Transfer Agent before the close of its
business day.
Federal regulations require that an investor provide a certified Tax
Identification Number ("TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes" and the Fund's Account Application for
further information concerning this requirement. Failure to furnish a certified
TIN to the Fund could subject the investor to a $50 penalty imposed by the
Internal Revenue Service ("IRS").
TeleTrade--You may purchase Portfolio shares (minimum purchase $500,
maximum $50,000 per transaction) by telephone for an existing Fund account if
you have checked the appropriate box and supplied the necessary information on
the Fund's Account Application. The proceeds will be transferred between the
bank account designated on the Account Application and your Fund account. Only a
bank account maintained in a domestic financial institution which is an
Automated Clearing House member may be so designated. TeleTrade purchases are
effected at the net asset value (plus the applicable sales load) next determined
after receipt of an order in proper form by the Transfer Agent. See "General"
above. TeleTrade may not be available to certain clients of the Adviser, its
affiliates and certain Service Organizations. The Fund may modify or terminate
TeleTrade at any time or charge a service fee upon notice to shareholders. No
such fee currently is contemplated. If you have selected TeleTrade, you may
request such a purchase of Portfolio shares by telephoning the Transfer Agent at
1-800-852-0045.
Purchase Price
The public offering price of Investor Shares is the net asset value per
share of that class, plus a sales load as shown below:
Total Sales Load
-----------------------------------------------
Dealers'
Amount of Offering Net Asset Reallowance as a %
Transaction Price Value of Offering Price
- - ------------------ ----------- ----------- ---------------------
Less than
$100,000.......... 3.00 3.09 2.50
$100,000 to less
than
$250,000......... 2.50 2.56 2.20
$250,000 to less
than
$500,000......... 2.00 2.04 1.75
$500,000 to less
than
$750,000......... 1.50 1.52 1.30
$750,000 to less
than
$1,000,000....... 1.00 1.01 0.90
$1,000,000 and
above............. 0.25 0.25 0.25
The dealer reallowance may be changed from time to time but will remain the
same for all dealers. From time to time, the Distributor may make or allow
additional payments or promotional incentives in the form of cash or other
compensation to dealers that sell Portfolio shares. In some instances, these
incentives may be offered only to certain dealers who have sold or may sell
significant amounts of Portfolio shares.
Management understands that the Adviser, its affiliates and some Service
Organizations may impose certain conditions on their clients which are different
from those described in this Prospectus, and, to the extent permitted by
applicable regulatory authority, may charge their clients a direct fee for
effecting transactions in Portfolio shares. You should consult the Adviser, its
affiliates or your Service Organization in this regard.
No Sales Load--Portfolio shares will be offered at net asset value without
a sales load to registered representatives of NASD member firms which have
entered into an agreement with the Distributor pertaining to the sale of
Portfolio shares, full-time employees of the Adviser, the Administrator or the
Distributor, their spouses and minor children, and accounts opened by a bank,
trust company or thrift institution which is acting as a fiduciary and has
entered into an agreement with the Distributor pertaining to the sale of
Portfolio shares, provided that they have furnished the Distributor appropriate
notification of such status at the time of the investment and with such
information as it may request from time to time in order to verify eligibility
for this privilege. This privilege also applies to the Fund's Directors,
fee-based financial planners and registered investment advisers not affiliated
with or clearing purchases through full service broker/dealers, investment
advisers regulated by Federal or state governmental authority when such
investment advisers purchase shares for their own accounts or for accounts for
which they are authorized to make investment decisions (i.e., discretionary
accounts), asset allocation programs offered by the Adviser for its clients, and
corporate/business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh
plans) sponsored by the Adviser, the Distributor or their affiliates or
subsidiaries or pursuant to a payroll deduction system which makes direct
investments in a Portfolio by means of electronic data transmission in a form
acceptable to the Fund. The sales load is not charged on shares acquired through
the reinvestment of dividends or distributions or pursuant to the Directed
Distribution Plan or Reinstatement Privilege, described below.
Right of Accumulation--Reduced sales loads apply to any purchase of shares
by you and any related "purchaser" as defined in the Statement of Additional
Information, where the aggregate investment in Investor Shares among any of the
Portfolios offered with a sales load, including such purchase, is $100,000 or
more. If, for example, you previously purchased and still hold Investor Shares
of the Short-Intermediate Duration Bond Portfolio, with an aggregate current
market value of $90,000 and subsequently purchase Investor Shares of the
Short-Intermediate Duration Bond Portfolio having a current value of $20,000,
the sales load applicable to the subsequent purchase would be reduced to 2.50%
of the offering price (2.56% of the net asset value). All present holdings of
Investor Shares may be combined to determine the current offering price of the
aggregate investment in ascertaining the sales load applicable to each
subsequent purchase. To qualify for reduced sales loads, at the time of a
purchase an investor or his Service Organization must notify the Transfer Agent.
The reduced sales load is subject to confirmation of an investor's holdings
through a check of appropriate records.
HOW TO REDEEM SHARES
General
An investor who has purchased shares through an account with the Adviser,
its affiliates or a Service Organization must redeem shares by following
instructions pertaining to such account. If such investor also is the
shareholder of record of the account on the books of the Transfer Agent, the
investor may redeem shares as described below under "Procedures." Such investors
wishing to use the other redemption methods described below must arrange with
the Adviser, its affiliates or the Service Organization for delivery of the
required application(s) to the Transfer Agent. It is the responsibility of the
Adviser, its affiliates or the Service Organization, as the case may be, to
transmit the redemption order to the Transfer Agent and credit the investor's
account with the redemption proceeds on a timely basis. Other investors may
redeem all or part of their shares in accordance with the procedures described
below.
When a request is received in proper form, the Fund will redeem the shares
at the next determined net asset value. The Fund ordinarily will make payment
for all shares redeemed within seven days after receipt by the Transfer Agent of
a redemption request in proper form, except as provided by the rules of the
Securities and Exchange Commission. However, if you have purchased Portfolio
shares by check or by TeleTrade and subsequently submit a redemption request by
mail, the redemption proceeds will not be transmitted to you until bank
clearance of the check or TeleTrade payment used for investment which may take
up to seven business days. The Fund will not transmit redemption proceeds
pursuant to a request to redeem shares by wire for a period of up to seven
business days after receipt by the Transfer Agent of the purchase check or
TeleTrade order against which such redemption is requested. This procedure does
not apply to shares purchased by wire payment.
The Fund imposes no charges when shares are redeemed. The Adviser, its
affiliates and Service Organizations may charge their clients a nominal fee for
effecting redemptions of Portfolio shares. The value of Portfolio shares
redeemed may be more or less than their original cost, depending upon the
Portfolio's then-current net asset value.
The Fund reserves the right to redeem your account at its option upon not
less than 45 days' written notice if your account's net asset value is $500 or
less, for reasons other than market conditions, and remains so during the notice
period.
Procedures
Written Orders--Written requests for redemption, indicating the name of the
Portfolio and that Investor Shares are being redeemed, with signature
appropriately guaranteed, if required, and otherwise in accordance with the
requirements listed below, should be mailed to The ValueStar Funds, c/o BISYS
Fund Services, Inc., Department L-1686, Columbus, Ohio 43260-1686.
Wire Redemption Privilege--After appropriate prior authorization, you may
request by telephone or in writing that redemption proceeds be transmitted by
the Transfer Agent via Federal Funds wire transfer to your bank account.
Redemption requests must be in an amount of at least $1,000. The Fund reserves
the right to refuse any request for a wire transfer and may limit the amount
involved or the number of telephone redemption requests. This Privilege may be
modified or terminated at any time by the Transfer Agent or the Fund.
TeleTrade--You may redeem Portfolio shares (minimum $500, maximum $50,000
per transaction) without charge by telephone if you have checked the appropriate
box and supplied the necessary information on the Fund's Account Application.
The proceeds will be transferred between your Fund account and the bank account
designated on the Account Application. Only a bank account maintained in a
domestic financial institution which is an Automated Clearing House member may
be so designated. Redemption proceeds will be on deposit in your account at an
Automated Clearing House member bank ordinarily two days after receipt of the
redemption request. The Fund may modify or terminate TeleTrade at any time or
charge a service fee upon notice to shareholders. No such fee currently is
contemplated. If you have selected TeleTrade, you may request such a redemption
of Portfolio shares by telephoning the Transfer Agent at 1-800-852-0045.
Redemption Requirements
Written redemption instructions, indicating the name of the Portfolio and
that Investor Shares are being redeemed, must be received by the Transfer Agent
in proper form and signed exactly as the shares are registered. Except as noted
below, all signatures must be guaranteed. The Transfer Agent has adopted
standards and procedures pursuant to which signature-guarantees in proper form
generally will be accepted from domestic banks, brokers, dealers, credit unions,
national securities exchanges, registered securities associations, clearing
agencies and savings associations, as well as from participants in the New York
Stock Exchange Medallion Signature Program, the Securities Transfer Agents
Medallion Program ("STAMP") and the Stock Exchanges Medallion Program.
Signature-guarantees may not be provided by notaries public. The signature
guarantee requirement will be waived if the following conditions apply: (1) the
redemption check is payable to the shareholder(s) of record; and (2) the
redemption check is mailed to the shareholder(s) at the address of record or the
proceeds are either mailed or wired to a financial institution account
previously designated. Redemption requests by corporate and fiduciary
shareholders must be accompanied by appropriate documentation establishing the
authority of the person seeking to act on behalf of the account. You may obtain
from the Fund or the Transfer Agent forms of resolutions and other documentation
which have been prepared in advance to assist compliance with the Fund's
procedures.
You may redeem or exchange Portfolio shares by telephone if you have
checked the appropriate box on the Fund's Account Application. By selecting a
telephone redemption or exchange privilege, an investor authorizes the Transfer
Agent to act on telephone instructions from any person representing himself or
herself to be the investor, or a representative of the investor's Service
Organization, and reasonably believed by the Transfer Agent to be genuine. The
Fund will require the Transfer Agent to employ reasonable procedures, such as
requiring a form of personal identification, to confirm that instructions are
genuine and, if it does not follow such procedures, the Fund or the Transfer
Agent may be liable for any losses due to unauthorized or fraudulent
instructions. Neither the Fund nor the Transfer Agent will be liable for
following telephone instructions reasonably believed to be genuine.
During times of drastic economic or market conditions, investors may
experience difficulty in contacting the Transfer Agent by telephone to request a
redemption or exchange of Portfolio shares. In such cases, investors should
consider using the other redemption procedures described herein. Use of these
other redemption procedures may result in the investor's redemption request
being processed at a later time than it would have been if telephone redemption
had been used. During the delay, the Portfolio's net asset value may fluctuate.
SHAREHOLDER PRIVILEGES
The services and privileges described under this heading may not be
available to certain clients of the Adviser, its affiliates and certain Service
Organizations and the Adviser, its affiliates and some Service Organizations may
impose certain conditions on their clients which are different from those
described in this Prospectus. Such investors should consult the Adviser, its
affiliates or their Service Organization in this regard.
Exchange Privilege
The Exchange Privilege enables you to purchase, in exchange for shares of a
Portfolio, shares of one of the other Portfolios offered by this Prospectus,
ValueStar Prime Money Market Portfolio or ValueStar U.S. Treasury Money Market
Portfolio, to the extent such shares are offered for sale in your state of
residence. If you desire to use this Privilege, you should consult the Adviser,
its affiliate where you maintain your account, your Service Organization or the
Distributor to determine if it is available and whether any conditions are
imposed on its use.
To use the Exchange Privilege, you or your Service Organization acting on
your behalf must give exchange instructions to the Transfer Agent in writing or
by telephone, or in accordance with the instructions pertaining to your account
at the Adviser or its affiliates. If you previously established the Telephone
Exchange Privilege, you may telephone exchange instructions by calling
1-800-852-0045. See "How to Redeem Shares-- Redemption Requirements." Before any
exchange into a Portfolio offered by another prospectus, you must obtain and
should review a copy of the current prospectus of the Portfolio into which the
exchange is being made. Prospectuses may be obtained from the Adviser, its
affiliates, certain Service Organizations or the Distributor. The shares being
exchanged must have a current value of at least $500; furthermore, when
establishing a new account by exchange, the shares being exchanged must have a
value of at least the minimum initial investment required for the Portfolio into
which the exchange is being made.
Shares will be exchanged at the next determined net asset value; however, a
sales load may be charged with respect to exchanges into a Portfolio sold with a
sales load. If you are exchanging into a Portfolio that charges a sales load,
you may qualify for share prices which do not include the sales load or which
reflect a reduced sales load, if the shares you are exchanging were: (a)
purchased with a sales load, (b) acquired by a previous exchange from shares
purchased with a sales load, or (c) acquired through reinvestment of dividends
or distributions paid with respect to the foregoing categories of shares. No
fees currently are charged shareholders directly in connection with exchanges
although the Fund reserves the right, upon not less than 60 days' written
notice, to charge shareholders a nominal fee in accordance with rules
promulgated by the Securities and Exchange Commission. The Fund reserves the
right to reject any exchange request in whole or in part. The Exchange Privilege
may be modified or terminated at any time upon notice to shareholders.
The exchange of shares of one Portfolio for shares of another is treated
for Federal income tax purposes as a sale of the shares given in exchange by the
shareholder and, therefore, an exchanging shareholder may realize a taxable gain
or loss.
Automatic Investment Plan
The Automatic Investment Plan permits you to purchase Portfolio shares
(minimum initial investment of $1,000 and minimum subsequent investments of $100
per transaction) at regular intervals selected by you. Provided your bank or
other financial institution allows automatic withdrawals, Portfolio shares may
be purchased by transferring funds from the bank account designated by you. At
your option, the account designated will be debited in the specified amount, and
Portfolio shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only an account maintained at a
domestic financial institution which is an Automated Clearing House member may
be so designated. This service enables you to make regularly scheduled
investments and may provide you with a convenient way to invest for long-term
financial goals. You should be aware, however, that periodic investment plans do
not guarantee a profit and will not protect an investor against loss in a
declining market. To establish an Automatic Investment Plan account, you must
check the appropriate box and supply the necessary information on the Account
Application. You may obtain the necessary applications from the Distributor. You
may cancel your participation in the Automatic Investment Plan or change the
amount of purchase at any time by mailing written notification to The ValueStar
Funds, c/o BISYS Fund Services, Inc., Department L-1686, Columbus, Ohio
43260-1686, and such notification will be effective three business days
following receipt. The Fund may modify or terminate the Automatic Investment
Plan at any time or charge a service fee. No such fee currently is contemplated.
Directed Distribution Plan
The Directed Distribution Plan enables you to invest automatically
dividends and capital gain distributions, if any, paid by a Portfolio in
Investor Shares of another Portfolio of which you are a shareholder. Shares of
the other Portfolio will be purchased at the then-current net asset value;
however, a sales load may be charged with respect to investments in shares of a
Portfolio sold with a sales load. You may qualify for share prices which do not
include the sales load or which reflect a reduced sales load. Minimum subsequent
investments do not apply. Investors desiring to participate in the Directed
Distribution Plan should check the appropriate box and supply the necessary
information on the Account Application. The Plan is available only for existing
accounts and may not be used to open new accounts. The Fund may modify or
terminate the Directed Distribution Plan at any time or charge a service fee. No
such fee currently is contemplated.
Automatic Withdrawal Plan
The Automatic Withdrawal Plan permits you to request withdrawal of a
specified dollar amount (minimum of $50) on either a monthly, quarterly,
semi-annual or annual basis if you have a $5,000 minimum account. The automatic
withdrawal will be made on the first or fifteenth day, at your option, of the
period selected. To participate in the Automatic Withdrawal Plan, you must check
the appropriate box and supply the necessary information on the Account
Application. The Automatic Withdrawal Plan may be ended at any time by the
investor, the Fund or the Transfer Agent.
Purchases of additional Investor Shares concurrent with withdrawals
generally are undesirable because a sales load may be imposed whenever purchases
of Investor Shares are made.
Reinstatement Privilege
The Reinstatement Privilege enables investors who have redeemed Investor
Shares to repurchase, within 90 days of such redemption, Investor Shares of a
Portfolio in an amount not to exceed the redemption proceeds received at a
purchase price equal to the then-current net asset value determined after a
reinstatement request and payment are received by the Transfer Agent. This
privilege also enables such investors to reinstate their account for the purpose
of exercising the Exchange Privilege. To use the Reinstatement Privilege, you
must submit a written reinstatement request to the Transfer Agent. The
reinstatement request and payment must be received within 90 days of the trade
date of the redemption. There currently are no restrictions on the number of
times an investor may use this privilege.
Letter of Intent
By signing a Letter of Intent form, available from the Distributor or
certain Service Organizations, you become eligible for the reduced sales load
applicable to the total number of Investor Shares purchased in a 13-month period
(beginning up to 90 days prior to the date of execution of the Letter of Intent)
pursuant to the terms and conditions set forth in the Letter of Intent. A
minimum initial purchase of $5,000 is required. To compute the applicable sales
load, the offering price of shares you hold (on the date of submission of the
Letter of Intent) in any Portfolio that may be used toward "Right of
Accumulation" benefits described above may be used as a credit toward completion
of the Letter of Intent.
The Transfer Agent will hold in escrow 5% of the amount indicated in the
Letter of Intent for payment of a higher sales load if the investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when the investor fulfills the terms of the Letter of Intent by
purchasing the specified amount. Assuming completion of the total minimum
investment specified under a Letter of Intent, an adjustment will be made to
reflect any reduced sales load applicable to shares purchased during the 90-day
period prior to the submission of the Letter of Intent. In addition, if the
investor's purchases qualify for a further sales load reduction, the sales load
will be adjusted to reflect the investor's total purchase at the end of 13
months.
If total purchases are less than the amount specified, the investor will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent, as
attorney-in-fact pursuant to the terms of the Letter of Intent, will redeem an
appropriate number of Investor Shares held in escrow to realize the difference.
Signing a Letter of Intent does not bind the investor to purchase, or the Fund
to sell, the full amount indicated at the sales load in effect at the time of
signing, but the investor must complete the intended purchase to obtain the
reduced sales load. At the time you purchase Investor Shares, you must indicate
your intention to do so under a Letter of Intent.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Capital Growth Portfolio--Declares and pays dividends from net investment
income and distributes any net capital gain annually.
Short-Intermediate Duration Bond, Investment Grade Bond and Tennessee Tax
Exempt Bond Portfolios--Declare dividends from net investment income on each day
the New York Stock Exchange is open for business. Dividends usually are paid on
the last calendar day of each month. The earnings for Saturdays, Sundays and
holidays are declared as dividends on the preceding business day. Shares begin
accruing income dividends on the day the purchase order is effective.
Applicable to All Portfolios (except where indicated)--Each Portfolio will
make distributions from net realized securities gains, if any, once a year, but
may make distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the
provisions of the 1940 Act. No Portfolio will make distributions from net
realized securities gains unless capital loss carryovers, if any, have been
utilized or have expired. Dividends are automatically reinvested in additional
Portfolio shares of the same class from which they were paid at net asset value,
unless payment in cash is requested. If all shares in an account are redeemed at
any time, all dividends to which the shareholder is entitled will be paid along
with the proceeds of the redemption. Dividends paid by each class of shares of a
Portfolio will be calculated at the same time and in the same manner and will be
of the same amount, except that the expenses attributable solely to a class will
be borne exclusively by such class.
If you elect to receive distributions in cash and your distribution checks
(1) are returned to the Fund marked "undeliverable" or (2) remain uncashed for
six months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in Portfolio shares
at the net asset value determined as of the date of payment of the distribution.
In addition, any such undeliverable checks or checks that remain uncashed for
six months will be canceled and will be reinvested in Portfolio shares at the
net asset value determined as of the date of cancellation.
The Fund anticipates that individual shareholders will not be subject to
Tennessee personal income tax on dividends paid by the Tennessee Tax Exempt Bond
Portfolio to the extent such dividends are attributable to interest from
securities of the U.S. Government or any of its agencies or instrumentalities or
from bonds of the State of Tennessee or any county, municipality or political
subdivision thereof, including any agency, board, authority or commission. To
the extent that an investor is obligated to pay state or local taxes outside of
the State of Tennessee, dividends earned by an investment in the Tennessee Tax
Exempt Bond Portfolio may represent taxable income. Dividends and distributions
of the Tennessee Tax Exempt Bond Portfolio derived from taxable investments and
from income or gain derived from securities transactions and from the use of the
investment techniques described under "Appendix--Investment Techniques" will be
subject to Federal and Tennessee income tax. Dividends paid by the Capital
Growth Portfolio, Short-Intermediate Duration Bond Portfolio and Investment
Grade Bond Portfolio derived from interest, together with distributions from any
net realized short-term securities gains and all or a portion of any gains
realized from the sale or other disposition of certain market discount bonds,
generally are taxable to U.S. investors as ordinary income, whether or not
reinvested in additional Portfolio shares. Distributions from net realized
long-term securities gains, if any, generally are taxable to U.S. investors as
long-term capital gains for Federal income tax purposes, regardless of how long
shareholders have held their shares and whether such distributions are received
in cash or reinvested in additional Portfolio shares. The Code provides that the
net capital gains of an individual generally will not be subject to Federal
income tax at a rate in excess of 28%. Dividends and distributions may be
subject to state and local taxes.
Dividends and distributions attributable to interest from direct
obligations of the United States and paid by a Portfolio to individuals
currently are not subject to tax in most states. Dividends and distributions
attributable to interest from other securities in which the Portfolios may
invest may be subject to state tax.
Although all or a substantial portion of the dividends paid by the
Tennessee Tax Exempt Bond Portfolio may be excluded by shareholders of such
Portfolio from their gross income for Federal income tax purposes, the Tennessee
Tax Exempt Bond Portfolio may purchase specified private activity bonds, the
interest from which may be (i) a preference item for purposes of the alternative
minimum tax, (ii) a component of the "adjusted current earnings" preference item
for purposes of the corporate alternative minimum tax as well as a component in
computing the corporate environmental tax or (iii) a factor in determining the
extent to which a shareholder's Social Security benefits are taxable. If the
Tennessee Tax Exempt Bond Portfolio purchases such securities, the portion of
dividends related thereto will not necessarily be tax exempt to an investor who
is subject to the alternative minimum tax and/or tax on Social Security benefits
and may cause an investor to be subject to such taxes.
Dividends derived from net investment income, together with distributions
from net realized short-term securities gains and all or a portion of any gains
realized from the sale or other disposition of certain market discount bonds,
paid by a Portfolio to a foreign investor generally are subject to U.S.
nonresident withholding taxes at the rate of 30%, unless the foreign investor
claims the benefits of a lower rate specified in a tax treaty. Distributions
from net realized long-term securities gains paid by a Portfolio to a foreign
investor, as well as the proceeds of any redemptions from a foreign investor's
account, regardless of the extent to which gain or loss may be realized, will
not be subject to U.S. nonresident withholding tax. However, such distributions
may be subject to backup withholding, as described below, unless the foreign
investor certifies his non-U.S. residency status.
The Code provides for the "carryover" of some or all of the sales load
imposed on Investor Shares if an investor exchanges his Investor Shares for
shares of another Portfolio within 91 days of purchase and such other Portfolio
reduces or eliminates its otherwise applicable sales load charge for the purpose
of the exchange. In this case, the amount of the sales load charged the investor
for Investor Shares, up to the amount of the reduction of the sales load charged
on the exchange, is not included in the basis of the investor's Investor Shares
for purposes of computing gain or loss on the exchange, and instead is added to
the basis of the shares received on the exchange.
Notice as to the tax status of your dividends and distributions will be
mailed to you annually. You also will receive periodic summaries of your account
which will include information as to dividends and distributions from securities
gains, if any, paid during the year.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and the proceeds of any redemption,
regardless of the extent to which gain or loss may be realized, paid to a
shareholder if such shareholder fails to certify either that the TIN furnished
in connection with opening an account is correct or that such shareholder has
not received notice from the IRS of being subject to backup withholding as a
result of a failure to properly report taxable dividend or interest income on a
Federal income tax return. Furthermore, the IRS may notify the Fund to institute
backup withholding if the IRS determines a shareholder's TIN is incorrect or if
a shareholder has failed to properly report taxable dividend and interest income
on a Federal income tax return.
A TIN is either the Social Security number or employer identification
number of the record owner of the account. Any tax withheld as a result of
backup withholding does not constitute an additional tax imposed on the record
owner of the account, and may be claimed as a credit on the record owner's
Federal income tax return.
Management of the Fund believes that the Short-Intermediate Duration Bond
Portfolio and the Tennessee Tax Exempt Bond Portfolio have qualified for the
fiscal year ended December 31, 1995 as a "regulated investment company" under
the Code. Each Portfolio intends to continue to so qualify if such qualification
is in the best interests of its shareholders. It is expected that each of the
Capital Growth Portfolio and Investment Grade Bond Portfolio will qualify as a
"regulated investment company" under the Code so long as such qualification is
in the best interests of its shareholders. Qualification as a regulated
investment company relieves the Portfolio of any liability for Federal income
tax to the extent its earnings are distributed in accordance with applicable
provisions of the Code. Each Portfolio is subject to a non-deductible 4% excise
tax, measured with respect to certain undistributed amounts of taxable
investment income and capital gains.
You should consult your tax adviser regarding specific questions as to
Federal, state or local taxes.
PERFORMANCE INFORMATION
Capital Growth Portfolio--For purposes of advertising, performance will be
calculated on the bases of average annual total return and/or total return.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the Capital Growth Portfolio was purchased
with an initial payment of $1,000 and that the investment was redeemed at the
end of a stated period of time, after giving effect to the reinvestment of
dividends and distributions during the period. The return is expressed as a
percentage rate which, if applied on a compounded annual basis, would result in
the redeemable value of the investment at the end of the period. Advertisements
of the Portfolio's performance will include the Portfolio's average annual total
return for one, five and ten year periods, or for shorter time periods depending
upon the length of time during which the Portfolio has operated.
Total return is computed on a per share basis and assumes the reinvestment
of dividends and distributions. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the maximum offering price per
share at the beginning of the period. Advertisements may include the percentage
rate of total return or may include the value of a hypothetical investment at
the end of the period which assumes the application of the percentage rate of
total return. Total return also may be calculated by using the net asset value
per share at the beginning of the period instead of the maximum offering price
per share at the beginning of the period.
Short-Intermediate Duration Bond, Investment Grade Bond and Tennessee Tax
Exempt Bond Portfolios--For purposes of advertising, performance will be
calculated on several bases, including current yield, average annual total
return and/or total return. Current yield refers to a Portfolio's annualized net
investment income per share over a 30-day period, expressed as a percentage of
the net asset value per share at the end of the period. For purposes of
calculating current yield, the amount of net investment income per share during
that 30-day period, computed in accordance with regulatory requirements, is
compounded by assuming that it is reinvested at a constant rate over a six-month
period. An identical result is then assumed to have occurred during a second
six-month period which, when added to the result for the first six months,
provides an "annualized" yield for an entire one-year period.
The Tennessee Tax Exempt Bond Portfolio may advertise tax equivalent yield,
which is calculated by determining the pre-tax yield which, after being taxed at
a certain rate, would be equivalent to a stated current yield calculated as
described above.
Average annual total return and total return will be calculated as
described above for the Capital Growth Portfolio.
Applicable to All Portfolios--Performance will vary from time to time and
past results are not necessarily representative of future results. Investors
should remember that performance is a function of portfolio management in
selecting the type and quality of portfolio securities and is affected by
operating expenses. The fees paid pursuant to the Distribution Plan will be
borne by the Portfolios' Investor Shares and not by the Trust Shares. As a
result, at any given time, the performance of the Investor Class should be
expected to be lower than that of the Trust Class. Performance information, such
as that described above, may not provide a basis for comparison with other
investments or other investment companies using a different method of
calculating performance.
Comparative performance information may be used from time to time in
advertising or marketing each Portfolio's shares, including data from Lipper
Analytical Services, Inc., Morningstar, Inc., Bond Buyer's 20-Bond Index,
Moody's Bond Survey Bond Index, Lehman Brothers Aggregate Bond Index and
components thereof, Standard & Poor's 500 Composite Stock Price Index, the Dow
Jones Industrial Average, CDA/Wiesenberger Investment Companies Service, Mutual
Fund Values; Mutual Fund Forecaster, Mutual Fund Investing and other industry
publications.
Historical Performance Information--(Capital Growth Portfolio and
Investment Grade Bond Portfolio only) The Capital Growth Portfolio and
Investment Grade Bond Portfolio will commence operations through a transfer of
assets from common trust funds managed by the Adviser, using substantially the
same investment objective, policies, restrictions and methodologies as the
corresponding Portfolio. Set forth below is historical performance information
for each common trust fund for various periods ended November 30, 1995, which
reflects the maximum operating expenses that may be charged the Investor Class
of the respective Portfolio as set forth in the Fee Table above. The common
trust funds did not charge any expenses. This performance information is not
necessarily indicative of the future performance of either Portfolio. Because
each Portfolio will be actively managed, its investments will vary from time to
time and will not be identical to the past portfolio investments of the
predecessor. Moreover, the predecessor common trust funds were not registered
under the 1940 Act and therefore were not subject to certain investment
restrictions that are imposed by the 1940 Act, which, if imposed, could have
adversely affected the common trust funds' performance. Each Portfolio's
performance will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
<TABLE>
<CAPTION>
Average Annual Total Return
------------------------------------------------------------
Since
1 Year 3 Years 5 Years 10 Years 12/31/80
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Capital Growth
Portfolio
Maximum
Offering Price.. 28.06% 9.89% 11.82% 11.33% 10.32%
Net Asset
Value........... 32.06% 11.01% 12.50% 11.67% 10.55%
Investment Grade
Bond Portfolio
Maximum
Offering Price.. 12.34% 6.39% 7.97% 8.05% 10.08%
Net Asset
Value........... 15.80% 7.47% 8.63% 8.38% 10.30%
</TABLE>
GENERAL INFORMATION
The Fund was incorporated under Maryland law on March 6, 1990, and
commenced operations on August 28, 1990.
The Fund is authorized to issue eleven billion shares of Common Stock (with
500 million shares allocated to each Portfolio), par value $.001 per share. Each
Portfolio's shares are classified into Investor Shares (250 million) and Trust
Shares (250 million). Trust Shares, which are described in a separate
prospectus, are sold only to clients of the Adviser for their qualified trust,
custody and/or agency accounts and to clients of the Adviser's affiliated and
correspondent banks and other affiliated and non-affiliated institutions for
their similar accounts maintained at such affiliates or institutions. As of the
date of this Prospectus, Trust Shares have not been offered. Each share has one
vote and shareholders will vote in the aggregate and not by class except as
otherwise required by law. Only holders of the Investor Shares, however, will be
entitled to vote on matters submitted to shareholders pertaining to the
Distribution Plan.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Fund to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of Directors or the
appointment of auditors. However, pursuant to the Fund's By-Laws, the holders of
at least 10% of the shares outstanding and entitled to vote may require the Fund
to hold a special meeting of shareholders for purposes of removing a Director
from office or for any other purpose. Shareholders may remove a Director by the
affirmative vote of a majority of the Fund's outstanding voting shares. In
addition, the Board of Directors will call a meeting of shareholders for the
purpose of electing Directors if, at any time, less than a majority of the
Directors then holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios, each of which is treated as a separate entity for certain matters
under the 1940 Act and for other purposes. A shareholder of one portfolio is not
deemed to be a shareholder of any other portfolio. For certain matters Fund
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, Investor Shares of four of the Fund's ValueStar
Portfolios are being offered--Capital Growth Portfolio, Short-Intermediate
Duration Bond Portfolio, Investment Grade Bond Portfolio and Tennessee Tax
Exempt Bond Portfolio, each of which is non-diversified. From time to time,
other portfolios may be established and sold pursuant to other offering
documents.
To date, 12 portfolios have been authorized. The other portfolios are not
being offered by this Prospectus. All consideration received by the Fund for
shares of one of the portfolios, and all assets in which such consideration is
invested, belong to that portfolio (subject only to the rights of creditors of
the Fund) and will be subject to the liabilities related thereto. The income
attributable to, and expenses of, one portfolio are treated separately from
those of the other portfolios.
The Transfer Agent maintains a record of each investor's ownership and
sends confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
APPENDIX
Portfolio Securities
To the extent set forth in this Prospectus, each Portfolio may invest in
the securities described below.
Money Market Instruments
U.S. Treasury Securities--Each Portfolio may invest in U.S. Treasury
securities which include Treasury Bills, Treasury Notes and Treasury Bonds that
differ in their interest rates, maturities and times of issuance. Treasury Bills
have initial maturities of one year or less; Treasury Notes have initial
maturities of one to ten years; and Treasury Bonds generally have initial
maturities of greater than ten years.
U.S. Government Securities--In addition to U.S. Treasury securities, each
Portfolio may invest in securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities. Some obligations issued or guaranteed by
U.S. Government agencies and instrumentalities, for example, Government National
Mortgage Association pass-through certificates, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. Principal
and interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance can
be given that it will always do so, since it is not so obligated by law. Each
Portfolio will invest in such securities only when it is satisfied that the
credit risk with respect to the issuer is minimal.
Bank Obligations--Each Portfolio may invest in bank obligations (other than
those issued by the Adviser or its affiliates), including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries or foreign branches of domestic banks, and
domestic branches of foreign banks, domestic savings and loan associations and
other banking institutions. With respect to such securities issued by foreign
subsidiaries or foreign branches of domestic banks, and domestic branches of
foreign banks, a Portfolio may be subject to additional investment risks that
are different in some respects from those incurred by a fund which invests only
in debt obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities, the possible seizure or nationalization of foreign deposits
and the possible subordination of deposits in foreign branches to receivership
expenses and U.S. office deposits in the event of insolvency. See "Description
of the Portfolios--Investment Considerations and Risk Factors--Investing in
Foreign Securities."
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by a Portfolio will not benefit from insurance from
the Bank Insurance Fund or the Savings Association Insurance Fund administered
by the Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations, bearing fixed, floating or variable interest
rates.
Commercial Paper and other Short-Term Corporate Obligations--Each Portfolio
may invest in commercial paper, which consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The commercial paper
purchased by the Portfolios will consist only of direct obligations which, at
the time of their purchase, are (a) rated not lower than Prime-1 by Moody's, A-1
by S&P, F-1 by Fitch or Duff-1 by Duff, or (b) issued by companies having an
outstanding unsecured debt issue currently rated not lower than Aa3 by Moody's
or AA- by S&P, Fitch or Duff, or (c) if unrated, determined by the Adviser to be
of comparable quality to those rated obligations which may be purchased by such
Portfolio.
Repurchase Agreements--Each Portfolio may enter into repurchase agreements,
which involve the acquisition by a Portfolio of an underlying debt instrument,
subject to an obligation of the seller to repurchase, and such Portfolio to
resell, the instrument at a fixed price usually not more than one week after its
purchase. Certain costs may be incurred by a Portfolio in connection with the
sale of the securities if the seller does not repurchase them in accordance with
the repurchase agreement. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the securities, realization on the securities by a
Portfolio may be delayed or limited. Each Portfolio will consider on an ongoing
basis the creditworthiness of the institutions with which it enters into
repurchase agreements.
Zero Coupon and Stripped Securities--Each Portfolio may invest in zero
coupon U.S. Treasury securities, which are Treasury Notes and Bonds that have
been stripped of their unmatured interest coupons, the coupons themselves and
receipts or certificates representing interests in such stripped debt
obligations and coupons. Each Portfolio also may invest in zero coupon
securities issued by corporations and financial institutions which constitute a
proportionate ownership of the issuer's pool of underlying U.S. Treasury
securities. A zero coupon security pays no interest to its holder during its
life and is sold at a discount to its face value at maturity. The amount of the
discount fluctuates with the market price of the security. The market prices of
zero coupon securities generally are more volatile than the market prices of
securities that pay interest periodically and are likely to respond to a greater
degree to changes in interest rates than non-zero coupon securities having
similar maturities and credit qualities. The Tennessee Tax Exempt Bond Portfolio
will invest no more than 25% of the value of its net assets in zero coupon and
stripped securities.
Foreign Government Obligations; Securities of Supranational Entities--Each
Portfolio may invest in obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Adviser to be of comparable quality
to the other obligations in which such Portfolio may invest. Such securities
also include debt obligations of supranational entities. Supranational entities
include international organizations designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Coal and Steel Community, the Asian Development Bank and the
InterAmerican Development Bank. The percentage of a Portfolio's assets invested
in securities issued by foreign governments will vary depending on the relative
yields of such securities, the economic and financial markets of the countries
in which the investments are made and the interest rate climate of such
countries.
Floating and Variable Rate Obligations--Each Portfolio may purchase
floating and variable rate demand notes and bonds, which are obligations
ordinarily having stated maturities in excess of 13 months, but which permit the
holder to demand payment of principal at any time, or at specified intervals.
Variable rate demand notes include master demand notes which are obligations
that permit the Portfolio to invest fluctuating amounts, at varying rates of
interest, pursuant to direct arrangements between the Portfolio, as lender, and
the borrower. These obligations permit daily changes in the amount borrowed.
Because these obligations are direct lending arrangements between the lender and
borrower, it is not contemplated that such instruments generally will be traded,
and there generally is no established secondary market for these obligations,
although they are redeemable at face value. Accordingly, where these obligations
are not secured by letters of credit or other credit support arrangements, the
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and a Portfolio may invest in obligations which are not
so rated only if the Adviser determines that at the time of investment the
obligations are of comparable quality to the other obligations in which the
Portfolio may invest. The Adviser, on behalf of each Portfolio, will consider on
an ongoing basis the creditworthiness of the issuers of the floating and
variable rate demand obligations purchased by such Portfolio.
Illiquid Securities--Each Portfolio may invest up to 10% of the value of
its net assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with its investment objective. Such
securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, certain privately negotiated, non-exchange traded options and securities
used to cover such options, certain mortgage-backed securities, floating and
variable rate demand obligations as to which the Portfolio cannot exercise the
related demand feature described above on not more than seven days' notice and
as to which there is no secondary market and repurchase agreements providing for
settlement in more than seven days after notice. As to these securities, the
Portfolio is subject to a risk that should the Portfolio desire to sell them
when a ready buyer is not available at a price the Portfolio deems
representative of their value, the value of the Portfolio's net assets could be
adversely affected.
Mortgage-Related Securities--(Capital Growth Portfolio, Short-Intermediate
Duration Bond Portfolio and Investment Grade Bond Portfolio) Mortgage-related
securities are a form of Derivative collateralized by pools of mortgages. The
mortgage-related securities in which these Portfolios may invest include those
with fixed, floating and variable interest rates, those with interest rates that
change based on multiples of changes in interest rates and those with interest
rates that change inversely to changes in interest rates, as well as stripped
mortgage-backed securities. Stripped mortgage-backed securities usually are
structured with two classes that receive different proportions of interest and
principal distributions on a pool of mortgage-backed securities or whole loans.
A common type of stripped mortgage-backed security will have one class receiving
some of the interest and most of the principal from the mortgage collateral,
while the other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the interest
(the interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). Although certain mortgage-related
securities are guaranteed by a third party or otherwise similarly secured, the
market value of the security, which may fluctuate, is not secured. If a
Portfolio purchases a mortgage-related security at a premium, all or part of the
premium may be lost if there is a decline in the market value of the security,
whether resulting from changes in interest rates or prepayments in the
underlying mortgage collateral. As with other interest-bearing securities, the
prices of certain of these securities are inversely affected by changes in
interest rates. However, though the value of a mortgage-related security may
decline when interest rates rise, the converse is not necessarily true, since in
periods of declining interest rates the mortgages underlying the security are
more likely to be prepaid. For this and other reasons, a mortgage-related
security's stated maturity may be shortened by unscheduled prepayments on the
underlying mortgages, and, therefore, it is not possible to predict accurately
the security's return to the Portfolio. Moreover, with respect to stripped
mortgage-backed securities, if the underlying mortgage securities experience
greater than anticipated prepayments of principal, the Portfolio may fail to
fully recoup its initial investment in these securities even if the securities
are rated in the highest rating category by a nationally recognized statistical
rating organization. For further discussion concerning the investment
considerations involved, see "Description of the Portfolios--Investment
Considerations and Risk Factors--Fixed-Income Securities" and "Illiquid
Securities" above and "Investment Objectives and Management Policies--Portfolio
Securities--Mortgage-Related Securities" in the Statement of Additional
Information.
Asset-Backed Securities--(Capital Growth Portfolio, Short-Intermediate
Duration Bond Portfolio and Investment Grade Bond Portfolio) Asset-backed
securities are a form of Derivative. The securitization techniques used for
asset-backed securities are similar to those used for mortgage-related
securities. These securities include debt securities and securities with
debt-like characteristics. The collateral for these securities has included home
equity loans, automobile and credit card receivables, boat loans, computer
leases, airplane leases, mobile home loans, recreational vehicle loans and
hospital account receivables. Each of these Portfolios may invest in these and
other types of asset-backed securities that may be developed in the future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may provide the
Portfolio with a less effective security interest in the related collateral than
do mortgage-backed securities. Therefore, there is the possibility that
recoveries on the underlying collateral may not, in some cases, be available to
support payments on these securities.
American Depositary Receipts--(Capital Growth Portfolio) The Capital Growth
Portfolio's assets may be invested in the securities of foreign issuers in the
form of American Depositary Receipts ("ADRs"). These securities maynot
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a United States
bank or trust company which evidence ownership of underlying securities issued
by a foreign corporation. Generally, ADRs in registered form are designed for
use in the United States securities markets. Each of these Portfolios may invest
in ADRs through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the underlying security and a depositary,
whereas a depositary may establish an unsponsored facility without participation
by the issuer of the deposited security. Holders of unsponsored depositary
receipts generally bear all the costs of such facilities and 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 voting rights to the holders of such receipts in respect of the
deposited securities.
Convertible Securities--(Capital Growth Portfo- lio, Short-Intermediate
Duration Bond Portfolio and Investment Grade Bond Portfolio) Convertible
securities may be converted at a stated price within a specified period of time
into a specified number of shares of common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure, but usually are subordinated to non-convertible debt
securities. While providing a fixed-income stream (generally higher in yield
than the income derivable from a common stock but lower than that afforded by a
non-convertible debt security), a convertible security also affords an investor
the opportunity, through its conversion feature, to participate in the capital
appreciation of the common stock into which it is convertible.
Warrants--(Capital Growth Portfolio) The Capital Growth Portfolio may
invest up to 5% of its net assets in warrants, except that this limitation does
not apply to warrants acquired in units or attached to securities. A warrant is
an instrument issued by a corporation which gives the holder the right to
subscribe to a specified amount of the corporation's capital stock at a set
price for a specified period of time.
Municipal Obligations--(Short-Intermediate Duration Bond Portfolio,
Investment Grade Bond Portfolio and Tennessee Tax Exempt Bond Portfolio)
Municipal Obligations are debt obligations issued by states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, or multistate agencies
or authorities. While in general, Municipal Obligations are tax exempt
securities having relatively low yields as compared to taxable, non-municipal
obligations of similar quality, certain issues of Municipal Obligations, both
taxable and non-taxable, offer yields comparable and in some cases greater than
the yields available on other permissible investments. Municipal Obligations
generally include debt obligations issued to obtain funds for various public
purposes as well as certain industrial development bonds issued by or on behalf
of public authorities. Municipal Obligations are classified as general
obligation bonds, revenue bonds and notes. General obligation bonds are secured
by the issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenue derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source, but not from the
general taxing power. Industrial development bonds, in most cases, are revenue
bonds and generally do not carry the pledge of the credit of the issuing
municipality, but generally are guaranteed by the corporate entity on whose
behalf they are issued. Notes are short-term instruments which are obligations
of the issuing municipalities or agencies and are sold in anticipation of a bond
sale, collection of taxes or receipt of other revenues. Municipal Obligations
include municipal lease/purchase agreements which are similar to installment
purchase contracts for property or equipment issued by municipalities. Municipal
Obligations bear fixed, floating or variable rates of interest, which are
determined in some instances by formulas under which the Municipal Obligation's
interest rate will change directly or inversely to changes in interest rates or
an index, or multiples thereof, in many cases subject to a maximum and minimum.
Certain Municipal Obligations are subject to redemption at a date earlier than
their stated maturity pursuant to call options, which may be separated from the
related Municipal Obligation and purchased and sold separately. Dividends
received by shareholders of the Short-Intermediate Duration Bond Portfolio or
Investment Grade Bond Portfolio which are attributable to interest income
received by it from Municipal Obligations generally will be subject to Federal
income tax. The Short-Intermediate Duration Bond Portfolio and Investment Grade
Bond Portfolio currently intend to invest no more than 25% of their respective
assets in Municipal Obligations. However, this percentage may be varied from
time to time without shareholder approval.
Tender Option Bonds--(Tennessee Tax Exempt Bond Portfolio) A tender option
bond is a Municipal Obligation (generally held pursuant to a custodial
arrangement) having a relatively long maturity and bearing interest at a fixed
rate substantially higher than prevailing short-term tax exempt rates, that has
been coupled with the agreement of a third party, such as a bank, broker-dealer
or other financial institution, pursuant to which such institution grants the
security holders the option, at periodic intervals, to tender their securities
to the institution and receive the face value thereof. As consideration for
providing the option, the financial institution receives periodic fees equal to
the difference between the Municipal Obligation's fixed coupon rate and the
rate, as determined by a remarketing or similar agent at or near the
commencement of such period, that would cause the securities, coupled with the
tender option, to trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-term tax exempt rate. The Adviser,
on behalf of the Portfolio, will consider on an ongoing basis the
creditworthiness of the issuer of the underlying Municipal Obligation, of any
custodian and of the third party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligations and for other reasons. The Portfolio will not invest more
than 10% of the value of its net assets in securities that are illiquid, which
would include tender option bonds as to which it cannot exercise the tender
feature on not more than seven days' notice if there is no secondary market
available for these obligations.
Ratings--Debt securities which are rated Baa by Moody's are considered
medium grade obligations; they are neither highly protected nor poorly secured,
and are considered by Moody's to have speculative characteristics. Debt
securities rated BBB by S&P are regarded as having adequate capacity to pay
interest and repay principal, and while such debt securities ordinarily exhibit
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 securities in this category than in higher rated
categories. Fitch considers the obligor's ability to pay interest and repay
principal on debt securities rated BBB to be adequate; adverse changes in
economic conditions and circumstances, however, are more likely to have an
adverse impact on these debt securities and, therefore, impair timely payment.
Debt securities rated BBB by Duff are considered to have below average
protection factors but still considered sufficient for prudent investment.
Securities rated Ba by Moody's are judged to have speculative elements;
their future cannot be considered as well assured and often the protection of
interest and principal payments may be very moderate. Securities rated BB by
S&P, Fitch or Duff are regarded as having predominantly speculative
characteristics and, while such obligations have less near-term vulnerability to
default than other speculative grade debt, they face major ongoing uncertainties
or exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The ratings of Moody's, S&P, Fitch and Duff represent their opinions as to
the quality of the obligations which they undertake to rate. Ratings are
relative and subjective and, although ratings may be useful in evaluating the
safety of interest and principal payments, they do not evaluate the market value
risk of such obligations. Although these ratings may be an initial criterion for
selection of portfolio investments, the Adviser also will evaluate such
obligations and the ability of their issuers to pay interest and principal. The
Portfolios will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, the quality of the
issuer's management and regulatory matters.
Investment Company Securities--Each Portfolio may invest in securities
issued by other investment companies which principally invest in securities of
the type in which such Portfolio invests. Under the 1940 Act, a Portfolio's
investment in such securities currently is limited to, subject to certain
exceptions, (i) 3% of the total voting stock of any one investment company, (ii)
5% of such Portfolio's total assets with respect to any one investment company
and (iii) 10% of such Portfolio's total assets in the aggregate. Investments in
the securities of other investment companies will involve duplication of
advisory fees and certain other expenses.
Investment Techniques
Short-Selling--(All Portfolios) Each Portfolio may make short sales
"against the box," a transaction in which the Portfolio enters into a short sale
of a security which it owns. The proceeds of the short sale will be held by a
broker until the settlement date at which time the Portfolio delivers the
security to close the short position. The Portfolio receives the net proceeds
from the short sale. At no time will any of these Portfolios have more than 15%
of the value of its net assets in deposits on short sales against the box. It
currently is anticipated that each of these Portfolios will make short sales
against the box for purposes of protecting the value of its respective net
assets.
Call and Put Options on Specified Securities-- (Capital Growth Portfolio)
The Capital Growth Portfolio may invest up to 5% of its total assets,
represented by the premium paid, in the purchase of call and put options in
respect of specific securities in which the Portfolio may invest. The Capital
Growth Portfolio may write covered call and put option contracts to the extent
of 15% of the value of its net assets at the time such option contracts are
written. A call option gives the purchaser of the option the right to buy, and
obligates the writer to sell, the underlying security at the exercise price at
any time during the option period. Conversely, a put option gives the purchaser
of the option the right to sell, and obligates the writer to buy, the underlying
security at the exercise price at any time during the option period. A covered
call option sold by the Capital Growth Portfolio, which is a call option with
respect to which the Portfolio owns the underlying security, exposes the
Portfolio during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or to
possible continued holding of a security which might otherwise have been sold to
protect against depreciation in the market price of the security. A covered put
option sold by the Capital Growth Portfolio exposes the Portfolio during the
term of the option to a decline in price of the underlying security. A put
option sold by the Capital Growth Portfolio is covered when, among other things,
cash or liquid securities are placed in a segregated account with the Fund's
custodian to fulfill the obligation undertaken.
To close out a position when writing covered options, the Capital Growth
Portfolio may make a "closing purchase transaction," which involves purchasing
an option on the same security with the same exercise price and expiration date
as the option which it has previously written on the security. To close out a
position as a purchaser of an option, the Capital Growth Portfolio may make a
"closing sale transaction," which involves liquidating its position by selling
the option previously purchased. The Capital Growth Portfolio will realize a
profit or loss from a closing purchase or sale transaction depending upon the
difference between the amount paid to purchase an option and the amount received
from the sale thereof.
Stock Index Options--(Capital Growth Portfolio) The Capital Growth
Portfolio may purchase and write put and call options on stock indexes listed on
national securities exchanges or traded in the over-the-counter market to the
extent of 15% of the value of its net assets. A stock index fluctuates with
changes in the market values of the stocks included in the index.
The effectiveness of the Capital Growth Portfolio's purchasing or writing
stock index options will depend upon the extent to which price movements in its
portfolio correlate with price movements of the stock index selected. Because
the value of an index option depends upon movements in the level of the index
rather than the price of a particular stock, whether the Portfolio will realize
a gain or loss from the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market generally or, in the
case of certain indexes, in an industry or market segment, rather than movements
in the price of a particular stock. Accordingly, successful use by the Capital
Growth Portfolio of options on stock indexes will be subject to the Adviser's
ability to predict correctly movements in the direction of the stock market
generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual stocks.
When the Capital Growth Portfolio writes an option on a stock index, it
will place in a segregated account with the Fund's custodian cash or liquid
securities in an amount at least equal to the market value of the underlying
stock index and will maintain the account while the option is open or will
otherwise cover the transaction.
Futures Transactions--In General--(Capital Growth Portfolio and Tennessee
Tax Exempt Bond Portfolio) Neither of these Portfolios will be a commodity pool.
However, as a substitute for a comparable market position in the underlying
securities or for hedging purposes, each of these Portfolios may engage in
futures and options on futures transactions, as described below.
The commodities transactions of each of these Portfolios must constitute
bona fide hedging or other permissible transactions pursuant to regulations
promulgated by the Commodity Futures Trading Commission. In addition, neither of
these Portfolios may engage in such transactions if the sum of the amount of
initial margin deposits and premiums paid for unexpired commodity options, other
than for bona fide hedging transactions, would exceed 5% of the liquidation
value of the Portfolio's total assets, after taking into account unrealized
profits and unrealized losses on such contracts it has entered into; provided,
however, that 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 calculating the 5%.
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission, each of these Portfolios may be required to segregate cash
or high quality money market instruments in connection with its commodities
transactions in an amount at least equal to the value of the underlying
commodity.
Initially, when purchasing or selling futures contracts a Portfolio will be
required to deposit with the Fund's custodian in the broker's name an amount of
cash or cash equivalents up to approximately 10% of the contract amount. This
amount is subject to change by the exchange or board of trade on which the
contract is traded and members of such exchange or board of trade may impose
their own higher requirements. This amount is known as "initial margin" and is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Portfolio upon termination of the futures position, assuming
all contractual obligations have been satisfied. Subsequent payments, known as
"variation margin," to and from the broker will be made daily as the price of
the index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." At any time prior to the expiration of a
futures contract, the Portfolio may elect to close the position by taking an
opposite position, at the then prevailing price, which will operate to terminate
its existing position in the contract.
Although each of these Portfolios intends to purchase or sell futures
contracts only if there is an active market for such contracts, no assurance can
be given that a liquid market will exist for any particular contract at any
particular time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the relevant Portfolio to substantial losses. If it is not possible,
or the Portfolio determines not, to close a futures position in anticipation of
adverse price movements, it will be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may offset partially or completely losses
on the futures contract. However, no assurance can be given that the price of
the securities being hedged will correlate with the price movements in a futures
contract and thus provide an offset to losses on the futures contract.
To the extent a Portfolio is engaging in a futures transaction as a hedging
device, because of the risk of an imperfect correlation between securities in a
portfolio that are the subject of a hedging transaction and the futures contract
used as a hedging device, it is possible that the hedge will not be fully
effective if, for example, losses on the portfolio securities exceed gains on
the futures contract or losses on the futures contract exceed gains on the
portfolio securities. for futures contracts based on indexes, the risk of
imperfect correlation increases as the composition of a Portfolio's investments
varies from the composition of the index. In an effort to compensate for the
imperfect correlation of movements in the price of the securities being hedged
and movements in the price of futures contracts, the Portfolio may buy or sell
futures contracts in a greater or lesser dollar amount than the dollar amount of
the securities being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. Such "over hedging" or
"under hedging" may adversely affect the Portfolio's net investment results if
market movements are not as anticipated when the hedge is established.
Successful use of futures by a Portfolio also is subject to the Adviser's
ability to predict correctly movements in the direction of the market or
interest rates. For example, if a Portfolio has hedged against the possibility
of a decline in the market adversely affecting the value of securities held in
its portfolio and prices increase instead, such Portfolio will lose part or all
of the benefit of the increased value of securities which it has hedged because
it will have offsetting losses in its futures positions. furthermore, if in such
circumstances the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. The Portfolio may have
to sell such securities at a time when it may be disadvantageous to do so.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the option exercise period. The
writer of the option is required upon exercise to assume an offsetting futures
position (a short position if the option is a call and a long position if the
option is a put). Upon exercise of the option, the assumption of offsetting
futures positions by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin account
which represents the amount by which the market price of the futures contract,
at exercise, exceeds, in the case of a call, or is less than, in the case of a
put, the exercise price of the option on the futures contract.
Call options sold by a Portfolio with respect to futures contracts will be
covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying, or instruments the prices of which are
expected to move relatively consistently with, the instruments underlying the
futures contract. Put options sold by a Portfolio with respect to futures
contracts will be covered in the same manner as put options on specific
securities as described above.
Stock Index Futures and Options on Stock Index Futures--(Capital Growth
Portfolio) The Capital Growth Portfolio may purchase and sell stock index
futures contracts and options on stock index futures contracts to the extent of
15% of the value of its net assets.
A stock index future obligates the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made. With respect to stock
indexes that are permitted investments, the Capital Growth Portfolio intends to
purchase and sell futures contracts on the stock index for which it can obtain
the best price with consideration also given to liquidity.
The Capital Growth Portfolio may use index futures as a substitute for a
comparable market position in the underlying securities.
Interest Rate Futures Contracts and Options on Interest Rate Futures
Contracts--(Tennessee Tax Exempt Bond Portfolio) The Tennessee Tax Exempt Bond
Portfolio may invest in interest rate futures contracts and options on interest
rate futures contracts as a substitute for a comparable market position and to
hedge against adverse movements in interest rates to the extent of 15% of the
value of its net assets.
To the extent the Portfolio has invested in interest rate futures contracts
or options on interest rate futures contracts as a substitute for a comparable
market position, the Portfolio will be subject to the same investment risks had
it purchased the securities underlying the contract.
The Portfolio may purchase call options on interest rate futures contracts
to hedge against a decline in interest rates and may purchase put options on
interest rate futures contracts to hedge its portfolio securities against the
risk of rising interest rates. The Portfolio may sell call options on interest
rate futures contracts to partially hedge against declining prices of portfolio
securities. The Portfolio may sell put options on interest rate futures
contracts to hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contracts.
The Portfolio also may sell options on interest rate futures contracts as
part of closing purchase transactions to terminate its options positions. No
assurance can be given that such closing transactions can be effected or the
degree of correlation between price movements in the options on interest rate
futures and price movements in the Portfolio's investment securities which are
the subject of the hedge.
Lending Portfolio Securities--(All Portfolios) From time to time, each
Portfolio may lend securities from its investment portfolio to brokers, dealers
and other financial institutions needing to borrow securities to complete
certain transactions. Such loans may not exceed 33 1/3% of the value of the
relevant Portfolio's total assets. In connection with such loans, each Portfolio
will receive collateral consisting of cash or U.S. Government securities which
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Each Portfolio can increase its
income through the investment of such collateral. Each Portfolio continues to be
entitled to payments in amounts equal to the dividends, interest and other
distributions payable on the loaned security and receives interest on the amount
of the loan. Such loans will be terminable at any time upon specified notice. A
Portfolio might experience risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with such
Portfolio.
Forward Commitments--(All Portfolios) Each Portfolio may purchase
securities on a when-issued or forward commitment basis, which means that the
price is fixed at the time of commitment, but delivery and payment ordinarily
take place a number of days after the date of the commitment to purchase. Each
Portfolio will make commitments to purchase such securities only with the
intention of actually acquiring the securities, but the Portfolio may sell these
securities before the settlement date if it is deemed advisable. The Portfolio
will not accrue income in respect of a security purchased on a forward
commitment basis prior to its stated delivery date.
Borrowing Money--(All Portfolios) As a fundamental policy, each Portfolio
is permitted to borrow money in an amount up to 33 1/3% of the value of its
total assets. However, each Portfolio currently intends to borrow money only for
temporary or emergency (not leveraging) purposes, in an amount up to 33 1/3% of
the value of its total assets (including the amount borrowed) valued at the
lesser of cost or market, less liabilities (not including the amount borrowed)
at the time the borrowing is made. While borrowings exceed 5% of a Portfolio's
total assets, such Portfolio will not make any investments.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations VALUESTAR must
not be relied upon as having been authorized SHORT-INTERMEDIATE DURATION by the
Fund. This Prospectus does not constitute BOND PORTFOLIO
an offer in any State in which, or to any person to whom, such offering may not
lawfully be made.
VALUESTAR VALUESTAR
SHORT-INTERMEDIATE TENNESSEE
DURATION TAX EXEMPT
BOND BOND
PORTFOLIO PORTFOLIO
Prospectus
May 1, 1996
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY. MUTUAL FUND SHARES INVOLVE CERTAIN RISKS, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL. EACH PORTFOLIO'S SHARE PRICE AND INVESTMENT RETURN FLUCTUATE AND
ARE NOT GUARANTEED.
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
ValueStar Funds
CAPITAL GROWTH PORTFOLIO
SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
INVESTMENT GRADE BOND PORTFOLIO
TENNESSEE TAX EXEMPT BOND PORTFOLIO
TRUST SHARES AND INVESTOR SHARES
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
MAY 1, 1996
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of the
ValueStar Capital Growth Portfolio, Short-Intermediate Duration Bond Portfolio,
Investment Grade Bond Portfolio and Tennessee Tax Exempt Bond Portfolio (each, a
"Portfolio" and collectively, the "Portfolios") of The Infinity Mutual Funds,
Inc. (the "Fund"), dated May 1, 1996, as it may be revised from time to time. To
obtain a copy of the Portfolios' Prospectus, please write to the Fund at 3435
Stelzer Road, Columbus, Ohio 43219-3035. This Statement of Additional
Information relates only to the Portfolios and not to any of the Fund's other
portfolios.
First American National Bank (the "Adviser") serves as each Portfolio's
investment adviser.
BISYS Fund Services Limited Partnership (the "Administrator") serves as
each Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), an
affiliate of the Administrator, serves as the distributor of each
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objectives and Management Policies......................... B-2
Management of the Fund................................................ B-17
Management Arrangements............................................... B-20
Purchase and Redemption of Shares..................................... B-23
Determination of Net Asset Value...................................... B-26
Performance Information............................................... B-27
Dividends, Distributions and Taxes.................................... B-29
Portfolio Transactions................................................ B-31
Information About the Portfolios...................................... B-33
Custodian, Transfer and Dividend Disbursing
Agent, Counsel and Independent Auditors............................. B-34
Appendix.............................................................. B-35
Financial Statements.................................................. B-41
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The following information supplements and should be read in
conjunction with the sections in the Portfolios' Prospectus entitled
"Description of the Portfolios" and "Appendix."
Portfolio Securities
Bank Obligations. Domestic commercial banks organized under
Federal law are supervised and examined by the Comptroller of the Currency and
are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by the Portfolio are insured by the Bank Insurance Fund
administered by the FDIC (although such insurance may not be of material benefit
to the Portfolio, depending upon the principal amount of the CDs of each bank
held by the Portfolio) and are subject to Federal examination and to a
substantial body of Federal law and regulation. As a result of Federal and state
laws and regulations, domestic branches of domestic banks, among other things,
are generally required to maintain specified levels of reserves, and are subject
to other supervision and regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic branches of foreign banks, such as
CDs and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation or governmental regulation. Such obligations are subject to different
risks than are those of domestic banks. These risks include foreign economic and
political developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. Foreign
branches and subsidiaries are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank. If a domestic bank with deposits insured by the FDIC
becomes insolvent, unsecured deposits and other general obligations of such
bank's foreign branches will be subordinated to the receivership expenses of the
FDIC and such bank's domestic deposits and would be subject to the loss of
principal to a greater extent than such bank's domestic branch deposits.
Obligations of United States branches of foreign banks may be
general obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. In addition, Federal branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may be required to: (1) pledge to the regulator, by depositing assets
with a designated bank within the state, a certain percentage of their assets as
fixed from time to time by the appropriate regulatory authority; and (2)
maintain assets within the state in an amount equal to a specified percentage of
the aggregate amount of liabilities of the foreign bank payable at or through
all of its agencies or branches within the state. The deposits of Federal and
State Branches generally must be insured by the FDIC if such branches take
deposits of less than $100,000.
In view of the foregoing factors associated with the purchase
of CDs and TDs issued by foreign branches of domestic banks, by foreign
subsidiaries of domestic banks, or by domestic branches of foreign banks, the
Adviser carefully evaluates such investments on a case-by-case basis.
Each Portfolio may purchase CDs issued by banks, savings and
loan associations and similar thrift institutions with less than $1 billion in
assets, which are members of the FDIC, provided such Portfolio purchases any
such CD in a principal amount of not more than $100,000, which amount would be
fully insured by the Bank Insurance Fund or the Savings Association Insurance
Fund administered by the FDIC. Interest payments on such a CD are not insured by
the FDIC. No Portfolio will own more than one such CD per such issuer.
Repurchase Agreements. Each Portfolio may enter into
repurchase agreements. The Fund's custodian or sub-custodian employed in
connection with third-party repurchase transactions will have custody of, and
will hold in a segregated account, securities acquired by a Portfolio under a
repurchase agreement. In connection with its third-party repurchase
transactions, the Fund will employ only eligible sub-custodians that meet the
requirements set forth in Section 17(f) of the Investment Company Act of 1940,
as amended (the "1940 Act"). Repurchase agreements are considered by the staff
of the Securities and Exchange Commission to be loans by the Portfolio entering
into them. In an attempt to reduce the risk of incurring a loss on a repurchase
agreement, each Portfolio will enter into repurchase agreements only with
registered or unregistered securities dealers or banks with total assets in
excess of one billion dollars or primary government securities dealers reporting
to the Federal Reserve Bank of New York, with respect to securities of the type
in which such Portfolio may invest or government securities regardless of their
remaining maturities, and will require that additional securities be deposited
with it if the value of the securities purchased should decrease below resale
price. The Adviser will monitor on an ongoing basis the value of the collateral
to assure that it always equals or exceeds the repurchase price. Each Portfolio
will consider on an ongoing basis the creditworthiness of the institutions with
which it enters into repurchase agreements.
Illiquid Securities. Where a substantial market of qualified
institutional buyers has developed for certain restricted securities purchased
by the Fund pursuant to Rule 144A under the Securities Act of 1933, as amended,
the Fund intends to treat such securities as liquid securities in accordance
with procedures approved by the Fund's Board. Because it is not possible to
predict with assurance how the market for specific restricted securities sold
pursuant to Rule 144A will develop, the Fund's Board has directed the Adviser to
monitor carefully each Portfolio's investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information. To the extent that, for a period of
time, qualified institutional buyers cease purchasing restricted securities
pursuant to Rule 144A, a Portfolio's investing in such securities may have the
effect of increasing the level of illiquidity in its investment portfolio during
such period.
Forward Commitments. Securities purchased on a forward commitment
or when-issued basis are subject to changes in value (generally changing in the
same way, i.e., appreciating when interest rates decline and depreciating when
interest rates rise) based upon the public's perception of the creditworthiness
of the issuer and changes, real or anticipated, in the level of interest rates.
Securities purchased on a forward commitment or when-issued basis may expose the
Portfolio to risks because they may experience such fluctuations prior to their
actual delivery. Purchasing securities on a when-issued basis can involve the
additional risk that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when- issued basis when the
Portfolio is fully or almost fully invested may result in greater potential
fluctuation in the value of the Portfolio's net assets and its net asset value
per share.
Mortgage-Related Securities. (Investment Grade Bond Portfolio,
Capital Growth Portfolio and Short-Intermediate Duration Bond Portfolio)
Government Agency Securities--Mortgage-related securities issued by the
Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Government Related Securities--Mortgage-related securities issued by the Federal
National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the Untied States. The FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan
Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "PCs"). The FHLMC is a corporate
instrumentality of the United States created pursuant to an Act of Congress,
which is owned entirely by Federal Home Loan Banks. Freddie Macs are not
guaranteed by the United States or by any Federal Home Loan Bank and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount due on account of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
Private Entity Securities--These mortgage-related securities are issued by
commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other non-governmental issuers. Timely payment
of principal and interest on mortgage-related securities backed by pools created
by non-governmental issuers often is supported partially by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or mortgage poolers can meet their obligations under the
policies, so that if the issuers default on their obligations the holders of the
security could sustain a loss. No insurance or guarantee covers the Portfolio or
the price of the Portfolio's shares. Mortgage- related securities issued by
non-governmental issuers generally offer a higher rate of interest than
government-agency and government-related securities because there are no direct
or indirect government guarantees of payment.
Standard & Poor's Depositary Receipts. (Capital Growth
Portfolio) These securities, commonly referred to as "spiders," represent an
interest in a fixed portfolio of common stocks designed to track the price and
dividend yield performance of the Standard & Poor's 500 Index or the Standard &
Poor's MidCap 400 Index, as the case may be.
Municipal Obligations. (Investment Grade Bond Portfolio,
Short-Intermediate Duration Bond Portfolio and Tennessee Tax Exempt Bond
Portfolio) The term "Municipal Obligations" generally includes debt obligations
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as airports, bridges, highways,
housing, hospitals, mass transportation, schools, streets and water and sewer
works. Other public purposes for which Municipal Obligations may be issued
include refunding outstanding obligations, obtaining funds for general operating
expenses and lending such funds to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds to provide for the construction,
equipment, repair or improvement of privately operated housing facilities,
sports facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity, or
sewage or solid waste disposal; the interest paid on such obligations may be
exempt from Federal income tax, although current tax laws place substantial
limitations on the size of such issues. There are, of course, variations in the
security of Municipal Obligations, both within a particular classification and
between classifications.
Floating and variable rate demand notes and bonds are tax
exempt obligations ordinarily having stated maturities in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such obligations ordinarily has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders thereof. The interest rate on a
floating rate demand obligation is based on a known lending rate, such as a
bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand obligation is adjusted
automatically at specified intervals.
The yields on Municipal Obligations are dependent on a variety
of factors, including general economic and monetary conditions, money market
factors, conditions in the Municipal Obligations market, size of a particular
offering, maturity of the obligation and rating of the issue. The imposition of
the advisory and administration fees, as well as other operating expenses, will
have the effect of reducing the yield to investors.
The Tennessee Tax Exempt Bond Portfolio may invest up to 5% of
the value of its total assets in municipal lease obligations or installment
purchase contract obligations (collectively, "lease obligations"). Lease
obligations have special risks not ordinarily associated with Municipal
Obligations. Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation ordinarily is backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. Certain lease
obligations in which the Tennessee Tax Exempt Bond Portfolio may invest may
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease payments in future years unless money is appropriated
for such purpose on a yearly basis. Although "non-appropriation" lease
obligations are secured by the leased property, disposition of the leased
property in the event of foreclosure might prove difficult. In addition, no
assurance can be given as to the liquidity of certain lease obligations. The
staff of the Securities and Exchange Commission currently considers certain
lease obligations to be illiquid. The Fund's Board of Directors has established
guidelines for the Adviser to determine the liquidity and appropriate valuation
of lease obligations based on factors which include: (1) the frequency of trades
and quotes for the lease obligation or similar securities; (2) the number of
dealers willing to purchase or sell the lease obligation or similar securities
and the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security or similar securities; and (4) the
nature of the marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer.
The Tennessee Tax Exempt Bond Portfolio will purchase tender
option bonds only when it is satisfied that the custodial and tender option
arrangements, including the fee payment arrangements, will not adversely affect
the tax exempt status of the underlying Municipal Obligations and that payment
of any tender fees will not have the effect of creating taxable income for the
Portfolio. Based on the tender option bond agreement, the Portfolio expects to
be able to value the tender option bond at par; however, the value of the
instrument will be monitored to assure that is valued at fair value.
Ratings of Municipal Obligations. Subsequent to its purchase
by a Portfolio, an issue of rated Municipal Obligations may cease to be rated or
its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require the sale of such Municipal Obligations by
the Portfolio, but the Adviser will consider such event in determining whether
the Portfolio should continue to hold the Municipal Obligations. To the extent
that the ratings given by Moody's, S&P or Fitch for Municipal Obligations may
change as a result of changes in such organizations or their rating systems, the
Portfolio will attempt to use comparable ratings as standards for its
investments in accordance with the investment policies contained in the relevant
Portfolio's Prospectus and this Statement of Additional Information. The ratings
of Moody's, S&P and Fitch represent their opinions as to the quality of the
Municipal Obligations which they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute standards
of quality. Although these ratings may be an initial criterion for selection of
portfolio investments, the Adviser also will evaluate these securities and the
creditworthiness of the issuers of such securities based upon financial and
other available information.
The average distribution of investments (at value) in
Municipal Obligations by ratings for the fiscal year ended December 31, 1995,
computed on a monthly basis, for the Tennessee Tax Exempt Bond Portfolio was as
follows:
<TABLE>
<CAPTION>
Moody's Standard
Investors Fitch Investors & Poor's
Service, Inc. Service, L.P. Ratings Group Percentage
("Moody's") ("Fitch") ("S&P") of Value
<S> <C> <C> <C>
Aaa AAA AAA __%
Aa AA AA __%
A A A __%
100%
</TABLE>
Management Policies
Options Transactions. (Capital Growth Portfolio) The Capital
Growth Portfolio may engage in options transactions, such as purchasing or
writing covered call or put options. The principal reason for the Portfolio
writing covered call options is to realize, through the receipt of premiums, a
greater return than would be realized on its portfolio securities alone. In
return for a premium, the writer of a covered call option forfeits the right to
any appreciation in the value of the underlying security above the strike price
for the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The writer of
a covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that the Portfolio may receive may
be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing activities.
Options written ordinarily will have expiration dates between
one and nine months from the date written. The exercise price of the options may
be below, equal to or above the market values of the underlying securities at
the time the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and "out-of-the-
money," respectively. The Portfolio may write (a) in-the-money call options when
the Adviser expects that the price of the underlying security will remain stable
or decline moderately during the option period, (b) at-the-money call options
when the Adviser expects that the price of the underlying security will remain
stable or advance moderately during the option period and (c) out- of-the-money
call options when the Adviser expects that the premiums received from writing
the call option plus the appreciation in market price of the underlying security
up to the exercise price will be greater than the appreciation in the price of
the underlying security alone. In these circumstances, if the market price of
the underlying security declines and the security is sold at this lower price,
the amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the- money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the Portfolio's obligation as the writer of an
option continues, it may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring it to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates when the option
expires or the Portfolio effects a closing purchase transaction. The Portfolio
can no longer effect a closing purchase transaction with respect to an option
once it has been assigned an exercise notice.
While it may choose to do otherwise, the Portfolio generally
will purchase or write only those options for which the Adviser believes there
is an active secondary market so as to facilitate closing transactions. There is
no assurance that sufficient trading interest to create a liquid secondary
market on a securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may exist. A
liquid secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading activity or
order flow, or other unforeseen events, at times have rendered certain clearing
facilities inadequate and resulted in the institution of special procedures,
such as trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance that
similar events, or events that otherwise may interfere with the timely execution
of customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If, as a covered call option
writer, the Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
The Portfolio intends to treat options in respect of specific
securities that are not traded on a national securities exchange and the
securities underlying covered call options written by the Portfolio as illiquid
securities.
The Portfolio will purchase options only to the extent
permitted by the policies of state securities authorities in states where units
of the Portfolio are qualified for offer and sale.
Stock Index Options. (Capital Growth Portfolio) The Capital
Growth Portfolio may purchase and write put and call options on stock indexes to
the extent of 15% of the value of its net assets. Options on stock indexes are
similar to options on stock except that (a) the expiration cycles of stock index
options are monthly, while those of stock options are currently quarterly, and
(b) the delivery requirements are different. Instead of giving the right to take
or make delivery of a stock at a specified price, an option on a stock index
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by
(ii) a fixed "index multiplier." Receipt of this cash amount will depend upon
the closing level of the stock index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. The amount of cash received will be equal to such
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple. The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. The writer may offset its position in stock index options prior to
expiration by entering into a closing transaction on an exchange or it may let
the option expire unexercised.
Futures Contracts and Options on Futures Contracts. (Capital
Growth Portfolio and Tennessee Tax Exempt Bond Portfolio) Upon exercise of an
option, the writer of the option delivers to the holder of the option the
futures position and the accumulated balance in the writer's futures margin
account, which represents the amount by which the market price of the futures
contract exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. The potential loss
related to the purchase of options on futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the value of the
option is fixed at the time of sale, there are no daily cash payments to reflect
changes in the value of the underlying contract; however, the value of the
option does change daily and that change would be reflected in the net asset
value of the Portfolio.
Future Developments. Each Portfolio may take advantage of
opportunities in the area of options and futures contracts and options on
futures contracts and any other derivative investments which are not presently
contemplated for use by such Portfolio or which are not currently available but
which may be developed, to the extent such opportunities are both consistent
with its investment objective and legally permissible for the Portfolio. Before
entering into such transactions or making any such investment, the Portfolio
will provide appropriate disclosure in its prospectus.
Lending Portfolio Securities. To a limited extent, each Portfolio
may lend its portfolio securities to brokers, dealers and other financial
institutions, provided it receives cash collateral which at all times is
maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, a Portfolio can
increase its income through the investment of the cash collateral. For purposes
of this policy, each Portfolio considers collateral consisting of U.S.
Government securities to be the equivalent of cash. From time to time, a
Portfolio may return to the borrower or a third party which is unaffiliated with
the Fund, and which is acting as a "placing broker," a part of the interest
earned from the investment of collateral received for securities loaned.
The Securities and Exchange Commission currently requires that
the following conditions must be met whenever portfolio securities are loaned:
(1) the Portfolio must receive at least 100% cash collateral from the borrower;
(2) the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Portfolio must be
able to terminate the loan at any time; (4) the Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) the Portfolio may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned securities may
pass to the borrower, the Fund's Board of Directors must terminate the loan and
regain the right to vote the securities if a material event adversely affecting
the investment occurs. These conditions may be subject to future modification.
Investment Considerations and Risk Factors
Investing in Tennessee Municipal Obligations. (Tennessee Tax
Exempt Bond Portfolio) Investors in the Tennessee Tax Exempt Bond Portfolio
should consider carefully the special risks inherent in such Portfolio's
investment in Tennessee Municipal Obligations. These risks result from the
financial condition of the State of Tennessee. The following information
constitutes only a brief summary, does not purport to be a complete description,
and is based on information drawn from official statements relating to
securities offerings of the State of Tennessee (the "State") and various local
agencies, available as of the date of the Statement of Additional Information.
While the Fund has not independently verified such information, it has no reason
to believe that such information is not correct in all material respects.
In 1978, the voters of the State of Tennessee approved an
amendment to the State Constitution requiring that (1) the total expenditures of
the State for any fiscal year shall not exceed the State's revenues and
reserves, including the proceeds of debt obligations issued to finance capital
expenditures and (2) in no year shall the rate of growth of appropriations from
State tax revenues exceed the estimated rate of growth of the State's economy.
In the past the Governor and the General Assembly have had to restrict
expenditures to comply with the State Constitution.
The Constitution of the State of Tennessee requires a balanced
budget. As required by law, the legislature enacted a balanced budget for fiscal
year 1994-95. Beginning January 1, 1994, the State of Tennessee received a
waiver from the Federal government to replace Medicaid with the new program,
TennCare. TennCare was implemented to help control the increasing cost of health
care and to provide insurance coverage not only to previous Medicaid eligible
individuals but also to uninsured Tennesseans. Due principally to inaccurate
funding assumptions with respect to TennCare program, the fiscal ended June 30,
1995 had an estimated budgetary shortfall of $126 million.
Despite the budgetary concerns caused by the costs associated
with implementing TennCare, the economic outlook for Tennessee remains
favorable. The State's economic diversity has improved substantially over the
last eleven years. Investments announced in new and expanding business exceeded
$1 billion in each of those years and exceeded $2 billion in the last two years.
The $3.2 billion in announced capital investments in 1989 was the single largest
year and exceeded the $2.78 billion in 1985 when Saturn Corporation chose
Tennessee for its plant site. This growth created 23,800 new jobs in Tennessee
for the year ended June 1994.
The Tennessee General Assembly enacted a balanced budget for
fiscal year 1994-95. The budget included a two percent salary increase for State
employees, public higher education employees and teachers in the public school
system effective on July 1, 1994, and another two percent salary increase
effective on October 1, 1994. The revenue estimates were officially revised at
March 1 when the budget for the fiscal year 1995-96 was presented to the General
Assembly.
Actual revenue collections for fiscal year 1994-95 through
January 1995 reflected increases of 9.68% for the sales tax and 17.45% for the
combined excise tax and franchise tax. Total growth in collections, excluding
the health services tax, is 9.07%. Expenditures for TennCare (a recently
implemented managed care program for Tennessee's poor and uninsured, under a
Medicaid waiver), the housing of state prisoners, institutional operating costs
in prisons, the children's plan and some other services were in excess of the
original budgeted amounts for fiscal year 1994-95. Supplemental appropriations
were accommodated within the revised revenue estimates and a proposal to use
one-time reserves. The recommended budget for 1995-96 continues the funding of
improvements in the Basic Education Program for public schools and begins
funding teacher salary equalization. It funds TennCare and the Administration's
proposed crime legislation. The revenue estimates for fiscal year 1995-96
assumed a 6.3% growth in the sales tax, and a 5.0% growth in the excise and
franchise taxes. The assumed growth in all collections by the Department of
Revenue is 5.08%. The Revenue Fluctuation Reserve was reduced to $101.4 million
at June 30, 1994 due to accrued liabilities in the children's plan and other
programs. The new budget maintains the reserve at $101.4 million for fiscal
years 1994-95 and 1995-96.
On March 22, 1993, the Tennessee Supreme Court affirmed a lower
court decision that funding for the pubic school system in Tennessee is
unconstitutional because citizens in more affluent school districts receive
greater educational funding. The case was remanded to the trial court for
further proceedings with respect to the State's providing additional funding to
less affluent school systems. After substantial subsequent litigation, the
Tennessee Supreme Court issued on February 16, 1995, an opinion approving the
State's plan set forth in the Educational Improvement Act of 1992 with the
modification that the plan should also include a provision to equalize teachers'
salaries in the same way that other expenditures were to be equalized under the
program. The result of this decision may be that the State must provide
additional funding to less affluent school systems. Currently, the general
obligation ratings for the State are Aaa by Moody's, AA+ by S&P and AAA by
Fitch.
Lower Rated Securities. (Capital Growth Portfolio) The Capital
Growth Portfolio is permitted to invest in securities rated as low as Ba by
Moody's or BB by S&P, Fitch or Duff & Phelps Credit Rating Co. ("Duff"). Such
securities, though higher yielding, are characterized by risk. See "Description
of the Portfolios-- Investment Considerations and Risk Factors--Lower Rated
Securities" in the Prospectus for a discussion of certain risks and the
"Appendix" for a general description of Moody's, S&P, Fitch and Duff ratings.
Although ratings may be useful in evaluating the
safety of interest and principal payments, they do not evaluate the market value
risk of these securities. The Portfolio will rely on the Adviser's judgment,
analysis and experience in evaluating the creditworthiness of an issuer.
Investors should be aware that the market values of many of these
securities tend to be more sensitive to economic conditions than are higher
rated securities and will fluctuate over time. These securities are considered
by S&P, Moody's, Fitch and Duff, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories.
Companies that issue certain of these securities often are highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with the higher rated securities.
For example, during an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of these securities may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be affected adversely by
specific corporate developments, forecasts, or the unavailability of additional
financing. The risk of loss because of default by the issuer is significantly
greater for the holders of these securities because such securities generally
are unsecured and often are subordinated to other creditors of the issuer.
Because there is no established retail secondary market for many
of these securities, the Portfolio anticipates that such securities could be
sold only to a limited number of dealers or institutional investors. To the
extent a secondary trading market for these securities does exist, it generally
is not as liquid as the secondary market for higher rated securities. The lack
of a liquid secondary market may have an adverse impact on market price and
yield and the Portfolio's ability to dispose of particular issues when necessary
to meet its liquidity needs or in response to a specific economic event such as
a deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
Portfolio to obtain accurate market quotations for purposes of valuing its
securities and calculating its net asset value. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of these securities. In such cases, judgment may play a
greater role in valuation because less reliable, objective data may be
available.
These securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could disrupt severely the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.
The Portfolio may acquire these securities during an initial
offering. Such securities may involve special risks because they are new issues.
The Portfolio does not have any arrangement with any persons concerning the
acquisition of such securities, and the Adviser will review carefully the credit
and other characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also
apply to lower rated zero coupon securities. Such zero coupon securities carry
an additional risk in that, unlike securities which pay interest throughout the
period to maturity, the Portfolio will realize no cash until the cash payment
date unless a portion of such securities are sold and, if the issuer defaults,
the Portfolio may obtain no return at all on its investment. See "Dividends,
Distributions and Taxes."
Investment Restrictions
Each Portfolio has adopted investment restrictions numbered 1
through 8 as fundamental policies. These restrictions cannot be changed, as to a
Portfolio, without approval by the holders of a majority (as defined in the 1940
Act) of such Portfolio's outstanding voting securities. Investment restrictions
numbered 9 through 14 are not fundamental policies and may be changed by vote of
a majority of the Fund's Directors at any time. No Portfolio may:
1. Invest in commodities, except that each Portfolio may
purchase and sell options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes.
2. Purchase, hold or deal in real estate, or oil, gas or other
mineral leases or exploration or development programs, but each Portfolio may
purchase and sell securities that are secured by real estate or issued by
companies that invest or deal in real estate.
3. Borrow money, except that the Portfolio may borrow up to
33-1/3% of the value of its total assets. For purposes of this investment
restriction, a Portfolio's entry into options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes shall not constitute borrowing.
4. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Portfolio
may lend its portfolio securities in an amount not to exceed 33-1/3% of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the Securities and Exchange Commission
and the Fund's Board of Directors.
5. Act as an underwriter of securities of other issuers, except
to the extent the Portfolio may be deemed an underwriter under the Securities
Act of 1933, as amended, by virtue of disposing of portfolio securities, and
except that the Tennessee Tax Exempt Bond Portfolio, Short-Intermediate Duration
Bond Portfolio and Investment Grade Bond Portfolio each may bid separately or as
part of a group for the purchase of Municipal Obligations directly from an
issuer for its own portfolio to take advantage of the lower purchase price
available.
6. Invest more than 25% of its assets in the securities of
issuers in any single industry, provided that, in the case of the Tennessee Tax
Exempt Bond Portfolio, there shall be no such limitation on the purchase of tax
exempt municipal obligations and, in the case of each Portfolio, there shall be
no limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
7. Issue any senior security (as such term is defined in Section
18(f) of the 1940 Act), except to the extent the activities permitted in
Investment Restriction Nos. 1, 3, 10 and 11 may be deemed to give rise to a
senior security.
8. Purchase securities on margin, but each Portfolio may make
margin deposits in connection with transactions in options, forward contracts,
futures contracts, including those relating to indexes, and options on futures
contracts or indexes.
9. Invest in the securities of a company for the purpose of
exercising management or control, but each Portfolio will vote the securities it
owns as a shareholder in accordance with its views.
10. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
11. Purchase, sell or write puts, calls or combinations thereof,
except as may be described in the Portfolios' Prospectus and this Statement of
Additional Information.
12. Purchase securities of any company having less than three
years' continuous operations (including operations of any predecessors) if such
purchase would cause the value of the Portfolio's investments in all such
companies to exceed 5% of the value of its total assets.
13. Enter into repurchase agreements providing for settlement in
more than seven days after notice or purchase securities which are illiquid, if,
in the aggregate, more than 10% of the value of the Portfolio's net assets would
be so invested.
14. Purchase securities of other investment companies, except to
the extent permitted under the 1940 Act.
For purposes of Investment Restriction No. 6, industrial
development bonds, where the payment of principal and interest is the ultimate
responsibility of companies within the same industry, are grouped together as an
"industry."
If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets will not constitute a violation of such restriction.
The Fund may make commitments more restrictive than the
restrictions listed above so as to permit the sale of shares of a Portfolio in
certain states. Should the Fund determine that a commitment is no longer in the
best interest of the Portfolio, and its shareholders, the Fund reserves the
right to revoke the commitment by terminating the sale of such Portfolio's
shares in the state involved.
MANAGEMENT OF THE FUND
Directors and officers of the Fund, together with information as
to their principal business occupations during at least the last five years, are
shown below. Each Director who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
Directors of the Fund
*WILLIAM B. BLUNDIN, Chairman of the Board of Directors. An employee of
Concord Holding Corporation, an affiliate of the
Administrator. Mr. Blundin also is an officer of other
investment companies administered by the Administrator or its
affiliates and President and Chief Executive Officer of Vista
Broker/Dealer Services, Inc. and BNY Hamilton Distributors,
Inc., registered broker/dealers. He is 58 years old and his
address is 125 West 55th Street, New York, New York 10019.
NORMA A. COLDWELL, Director. International Economist and Consultant;
Executive Vice President of Coldwell Financial Consultants;
Trustee and Treasurer of Meridian House International
(International Education and Cultural Group); Member of the
Board of Advisors of Meridian International Center and
Emerging Capital Markets, S.A. (Montevideo, Uruguay);
formerly, Chief International Economist of Riggs National
Bank, Washington, D.C. She is 70 years old and her address is
3330 Southwestern Boulevard, Dallas, Texas 75225.
RICHARD H. FRANCIS, Director. Former Executive Vice President
and Chief Financial Officer of Pan American World
Airways, Inc. (currently, debtor-in-possession under the
U.S. Bankruptcy Code), March 1988 to October 1991; Senior
Vice President and Chief Financial Officer of American
Standard Inc., 1960 to March 1988. Mr. Francis is a
director of Allendale Mutual Insurance and The Indonesia
Fund, Inc. He is 63 years old and his address is 40
Grosvenor Road, Short Hills, New Jersey 07078.
WILLIAM W. McINNES, Director. Private investor. From July 1978
to February 1993, he was Vice-President--Finance and
Treasurer of Hospital Corp. of America. He is also a
director of Gulf South Medical Supply and Diversified
Trust Co. He is 47 years old and his address is 116 30th
Avenue South, Nashville, Tennessee 37212.
ROBERT A. ROBINSON, Director. Private investor. Since 1991,
President Emeritus, and from 1968 to 1991, President of The
Church Pension Group, NYC. From 1956 to 1966, Senior Vice
President of Colonial Bank & Trust Co. He is also a
director of Mariner Institutional Funds, Inc., Mariner Tax-
Free Institutional Funds, Inc., UST Master Funds, UST
Master Tax Exempt Funds, H.B. and F.H. Bugher Foundation,
Morehouse-Barlow Co. Publishers, The Canterbury Cathedral
Trust in America, The Living Church Foundation and Hoosac
School. He is 70 years old and his address is 2 Hathaway
Common, New Canaan, Connecticut 06840.
Officers of the Fund
GEORGE O. MARTINEZ, President and Secretary. Senior Vice President
and Director of Legal and Compliance Services with BISYS Fund
Services, Inc., the Administrator's general partner, since
April 1995, and an officer of other investment companies
administered by the Administrator or its affiliates. Prior
thereto, he was Vice President and Associate General Counsel
with Alliance Capital Management, L.P. He is 36 years old and
his address is 3435 Stelzer Road, Columbus, Ohio 43219.
JEFFREY C. CUSICK, Vice President and Assistant Secretary. An employee
of BISYS Fund Services, Inc., since July 1995, and an officer
of other investment companies administered by the
Administrator or its affiliates. From September 1993 to July
1995, he was Assistant Vice President and, from 1989 to
September 1993, he was Manager--Client Services, of Federated
Administrative Services. He is 37 years old and his address is
3435 Stelzer Road, Columbus, Ohio 43219.
WILLIAM TOMKO, Vice President. An employee of BISYS Fund Services,
Inc. and an officer of other investment companies
administered by the Administrator or its affiliates. He is
37 years old and his address is 3435 Stelzer Road,
Columbus, Ohio 43219.
ANN E. BERGIN, Vice President. An employee of Concord Holding
Corporation, an affiliate of the Administrator, and an
officer of other investment companies administered by the
Administrator or its affiliates. She is 35 years old and
her address is 125 West 55th Street, New York, New York 10019.
MARTIN R. DEAN, Treasurer. An employee of BISYS Fund Services, Inc.,
since May 1994, and an officer of other investment companies
administered by the Administrator or its affiliates. Prior
thereto, he was a Senior Manager of KPMG Peat Marwick LLP. He
is 32 years old and his address is 3435 Stelzer Road,
Columbus, Ohio 43219.
ROBERT L. TUCH, Assistant Secretary. An employee of BISYS Fund
Services, Inc., since June 1991, and an officer of other
investment companies administered by the Administrator or its
affiliates. From July 1990 to June 1991, he was Vice President
and Associate General Counsel with National Securities
Research Corp. Prior thereto, he was an Attorney with the
Securities and Exchange Commission. He is 44 years old and his
address is 3435 Stelzer Road, Columbus, Ohio 43219.
ALAINA METZ, Assistant Secretary. An employee of BISYS Fund
Services, Inc. and an officer of other investment companies
administered by the Administrator or its affiliates. She
is 28 years old and her address is 3435 Stelzer Road,
Columbus, Ohio 43219.
For so long as the Distribution Plan described in the section
captioned "Management Arrangements--Distribution Plan" remains in effect, the
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the 1940 Act, will be selected and nominated by the Directors who are not
"interested persons" of the Fund.
Directors and officers of the Fund, as a group, owned less
than 1% of any Portfolio's shares of common stock outstanding on April 1, 1996.
The Fund does not pay any remuneration to its officers and
Directors other than fees and expenses to those Directors who are not directors,
officers or employees of the Adviser or Administrator or any of their
affiliates. The aggregate amount of compensation paid to each such Director by
the Fund for year ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Aggregate Total Compensation From Fund
Name of Board Compensation from and Fund Complex Paid
Member Fund* to Board Member*
<S> <C> <C>
Norma A. Coldwell $______ $______
John H. Forsgren $______ $______
William W. McInnes $______ $______
Robert A. Robinson $______ $______
</TABLE>
- - ------------------------------
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $_____ for all Directors as a group.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "Management
of the Portfolios."
Investment Advisory Agreement. The Adviser provides investment
advisory services pursuant to the Investment Advisory Agreement (the
"Agreement") dated February 15, 1994 with the Fund. As to each Portfolio, the
Agreement is subject to annual approval by (i) the Fund's Board of Directors or
(ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of such Portfolio, provided that in either event the continuance also
is approved by a majority of the Directors who are not "interested persons" (as
defined in the 1940 Act) of the Fund or the Adviser, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Agreement was
last approved by the Fund's Board of Directors, including a majority of the
Directors who are not "interested persons" of any party to the Agreement, at a
meeting held on October 25, 1995. As to each Portfolio, the Agreement is
terminable without penalty, on 60 days' notice, by the Fund's Board of Directors
or by vote of the holders of a majority of such Portfolio's shares, or, on not
less than 90 days' notice, by the Adviser. The Agreement will terminate
automatically, as to the relevant Portfolio, in the event of its assignment (as
defined in the 1940 Act).
As compensation for the Adviser's services, the Fund has
agreed to pay the Adviser a monthly investment advisory fee at the annual rate
of .50 of 1% of the value of Short-Intermediate Duration Bond Portfolio's,
Investment Grade Bond Portfolio's and Tennessee Tax Exempt Bond Portfolio's
average daily net assets and .65% of 1% of the value of the Capital Growth
Portfolio's average daily net assets. For the period March 28, 1994
(commencement of operations) through December 31, 1994 and for the fiscal year
ended December 31, 1995, $193,049 and $491,561, respectively, was payable by the
Short- Intermediate Duration Bond Portfolio and $326,848 and $463,502,
respectively, was payable by the Tennessee Tax Exempt Bond Portfolio pursuant to
the Agreement. The Adviser waived $49,660 and $55,056 of such fees payable for
the period ended December 31, 1994 by the Short-Intermediate Duration Bond
Portfolio and Tennessee Tax Exempt Bond Portfolio, respectively, resulting in
net fees being paid to the Adviser of $143,389 by the Short-Intermediate
Duration Bond Portfolio and $271,792 by the Tennessee Tax Exempt Bond Portfolio
during the fiscal period ended December 31, 1994.
Administration Agreement. The Administrator provides certain
administrative services pursuant to the Administration Agreement (the
"Administration Agreement") dated April 25, 1996 with the Fund. As to each
Portfolio, the Administration Agreement will continue until April 25, 2001 and
thereafter is subject to annual approval by (i) the Fund's Board of Directors or
(ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of such Portfolio, provided that in either event the continuance also
is approved by a majority of the Directors who are
not "interested persons" (as defined in the 1940 Act) of the Fund or the
Administrator, by vote cast in person at a meeting called for the purpose of
voting such approval. The Administration Agreement was last approved by the
Fund's Board of Directors, including a majority of the Directors who are not
"interested persons" of any party to the Administration Agreement, at a meeting
held on April 25, 1996. As to each Portfolio, the Administration Agreement is
terminable without penalty, at any time if for cause, by the Fund's Board of
Directors or by vote of the holders of a majority of such Portfolio's
outstanding voting securities, or, on not less than 90 days' notice, by the
Administrator. The Administration Agreement will terminate automatically, as to
the relevant Portfolio, in the event of its assignment (as defined in the 1940
Act).
As compensation for the Administrator's services, the Fund has
agreed to pay the Administrator a monthly administration fee at the annual rate
of .15 of 1% of the value of each Portfolio's average daily net assets. For the
period March 28, 1994 (commencement of operations) through December 31, 1994 and
for the fiscal year ended December 31, 1995, $57,915 and $147,468, respectively,
was payable to Concord Holding Corporation, an affiliate of the Administrator
and the Portfolios' administrator during such periods, by the Short-
Intermediate Duration Bond Portfolio and $98,054 and $139,051, respectively, was
payable to Concord Holding Corporation as administrator by the Tennessee Tax
Exempt Bond Portfolio pursuant to an Administration Agreement with Concord
Holding Corporation which was terminated on April 25, 1996. Concord Holding
Corporation waived $13,997 and $16,134 of such fees payable for the period ended
December 31, 1994 by the Short-Intermediate Duration Bond Portfolio and
Tennessee Tax Exempt Bond Portfolio, respectively, resulting in net fees being
paid to Concord Holding Corporation of $43,918 by the Short-Intermediate
Duration Bond Portfolio and $81,920 by the Tennessee Tax Exempt Bond Portfolio
during the fiscal year ended December 31, 1994.
Distribution Agreement. The Distributor acts as the exclusive
distributor of each Portfolio's shares on a best efforts basis pursuant to a
Distribution Agreement (the "Distribution Agreement") dated March 29, 1995, with
the Fund. Shares are sold on a continuous basis by the Distributor as agent,
although the Distributor is not obliged to sell any particular amount of shares.
No compensation is payable by the Fund to the Distributor for its distribution
services.
For the period March 28, 1994 (commencement of operations)
through December 31, 1994 and for the fiscal year ended December 31, 1995, the
Distributor retained $___________ and $___________, respectively, from sales
loads on shares of the Short-Intermediate Duration Bond Portfolio and
$____________ and $__________, respectively, from sales loads on shares of the
Tennessee Tax Exempt Bond Portfolio.
Distribution Plan. (Applicable only with respect to the Investor
Shares) Rule 12b-1 (the "Rule") adopted by the Securities and Exchange
Commission under the 1940 Act provides, among other things, that an investment
company may bear expenses of distributing its shares only pursuant to a plan
adopted in accordance with the Rule. The Fund's Directors have adopted such a
plan (the "Distribution Plan") with respect to the Investor Shares pursuant to
which each Portfolio pays the Distributor for advertising, marketing and
distributing Investor Shares at an annual rate of .25% of the value of such
shares. The Fund's Directors believe that there is a reasonable likelihood that
the Distribution Plan will benefit each Portfolio and the holders of its
Investor Shares. In some states, certain institutions effecting transactions in
Investor Shares may be required to register as dealers pursuant to state law.
A quarterly report of the amounts expended under the
Distribution Plan, and the purposes for which such expenditures were incurred,
must be made to the Directors for their review. In addition, the Distribution
Plan provides that it may not be amended to increase materially the costs which
holders of the Investor Shares may bear for distribution pursuant to the
Distribution Plan without approval of such shareholders and that other material
amendments of the Distribution Plan must be approved by the Board of Directors,
and by the Directors who are neither "interested persons" (as defined in the
1940 Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Distribution Plan or in the related Distribution Plan
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. The Distribution Plan and related agreements are
subject to annual approval by such vote of the Directors cast in person at a
meeting called for the purpose of voting on the Distribution Plan. The
Distribution Plan was last so approved on October 25, 1995. The Distribution
Plan is terminable at any time by vote of a majority of the Directors who are
not "interested persons" and who have no direct or indirect financial interest
in the operation of the Distribution Plan or in the Distribution Plan agreements
or by vote of the holders of a majority of the Investor Shares. A Distribution
Plan agreement is terminable without penalty, at any time, by such vote of the
Directors, upon not more than 60 days' written notice to the parties to such
agreement or by vote of the holders of a majority of the Portfolio's Investor
Shares. A Distribution Plan agreement will terminate automatically in the event
of its assignment (as defined in the 1940 Act).
For the fiscal year ended December 31, 1995, the Distributor
waived receipt of $245,780 payable by the Short- Intermediate Duration Bond
Portfolio and $231,751 payable by the Tennessee Tax Exempt Bond Portfolio with
respect to Investor Shares pursuant to the Distribution Plan.
Expenses. All expenses incurred in the operation of the Fund are
borne by the Fund, except to the extent specifically assumed by others. The
expenses borne by the Fund include: organizational costs, taxes, interest,
brokerage fees and commissions, if any, fees of Directors who are not officers,
directors, employees or holders of 5% or more of the outstanding voting
securities of the Adviser or Administrator or any of their affiliates,
Securities and Exchange Commission fees, state Blue Sky qualification fees,
advisory and administration fees, charges of custodians, transfer and dividend
disbursing agents' fees, certain insurance premiums, industry association fees,
auditing and legal expenses, costs of maintaining corporate existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
calculating the net asset value of each Portfolio's shares, costs of
shareholders' reports and corporate meetings, costs of preparing and printing
certain prospectuses and statements of additional information, and any
extraordinary expenses. Expenses attributable to a Portfolio are charged against
the assets of that Portfolio; other expenses of the Fund are allocated among the
Portfolios on the basis determined by the Board of Directors, including, but not
limited to, proportionately in relation to the net assets of each Portfolio.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in
conjunction with the sections in the Portfolios' Prospectus entitled "How to Buy
Shares" and "How to Redeem Shares."
Terms of Purchase. The Fund reserves the right to reject any
purchase order and to change the amount of the minimum investment and subsequent
purchases in the Portfolios.
Sales Loads. (Applicable to Investor Shares Only) The scale of
sales loads applies to purchases of Investor Shares made by any "purchaser,"
which term includes an individual and/or spouse purchasing securities for his,
her or their own account or for the account of any minor children, or a trustee
or other fiduciary purchasing securities for a single trust estate or a single
fiduciary account trust estate or a single fiduciary account (including a
pension, profit-sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue Code of 1986, as
amended (the "Code")) although more than one beneficiary is involved; or a group
of accounts established by or on behalf of the employees of an employer or
affiliated employers pursuant to an employee benefit plan or other program
(including accounts established pursuant to Sections 403(b), 408(k) and 457 of
the Code); or an organized group which has been in existence for more than six
months, provided that it is not organized for the purpose of buying redeemable
securities of a registered investment company and provided that the purchases
are made through a central administration or a single dealer, or by other means
which result in economy of sales effort or expense.
Set forth below are examples of the method of computing the
offering price of the Investor Shares of the Short-Intermediate Duration Bond
Portfolio and Tennessee Tax Exempt Bond Portfolio. The examples assume a
purchase of Investor Shares of the Portfolio aggregating less than $100,000
subject to the current schedule of sales charges set forth in the Fund's
Prospectus at a price based
upon the net asset value of the Portfolio's Investor Shares on
December 31, 1995:
Short-Intermediate Duration Bond Portfolio:
Net Asset Value per Share $ 10.13
Per Share Sales Charge - 3.00%
of offering price (3.09% of
net asset value per share) $ .
Per Share Offering Price to
the Public $______
Tennessee Tax Exempt Bond Portfolio:
Net Asset Value per Share $ 10.19
Per Share Sales Charge - 3.00%
of offering price (3.09% of
net asset value per share) $ .
Per Share Offering Price to
the Public $______
Reopening an Account. An investor may reopen an account with a
minimum investment of $100 without filing a new Account Application during the
calendar year the account is closed or during the following calendar year,
provided the information on the old Account Application is still applicable.
Stock Certificates; Signatures. Any certificate representing
Portfolio shares to be redeemed must be submitted with the redemption request.
Written redemption requests must be signed by each shareholder, including each
holder of a joint account, and each signature must be guaranteed. Signatures on
endorsed certificates submitted for redemption also must be guaranteed. The
Fund's Transfer Agent has adopted standards and procedures pursuant to which
signature-guarantees in proper form generally will be accepted from domestic
banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations,
as well as from participants in the New York Stock Exchange Medallion Signature
Program, the Securities Transfer Agents Medallion Program ("STAMP") and the
Stock Exchanges Medallion Program. Signature-guaranties may not be provided by
notaries public. If the signature is guaranteed by a broker or dealer, such
broker or dealer must be a member of a clearing corporation and maintain net
capital of at least $100,000. Guarantees must be signed by an authorized
signatory of the guarantor and "Signature-Guaranteed" must appear with the
signature.
Redemption Commitment. Each Portfolio has committed itself to pay
in cash all redemption requests by any shareholder of record, limited in amount
during any 90-day period to the lesser of $250,000 or 1% of the value of such
Portfolio's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of Directors reserves the right to make payments in whole or in part in
securities or other assets in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in the same
manner as the Portfolio is valued. If the recipient sold such securities,
brokerage charges would be incurred.
Suspension of Redemptions. The right of redemption may be
suspended or the date of payment postponed (a) during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closing), (b) when trading in the markets the Portfolio normally utilizes is
restricted, or when an emergency exists as determined by the Securities and
Exchange Commission so that disposal of the Portfolio's investments or
determination of its net asset value is not reasonably practicable, or (c) for
such other periods as the Securities and Exchange Commission by order may permit
to protect the Portfolio's shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "How to Buy
Shares."
General. Expenses and fees, including the advisory fee and fees
paid by Investor Shares pursuant to the Distribution Plan, are accrued daily and
taken into account for the purpose of determining the net asset value of
Portfolio shares.
Capital Growth Portfolio. The Portfolio's securities, including
covered call options written by the Portfolio, are valued at the last sale price
on the securities exchange or national securities market on which such
securities primarily are traded. Securities not listed on an exchange or
national securities market, or securities in which there were no transactions,
are valued at the average of the most recent bid and asked prices, except in the
case of open short positions where the asked price is used for valuation
purposes. Bid price is used when no asked price is available. Any assets or
liabilities initially expressed in terms of foreign currency will be translated
into dollars at the midpoint of the New York interbank market spot exchange rate
as quoted on the day of such translation by the Federal Reserve Bank of New York
or if no such rate is quoted on such date, at the exchange rate previously
quoted by the Federal Reserve Bank of New York or at such other quoted market
exchange rate as may be determined to be appropriate by the Adviser. Short-term
investments are carried at amortized cost, which approximates value. Any
securities or other assets for which recent market quotations are not readily
available are valued at fair value as determined in good faith by the Fund's
Board of Directors.
Restricted securities, as well as securities or other assets for
which market quotations are not readily available, or are not valued by a
pricing service approved by the Board of Directors, are valued at fair value as
determined in good faith by the Board of Directors. The Board of Directors will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Directors generally will take the
following factors into consideration: restricted securities which are, or are
convertible into, securities of the same class of securities for which a public
market exists usually will be valued at market value less the same percentage
discount at which purchased. This discount will be revised periodically by the
Board of Directors if the Directors believe that it no longer reflects the value
of the restricted securities. Restricted securities not of the same class as
securities for which a public market exists usually will be valued initially at
cost. Any subsequent adjustment from cost will be based upon considerations
deemed relevant by the Board of Directors.
Investment Grade Bond Portfolio and Short-Intermediate Duration
Bond Portfolio. Each of these Portfolio's investments are valued each business
day using available market quotations or at fair value as determined by one or
more independent pricing services (collectively, the "Service") approved by the
Board of Directors. The Service may use available market quotations, employ
electronic data processing techniques and/or a matrix system to determine
valuations. The Service's procedures are reviewed by the Fund's officers under
the general supervision of the Board of Directors.
Tennessee Tax Exempt Bond Portfolio. The Tennessee Tax Exempt
Bond Portfolio's investments are valued by the Service. When, in the judgment of
the Service, quoted bid prices for investments are readily available and are
representative of the bid side of the market, these investments are valued at
the mean between the quoted bid prices (as obtained by the Service from dealers
in such securities) and asked prices (as calculated by the Service based upon
its evaluation of the market for such securities). Other investments (which
constitute a majority of the Portfolio's securities) are carried at fair value
as determined by the Service, based on methods which include consideration of:
yields or prices of municipal bonds of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions. The
Service may employ electronic data processing techniques and/or a matrix system
to determine valuations. The Service's procedures are reviewed by the Fund's
officers under the general supervision of the Board of Directors.
New York Stock Exchange Closing. The holidays (as observed) on
which the New York Stock Exchange is closed currently are: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
PERFORMANCE INFORMATION
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "Performance
Information."
The Short-Intermediate Duration Bond Portfolio's yield, with
respect to Investor Shares, for the 30-day period ended December 31, 1995 was
____%. The Tennessee Tax Exempt Bond Portfolio's yield, with respect to Investor
Shares, for the 30-day period ended December 31, 1995 was ____%. Each
Portfolio's yield reflects the absorption of certain expenses and/or waiver of
fees, without which the yield for the 30-day period ended December 31, 1995
would have been ____% for the Short-Intermediate Duration Bond Portfolio and
____% for the Tennessee Tax Exempt Bond Portfolio. Current yield is computed
pursuant to a formula which operates as follows: The amount of the Portfolio's
expenses accrued for the 30- day period (net of reimbursements) is subtracted
from the amount of the dividends and interest earned by the Portfolio during the
period. That result is then divided by the product of: (a) the average daily
number of shares outstanding during the period that were entitled to receive
dividends, and (b) the maximum offering price per share on the last day of the
period less any undistributed earned income per share reasonably expected to be
declared as a dividend shortly thereafter. The quotient is then added to 1, and
that sum is raised to the 6th power, after which 1 is subtracted. The current
yield is then arrived at by multiplying the result by 2.
Based upon a combined 1995 Federal and Tennessee income tax rate
of [41.865]%, the Tennessee Tax Exempt Bond Portfolio's tax equivalent yield for
the 30-day period ended December 31, 1995 was ____%. Absent the expense
absorption and fee waiver then in effect, the Portfolio's tax equivalent yield
for such period would have been ____%. Tax equivalent yield is computed by
dividing that portion of the current yield (calculated as described above) which
is tax exempt by 1 minus a stated tax rate and adding the quotient to that
portion, if any, of the yield of the Portfolio that is not tax exempt.
The tax equivalent yield quoted above represents the application
of the highest Federal and State of Tennessee marginal personal income tax rates
presently in effect. For Federal personal income tax purposes, a 39.60% tax rate
has been used. For Tennessee personal income tax purposes, a 6.00% tax rate has
been used. For the fiscal period ended December 31, 1995, ____% of the Tennessee
Tax Exempt Bond Portfolio's assets were invested in Tennessee Municipal
Obligations, which reduced the effect of the State's tax rate to ____%. The tax
equivalent figure, however, does not include the potential effect of any local
(including, but not limited to, county, district or city) taxes, including
applicable surcharges. In addition, there may be pending legislation which could
affect such stated tax rates or yield. Each investor should consult its tax
adviser, and consider its own factual circumstances and applicable tax laws, in
order to ascertain the relevant tax equivalent yield.
The average annual total return for the one-year period ended
December 31, 1995 and for the period from March 28, 1994 (commencement of
operations) through December 31, 1995 for Investor Shares was ____% and ____%,
respectively, for the Short-Intermediate Duration Bond Portfolio and ____% and
____%, respectively, for the Tennessee Tax Exempt Bond Portfolio. Average annual
total return is calculated by determining the ending redeemable value of an
investment purchased with a hypothetical $1,000 payment made at the beginning of
the period (assuming the reinvestment of dividends and distributions), dividing
by the amount of the initial investment, taking the "n"th root of the quotient
(where "n" is the number of years in the period) and subtracting 1 from the
result. A Class's average annual total return figures calculated in accordance
with such formula assume that in the case of the Investor Class the maximum
sales load has been deducted from the hypothetical initial investment at the
time of purchase.
The Short-Intermediate Duration Bond Portfolio's total return,
with respect to Investor Shares, for the period March 28, 1994 (commencement of
operations) through December 31, 1995 was _____%. The Tennessee Tax Exempt Bond
Portfolio's total return, with respect to Investor Shares, for the period March
28, 1994 (commencement of operations) through December 31, 1995 was _____%.
Total return is calculated by subtracting the amount of the maximum offering
price per share at the beginning of a stated period from the net asset value per
share at the end of the period (after giving effect to the reinvestment of
dividends and distributions during the period), and dividing the result by the
maximum offering price per share at the beginning of the period. Total return
also may be calculated based on the net asset value per share at the beginning
of the period of Investor Shares. In such cases, the calculation would not
reflect the deduction of the sales load with respect to Investor Shares, which,
if reflected, would reduce the performance quoted. Based on net asset value per
share, the total return for the Short- Intermediate Duration Bond Portfolio and
Tennessee Tax Exempt Bond Portfolio for the period from March 28, 1994
(commencement of operations) through December 31, 1995 was ____% and ____%,
respectively.
The Capital Growth Portfolio and the Investment Grade Bond
Portfolio had not commenced operations as of the date of the financial
statements, and, therefore, no performance data for such Portfolios is provided.
From time to time, advertising materials for a Portfolio may
refer to or discuss current or past business, political, economic or financial
conditions, such as U.S. monetary or fiscal policies and actual or proposed tax
legislation. In addition, from time to time, advertising materials for a
Portfolio may include information concerning retirement and investing for
retirement, average life expectancy and pension and social security benefits.
DIVIDENDS, DISTRIBUTION AND TAXES
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "Dividends,
Distributions and Taxes."
Management of the Fund believes that the Short-Intermediate
Duration Bond Portfolio and the Tennessee Tax Exempt Bond Portfolio have
qualified as a "regulated investment company" under the Code for the fiscal year
ended December 31, 1995. It is expected that the Capital Growth Portfolio and
Investment Grade Bond Portfolio will qualify as regulated investment companies
under the Code. Each Portfolio intends to continue to so qualify if such
qualification is in the best interests of its shareholders. To qualify as a
regulated investment company, the Portfolio must pay out to its shareholders at
least 90% of its net income (consisting of net investment income from tax exempt
obligations and net short-term capital gain), must derive less than 30% of its
annual gross income from gain on the sale of securities held for less than three
months, and must meet certain asset diversification and other requirements.
Qualification as a regulated investment company relieves the Portfolio from any
liability for Federal income taxes to the extent its earnings are distributed in
accordance with the applicable provisions of the Code. The term "regulated
investment company" does not imply the supervision of management or investment
practices or policies by any government agency.
Any dividend or distribution paid shortly after an investor's
purchase may have the effect of reducing the aggregate net asset value of his
shares below the cost of his investment. Such a distribution would be a return
on investment in an economic sense although taxable as stated in "Dividends,
Distributions and Taxes" in the Prospectus. In addition, the Code provides that
if a shareholder holds shares for six months or less and has received a capital
gain dividend with respect to such shares, any loss incurred on the sale of such
shares will be treated as a long-term capital loss to the extent of the capital
gain dividend received.
Ordinarily, gains and losses realized from portfolio transactions
will be treated as capital gains and losses. However, a portion of the gain or
loss realized from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain financial futures and options, and certain
preferred stock) may be treated as ordinary income or loss under Section 988 of
the Code.
Under Section 1256 of the Code, gain or loss realized by the
Portfolio from certain financial futures and options transactions (other than
those taxed under Section 988 of the Code) will be treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. Gain or loss will
arise upon the exercise or lapse of such futures and options as well as from
closing transactions. In addition, any such futures or options remaining
unexercised at the end of the Portfolio's taxable year will be treated as sold
for their then fair market value, resulting in additional gain or loss to the
Portfolio characterized in the manner described above.
Offsetting positions held by a Portfolio involving financial
futures and options may constitute "straddles." Straddles are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of straddles is governed by Section 1092 of the Code, which, in certain
circumstances, overrides or modifies the provisions of Sections 988 and 1256. If
the Portfolio was treated as entering into straddles by reason of its futures or
options transactions, such straddles could be characterized as "mixed straddles"
if the futures or options transactions comprising such straddles were governed
by Section 1256. The Portfolio may make one or more elections with respect to
"mixed straddles." Depending upon which election is made, if any, the results to
the Portfolio may differ. If no election is made, to the extent the straddle
rules apply to positions established by the Portfolio, losses realized by the
Portfolio will be deferred to the extent of unrealized gain in any offsetting
positions. Moreover, as a result of the straddle rules, short-term capital loss
on straddle positions may be recharacterized as long-term capital loss, and
long-term capital gain may be recharacterized as short-term capital gain.
Investment by a Portfolio in securities issued or acquired at a
discount, or providing for deferred interest or for payment of interest in the
form of additional obligations could under special tax rules affect the amount,
timing and character of distributions to shareholders by causing such Portfolio
to recognize income prior to the receipt of cash payments. For example, the
Portfolio could be required to accrue a portion of the discount (or deemed
discount) at which the securities were issued each year and to distribute such
income in order to maintain its qualification as a regulated investment company.
In such case, the Portfolio may have to dispose of securities which it might
otherwise have continued to hold in order to generate cash to satisfy these
distribution requirements.
Ordinarily, gains and losses realized from portfolio transactions
will be treated as capital gain or loss. However, all or a portion of the gain
realized from the disposition of market discount bonds will be treated as
ordinary income under Section 1276 of the Code. A market discount bond is
defined as any bond purchased by a Portfolio after April 30, 1993, and after its
original issuance, at a price below its face or accredited value. In addition,
all or a portion of the gain realized from engaging in "conversion transactions"
may be treated as ordinary income under Section 1258. "Conversion transactions"
are defined to include certain forward, futures, option and "straddle"
transactions, transactions marketed or sold to produce capital gains, or
transactions described in Treasury regulations to be issued in the future.
PORTFOLIO TRANSACTIONS
General. Transactions are allocated to various dealers by the
Portfolios' investment personnel in their best judgment. The primary
consideration is prompt and effective execution of orders at the most favorable
price. Subject to that primary consideration, dealers may be selected to act on
an agency basis for research, statistical or other services to enable the
Adviser to supplement its own research and analysis with the views and
information of other securities firms. No brokerage commissions have been paid
to date.
To the extent research services are furnished by brokers through
which the Portfolio effects securities transactions, the Adviser may use such
information in advising other funds or accounts it advises and, conversely, to
the extent research services are furnished to the Adviser by brokers in
connection with other funds or accounts the Adviser advises, the Adviser also
may use such information in advising the Portfolios. Although it is not possible
to place a dollar value on these services, if they are provided, it is the
opinion of the Adviser that the receipt and study of any such services should
not reduce the overall expenses of its research department.
Capital Growth Portfolio. Brokers also are selected because of
their ability to handle special executions such as are involved in large block
trades or broad distributions, provided the primary consideration is met. Large
block trades may, in certain cases, result from two or more clients the Adviser
might advise being engaged simultaneously in the purchase or sale of the same
security. Portfolio turnover may vary from year to year, as well as within a
year. It is anticipated that in any fiscal year, the turnover rate for the
Portfolio generally should be less than 100%. Higher turnover rates are likely
to result in comparatively greater brokerage expenses. The overall
reasonableness of brokerage commissions paid is evaluated by the Adviser based
upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services.
When transactions are executed in the over-the-counter market,
the Adviser will deal with the primary market makers unless a more favorable
price or execution otherwise is obtainable.
The Fund's Board of Directors has determined, in accordance with
Section 17(e) of the 1940 Act and Rule 17e-1 thereunder, that any portfolio
transaction for the Portfolio may be executed by certain brokers that are
affiliates of the Adviser when such broker's charge for the transaction does not
exceed the usual and customary level.
Investment Grade Bond Portfolio, Short-Intermediate Duration Bond
Portfolio and Tennessee Tax Exempt Bond Portfolio. Purchases and sales of
portfolio securities usually are principal transactions. Portfolio securities
ordinarily are purchased directly from the issuer or from an underwriter or
market maker. Usually no brokerage commissions are paid by the Portfolio for
such purchases and sales. The prices paid to underwriters of newly-issued
securities usually include a concession paid by the issuer to the underwriter,
and purchases of securities from market makers may include the spread between
the bid and asked price.
INFORMATION ABOUT THE PORTFOLIOS
The following information supplements and should be read in
conjunction with the section in the Portfolios' Prospectus entitled "General
Information."
Each Portfolio share has one vote and, when issued and paid for
in accordance with the terms of the offering, is fully paid and non-assessable.
Shares have no preemptive, subscription or conversion rights and are freely
transferable.
Rule 18f-2 under the 1940 Act provides that any matter required
to be submitted under the provisions of the 1940 Act or applicable state law or
otherwise, to the holders of the outstanding voting securities of an investment
company, such as the Fund, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
portfolio shall be deemed to be affected by a matter unless it is clear that the
interests of each portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, the Rule exempts the
election of directors from the separate voting requirements of the Rule.
Each Portfolio will send annual and semi-annual financial
statements to all its shareholders.
As of April 20, 1996, the following shareholders beneficially
owned, directly or indirectly, 5% or more of the indicated Portfolio's
outstanding shares:
Percent of
Total Investor
Name and Address Shares Outstanding
SHORT-INTERMEDIATE DURATION BOND PORTFOLIO:
First American Trust Company 95.14%
Attn: Cash Management
800 First American Center
Nashville, TN 37237
TENNESSEE TAX EXEMPT BOND PORTFOLIO:
First American Trust Company 94.98%
Attn: Cash Management
800 First American Center
Nashville, TN 37237
A shareholder who beneficially owns, directly or indirectly, more
than 25% of a Portfolio's voting securities may be deemed a "control person" (as
defined in the 1940 Act) of the Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
The Bank of New York, 90 Washington Street, New York, New York
10286, acts as custodian of each Portfolio's investments. BISYS Fund Services
Ohio, Inc., an affiliate of the Administrator, 3435 Stelzer Road, Columbus, Ohio
43219, acts as the Fund's transfer and dividend disbursing agent (the "Transfer
Agent"). Under the transfer agency agreement with the Fund, the Transfer Agent
maintains shareholder account records for the Fund, handles certain
communications between shareholders and the Fund and pays dividends and
distributions payable by the Fund. For these services, the Transfer Agent
receives a monthly fee compiled on the basis of the number of shareholder
accounts it maintains for the Fund during the month, and is reimbursed for
certain out-of-pocket expenses. Neither The Bank of New York nor
BISYS Fund Services Ohio, Inc. has any part in determining the
investment policies of any Portfolio or which securities are to
be purchased or sold by a Portfolio.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York
10004-2696, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of Common Stock being sold pursuant to the Portfolios' Prospectus.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154,
independent auditors, have been selected as each Portfolio's auditors.
<PAGE>
APPENDIX
Description of certain ratings assigned by Standard & Poor's
Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch
Investors Service, L.P. ("Fitch") and Duff & Phelps Credit Rating Co. ("Duff"):
S&P
Bond Ratings
AAA
Bonds rated AAA have the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit 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 bonds in this category than for bonds in higher rated categories.
BB
Bonds rated BB have less near-term vulnerability to default than
other speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payment.
S&P's letter ratings may be modified by the addition of a plus
(+) or minus (-) sign designation, which is used to show relative standing
within the major rating categories, except in the AAA (Prime Grade) category.
Commercial Paper Rating
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's
Bond Ratings
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 edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa
Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Moody's applies the numerical modifiers 1, 2 and 3 to show
relative standing within the major rating categories, except in the Aaa
category. The modifier 1 indicates a ranking for the security in the higher end
of a rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of a rating category.
Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper
rating assigned by Moody's. Issuers of P-1 paper must have a superior capacity
for repayment of short-term promissory obligations, and ordinarily will be
evidenced by leading market positions in well established industries, high rates
of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and well
established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers (or relating supporting institutions) rated Prime-2 (P-2)
have a strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Fitch
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability
to meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an 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 rated BB 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.
Plus (+) and minus (-) signs are used with a rating symbol to
indicate the relative position of a credit within the rating category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2
Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the margin of safety
is not as great as the F-1+ and F-1 categories.
Duff
Bond Ratings
AAA
Bonds rated AAA are considered highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA
Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A
Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
BBB
Bonds rated BBB are considered to have below average protection
factors but still considered sufficient for prudent investment. Considerable
variability in risk exists during economic cycles.
BB
Bonds rated BB are below investment grade but are deemed by Duff
as likely to meet obligations when due. Present or prospective financial
protection factors fluctuate according to industry conditions or company
fortunes. Overall quality may move up or down frequently within the category.
Plus (+) and minus (-) signs are used with a rating symbol
(except AAA) to indicate the relative position of a credit within the rating
category.
Commercial Paper Rating
The rating Duff-1 is the highest commercial paper rating assigned
by Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
<PAGE>
FINANCIAL STATEMENTS
The Portfolios' Annual Report to Shareholders for the fiscal year
ended December 31, 1995 is a separate document supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing therein are incorporated by reference
in this Statement of Additional Information.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A of the Registration Statement:
Condensed Financial Information.
Included in Part B of the Registration Statement:
Statements of Investments.*
Statements of Assets and Liabilities.*
Statements of Operations.*
Statements of Changes in Net Assets.*
Notes to Financial Statements.*
Reports of KPMG Peat Marwick LLP, Independent
Auditors.*
- - -------------------------
* Incorporated by reference to the Registrant's Annual Reports
to Shareholders.
(b) Exhibits:
(1) (a) Articles of Incorporation are incorporated by
reference to Exhibit (1) of the Registration
Statement on Form N-1A, filed on March 29,
1990.
(b) Articles of Amendment are incorporated by
reference to Exhibit (1)(b) of Pre-Effective
Amendment No. 3 to the Registration
Statement on Form N-1A, filed on June 22,
1990.
(c) Articles Supplementary dated October 16,
1990 are incorporated by reference to
Exhibit(1)(c) of Post-Effective Amendment
No. 3 to the Registration Statement on Form
N-1A, filed on October 25, 1990.
(d) Articles Supplementary dated January 9, 1992
are incorporated by reference to Exhibit
(1)(d) of Post-Effective Amendment No. 10 to
the Registration Statement on Form N-1A,
filed on January 17, 1992.
(e) Articles Supplementary dated February 15,
1994 are incorporated by reference to Exhibit
(1)(e) of Post-Effective Amendment No. 22 to
the Registration Statement on Form N-1A,
filed on February 10, 1994.
(f) Articles of Amendment.
(2) By-Laws are incorporated by reference to Exhibit
(2) of Pre-Effective Amendment No. 3 to the
Registration Statement on Form N-1A, filed on June
22, 1990.
(4) Specimen copies of stock certificates are
incorporated by reference to Exhibit (4) of Post-
Effective Amendment No. 6 to the Registration
Statement on Form N-1A, filed on June 7, 1991.
(5) (a)(i) Amended Investment Advisory Agreement
between the Registrant and BEA
Associates is incorporated by reference
to Exhibit (5)(b)(i) of Post-Effective
Amendment No. 15 to the Registration
Statement on Form N-1A, filed on
August 19, 1992.
(a)(ii) Investment Advisory Agreement between
the Registrant and Mitchell Hutchins
Asset Management Inc. is incorporated by
reference to Exhibit (5)(b)(iii) of
Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A,
filed on June 7, 1991.
(a)(iii) Investment Advisory Agreement
between Registrant and First
American National Bank is
incorporated by reference to
Post-Effective Amendment No. 22 to
the Registration Statement on Form
N-1A, filed on February 10, 1994.
(a)(iv) Investment Advisory Agreement
between the Registrant and BEA
Associates is incorporated by
reference to Post- Effective
Amendment No. 25 to the Registration
Statement on Form N-1A, filed on May
1, 1995.
(b)(i) Sub-Investment Advisory Agreement among
Registrant, First American National Bank
and Barnett Banks and Trust Company,
N.A. is incorporated by reference to
Post-Effective Amendment No. 22 to the
Registration Statement on Form N-14,
filed on February 10, 1994.
(c)(i) Administration Agreement between
Registrant and Concord Holding
Corporation dated March 29, 1995.
(c)(ii) Administration Agreement between
Registrant and BISYS Fund Services
Limited Partnership dated April 25,
1996.
(6) (a) Distribution Agreement between
Registrant and Concord Financial Group,
Inc. dated March 29, 1995 is
incorporated by reference to Post-
Effective Amendment No. 25 to the
Registration Statement on Form N-1A,
filed on May 1, 1995.
(b)(i) Form of Plan Agreement, with respect to
Registrant's Correspondent Cash Reserves
Money Market Portfolio and Correspondent
Cash Reserves Municipal Portfolio, is
incorporated by reference to Exhibit
(6)(b) of Post-Effective Amendment No. 6
to the Registration Statement on Form
N-1A, filed on June 7, 1991.
(b)(ii) Form of Distribution Plan Agreement,
with respect to Registrant's BEA Short
Duration Portfolio is incorporated by
reference to Exhibit (6)(b)(iv) of Post-
Effective Amendment No. 15 to the
Registration Statement on Form N-1A,
filed On August 19, 1992.
(b)(iii) Distribution Plan Agreement, with
respect to Registrant's ValueStar
Equity, Equity Income, Short-
Intermediate Duration Bond, Bond and
Tennessee Tax Exempt Bond Portfolios is
incorporated by reference to Post-
Effective Amendment No. 22 to the
Registration Statement on Form N-1A,
filed on February 10, 1994.
(8) (a) Custody and Fund Accounting Agreement
with The Bank of New York is
incorporated by reference to
Exhibit (8)(a) of Pre-Effective
Amendment No. 3 to the Registration
Statement on Form N-1A, filed on June
22, 1990.
(b) Form of Foreign Sub-Custodian
Agreement is incorporated by
reference to Post- Effective
Amendment No. 22 to the Registration
Statement on Form N-1A, filed on
February 10, 1994.
(9) (a) Special Management Services Agreement
among the Registrant, Mitchell Hutchins
Asset Management Inc. and Concord
Holding Corporation is incorporated by
reference to Exhibit (9) of Post-
Effective Amendment No. 6 to the
Registration Statement on Form N-1A,
filed on June 7, 1991.
(b) Form of Shareholder Services Agreement
is incorporated by reference to
Exhibit (5)(e) of Pre-Effective
Amendment No. 3 to the Registration
Statement on Form N-1A, filed on
June 22, 1990.
(c) Shareholder Services Plan with respect
to Registrant's ValueStar Prime Money
Market and U.S. Treasury Money Market
Portfolios is incorporated by reference
to Post-Effective Amendment No. 22 to
the Registration Statement on Form N-1A,
filed on February 10, 1994.
(11) Consent of Independent Auditors.
(15) (a) Plan of Distribution pursuant to Rule
12b-1, with respect to Registrant's
Correspondent Cash Reserves Money Market
Portfolio and Correspondent Cash
Reserves Municipal Portfolio, is
incorporated by reference to Exhibit
(15) of Post-Effective Amendment No. 6
to the Registration Statement on Form
N-1A, filed on June 7, 1991.
(b) Distribution Plan pursuant to Rule
12b-1, with respect to Registrant's BEA
Short Duration Portfolio, is
incorporated by reference to
Exhibit (15)(c) of Post-Effective
Amendment No. 15 to the Registration
Statement on Form N-1A filed on
August 19, 1992.
(c) Distribution Plan pursuant to Rule
12b-1, with respect to Registrant's
ValueStar Equity, Equity Income, Short-
Intermediate Duration Bond, Bond and
Tennessee Tax Exempt Bond Portfolios is
incorporated by reference to Post-
Effective Amendment No. 22 to the
Registration Statement on Form N-1A,
filed on February 10, 1994.
(16) Computations of Performance Information
are incorporated by reference to Post-
Effective Amendment No. 25 to the
Registration Statement on Form N-1A,
filed on May 1, 1995.
(17) Financial Data Schedules are
incorporated by reference to
Registrant's Annual Report on Form N-SAR
filed on or about February 29, 1996.
(18) (i) Rule 18f-3 Plans for Registrant's BEA,
CCR and ValueStar Prime and U.S.
Treasury Portfolios are incorporated by
reference to Post-Effective Amendment
No. 25 to the Registration Statement on
Form N-1A, filed on May 1, 1995.
(ii) Rule 18f-3 Plan for Registration's
ValueStar Non-Money Market Portfolios.
Other Exhibit: (i) Certificate of Corporate Secretary is
incorporated by reference to Other
Exhibit of Pre-Effective Amendment
No. 3 to the Registration Statement
on Form N-1A, filed on June 22,
1990.
(ii) Powers of Attorney are incorporated by
reference to Pre-Effective Amendment No.
1 and Post-Effective Amendment No. 8 to
the Registration Statement on Form
N-1A, filed on May 23, 1990 and November
15, 1991, respectively.
Item 25. Persons Controlled By or Under Common Control
with Registrant
Not applicable.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Holders as of
Title of Class March 31, 1996
Common Stock, par value
$.001 per share
Alpha Government 69
Securities Portfolio
BEA Short Duration Portfolio
--Client Shares 25
--Service Shares 1
--Investor Shares 1
Correspondent Cash Reserves
Money Market Portfolio
--Retail Shares 34,901
--Institutional Shares 2
ValueStar Prime Money Market Portfolio
--Trust Shares --
--Investor Shares 25
ValueStar Capital Growth Portfolio
--Trust Shares --
--Investor Shares 1
ValueStar Investment Grade
Bond Portfolio
--Trust Shares --
--Investor Shares 1
ValueStar Short-Intermediate
Duration Bond Portfolio
--Trust Shares --
--Investor Shares 7
ValueStar Tennessee Tax Exempt
Bond Portfolio
--Trust Shares --
--Investor Shares 7
ValueStar U.S. Treasury Money
Market Portfolio
--Trust Shares --
--Investor Shares 10
Item 27. Indemnification
Reference is made to Article SEVENTH of the Registrant's Articles
of Incorporation filed as Exhibit 1 to the Registration Statement, filed on
March 29, 1990, and to Section 2-418 of the Maryland General Corporation Law.
The application of these provisions is limited by Article VIII of the
Registrant's By-Laws filed as Exhibit 2 to Pre-Effective Amendment No. 3 to the
Registration Statement, filed on June 22, 1990, and by the following undertaking
set forth in the rules promulgated by the Securities and Exchange Commission:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Com- mission such indemnification is against public policy as expressed
in such Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in such Act and will
be governed by the final adjudication of such issue.
Reference also is made to the Distribution Agreement filed as
Exhibit 6(a) hereto.
Item 28(a). Business and Other Connections of Investment
Adviser and/or Sub-Investment Adviser
(i) Registrant is fulfilling the requirement of this Item 28(a)
to provide a list of the officers and directors of BEA Associates, the
investment adviser of the Registrant's BEA Short Duration Portfolio and Alpha
Government Securities Portfolio, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by BEA Associates or those of its officers and directors during the past two
years, by incorporating by reference the information contained in the Form ADV
filed with the SEC pursuant to the Investment Advisers Act of 1940 by BEA
Associates (SEC File No. 801-37170).
(ii) Registrant is fulfilling the requirement of this Item 28(a)
to provide a list of the officers and directors of Mitchell Hutchins Asset
Management Inc., the investment adviser of the Registrant's Correspondent Cash
Reserves Money Market Portfolio, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by Mitchell Hutchins Asset Management Inc. or those of its officers and
directors during the past two years, by incorporating by reference the
information contained in the Form ADV filed with the SEC pursuant to the
Investment Advisers Act of 1940 by the Mitchell Hutchins Asset Management Inc.
(SEC File No. 801-13219).
(iii) First American National Bank, the investment adviser of the
Registrant's ValueStar Portfolios, is a wholly-owned subsidiary of First
American Corporation, a registered bank holding company. To the knowledge of the
Registrant, none of the directors or executive officers of First American
National Bank, except those described below, are or have been, at any time
during the past two years, engaged in any other business, profession, vocation
or employment of a substantial nature, except that certain directors and
executive officers of First American National Bank also hold or have held
various positions with bank and non-bank affiliates of First American National
Bank, including First American Corporation.
<TABLE>
<CAPTION>
Principal Occupation or
Other Employment of a
Position with Substantial
Name Adviser Nature
<S> <C> <C>
Samuel E. Beale, III Director President and Chief
Executive Officer of
Morrison Restaurants,
Inc.
Dennis C. Bottorff Director and President and Chief
Chief Executive Executive Officer of
Officer First American
Corporation
Earnest W. Deavenport, Jr. Director Group Vice President of
Eastman Kodak Company
Reginald D. Dickson Director President Emeritus of
INROADS, Inc.
T. Scott Fillebrown Director Private Investor
James A. Haslam, II Director President and Chief
Executive Officer of
Pilot Corporation
Martha R. Ingram Director Director of Public
Affairs of Ingram
Industries, Inc.
Walter D. Knestrick Director Chairman of the Board
of Walter Knestrick
Contractor, Inc.
Gene C. Koonce Director President and Chief
Executive Officer of
United Cities Gas
Company
James R. Martin Director Chairman and Chief
Executive Officer of
PlastiLine, Inc.
William O. McCoy Director Vice Chairman of the
Board of BellSouth
Corporation
Dale W. Polley Director, Vice Vice Chairman and Chief
Chairman and Administrative Officer
Chief of First American
Administrative Corporation
Officer
Toy F. Reid Director Retired Executive Vice
President of Eastman
Kodak Company
Roscoe R. Robinson Director Vice Chancellor for
Health Affairs of
Vanderbilt University
Medical Center
James F. Smith Director Chairman of the Board
of First American
Corporation
Cal Turner, Jr. Director Chairman and Chief
Executive Officer of
Dollar General
Corporation
David K. Wilson Director Chairman of the Board
of Cherokee Equity
Corporation
Toby S. Wilt Director President of TSW
Investment Company
William S. Wire, II Director Chairman of the Board
of Genesco, Inc.
James C. Armistead, Jr. Executive Vice None
President
John W. Boyle, Jr. President, None
Corporate Bank
R. Booth Chapman Executive Vice None
President
Emery F. Hill Executive Vice None
President
Dennis J. Hooks Executive Vice None
President
Rufus B. King Executive Vice None
President
John W. Logan Executive Vice None
President
Robert A. McCabe, Jr. President, None
General Bank
Robert E. McNeilly, Jr. President and None
Chief Executive
Officer, First
American Trust
Company, N.A.
Martin E. Simmons Executive Vice None
President,
General Counsel
and Corporate
Secretary
Terry S. Spencer Executive Vice None
President
Jonn W. Smithwick Executive Vice None
President
M. Terry Turner Executive Vice None
President
Alexander P. Waddell, IV Senior Vice None
President and
Treasurer
</TABLE>
Item 29. Principal Underwriters
(a) Other investment companies for which Registrant's principal
underwriter (exclusive distributor) acts as principal underwriter or exclusive
distributor:
Pacific Horizon Funds, Inc.
Prairie Funds
Prairie Institutional Funds
Prairie Intermediate Bond Fund
Prairie Municipal Bond Fund, Inc.
(b) The information required by this Item 29(b) regarding each
director or officer of Concord Financial Group, Inc. is incorporated by
reference to Schedule A of Form BD filed by Concord Financial Group, Inc.
pursuant to the Securities Exchange Act of 1934 (SEC File No. 8- 37601).
Item 30. Location of Accounts and Records
1. BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-3035
2. The Bank of New York
90 Washington Street
New York, New York 10015
3. BEA Associates
One Citicorp Center, 58th Floor
153 East 53rd Street
New York, New York 10022
4. Concord Financial Group, Inc.
125 West 55th Street
11th Floor
New York, New York 10019
5. First American National Bank
315 Deaderick Street
Nashville, Tennessee 37238
6. Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(b) Registrant hereby undertakes
(1) to call a meeting of shareholders for the purpose of voting
upon the question of removal of a Director or Directors when requested in
writing to do so by the holders of at least 10% of the Registrant's outstanding
Common Stock and in connection with such meeting to comply with the provisions
of Section 16(c) of the Investment Company Act of 1940 relating to shareholders
communications.
(2) to furnish each person to whom a prospectus is delivered with
a copy of its most current annual report to shareholders, upon request and
without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Amendment pursuant to Rule 485(b)
under the Securities Act of 1933 and has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 30th day
of April, 1995.
THE INFINITY MUTUAL FUNDS, INC.
(Registrant)
By: /s/George O. Martinez*
George O. Martinez, President
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
/s/George O. Martinez* President (Principal
GEORGE O. MARTINEZ Executive Officer)
/s/Martin R. Dean* Treasurer (Chief
MARTIN R. DEAN Financial and
Accounting Officer)
/s/William B. Blundin* Chairman of the
WILLIAM B. BLUNDIN Board of Directors
/s/Richard H. Francis* Director
RICHARD H. FRANCIS
/s/Norma A. Coldwell* Director
NORMA A. COLDWELL
/s/William W. McInnes* Director
WILLIAM W. McINNES
/s/Robert A. Robinson* Director
ROBERT A. ROBINSON
*By:/s/Robert L. Tuch April 30, 1995
Robert L. Tuch
Attorney-in-fact
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
Post-Effective Amendment No. 26 to
Registration Statement on Form N-1A under
the Securities Act of 1933 and
the Investment Company Act of 1940
EXHIBITS
<PAGE>
INDEX TO EXHIBITS
Page
(1)(f) Articles of Amendment..........................................
(5)(c)(i) Administration Agreement
dated March 29, 1995....................................
(5)(c)(ii) Administration Agreement
dated April 25, 1996....................................
(11) Consent of Independent Auditors................................
(18)(ii) Rule 18f-3 Plan for ValueStar
Non-Money Market Portfolios.............................
EXHIBIT 1(f)
ARTICLES OF AMENDMENT
THE INFINITY MUTUAL FUNDS, INC., a Maryland corporation having
its principal office in the State of Maryland at 32 South Street, Baltimore,
Maryland (hereinafter called the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended to
redesignate ValueStar Bond Portfolio as ValueStar Investment Grade Bond
Portfolio and ValueStar Equity Portfolio as ValueStar Capital Growth Portfolio
by striking paragraph (1) of Article FIFTH of the Articles of Incorporation and
inserting in lieu thereof the following:
"FIFTH: (1) The total number of shares of stock which the
corporation has authority to issue is eleven billion
(11,000,000,000) shares of Common Stock, all of which are of
a par value of one tenth of one cent ($.001) each, of which
one billion (1,000,000,000) shares are classified as shares
of the Alpha Government Securities Portfolio, one billion
(1,000,000,000) shares are classified as shares of the Alpha
Prime Portfolio, one billion (1,000,000,000) shares are
classified as shares of the BEA Short Duration Portfolios of
which five hundred million (500,000,000) shares (marketed as
"BEA Client Shares") are generic shares of Common Stock of
such Portfolio, two hundred and fifty million (250,000,000)
shares are classified as BEA Service Shares and two hundred
and fifty million (250,000,000) shares are classified as BEA
Investor Shares, two billion (2,000,000,000) shares are
classified as shares of the Correspondent Cash Reserves
Money Market Portfolio of which one billion (1,000,000,000)
shares are classified as Institutional Shares and one
billion (1,000,000,000) shares (marketed as "Retail Shares")
are generic shares of Common Stock of such Portfolio, one
billion (1,000,000,000) shares are classified as shares of
the Correspondent Cash Reserves Municipal Portfolio, five
hundred million (500,000,000) shares are classified as
shares of the ValueStar Capital Growth Portfolio of which
two hundred and fifty million (250,000,000) shares are
classified as Trust Shares and two hundred and fifty million
(250,000,000) shares are classified as Investor Shares, five
hundred million (500,000,000) shares are classified as
shares of the ValueStar Equity Income Portfolio of which two
hundred and fifty million (250,000,000) shares are
classified as Trust Shares and two hundred and fifty million
(250,000,000) shares are classified as Investor Shares, five
hundred million (500,000,000) shares are classified as
shares of the ValueStar Investment Grade Bond Portfolio of
which two hundred and fifty million (250,000,000) shares are
classified as Trust Shares and two hundred and fifty million
(250,000,000) shares are classified as Investor Shares, five
hundred million (500,000,000) shares are classified as
shares of the ValueStar Short-Intermediate Duration Bond
Portfolio of which two hundred and fifty million
(250,000,000) shares are classified as Trust Shares and two
hundred and fifty million (250,000,000) shares are
classified as Investor Shares, five hundred million
(500,000,000) shares are classified as shares of the
ValueStar Tennessee Tax Exempt Bond Portfolio of which two
hundred and fifty million (250,000,000) shares are
classified as Trust Shares and two hundred and fifty million
(250,000,000) shares are classified as Investor Shares,
seven hundred fifty million (750,000,000) shares are
classified as shares of the ValueStar Prime Money Market
Portfolio of which three hundred and seventy-five million
(375,000,000) shares are classified as Trust Shares and
three hundred and seventy-five million (375,000,000) shares
are classified as Investor Shares, seven hundred and fifty
million (750,000,000) shares are classified as shares of the
ValueStar U.S. Treasury Money Market Portfolio of which
three hundred and seventy-five million (375,000,000) shares
are classified as Trust Shares and three hundred and
seventy-five million (375,000,000) shares are classified as
Investor Shares, and one billion (1,000,000,000) shares are
unclassified."
SECOND: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
THIRD: These Articles of Amendment were approved by at least a
majority of the entire Board of Directors of the Corporation and are limited to
changes expressly permitted by Section 2-605 of subtitle 6 of Title 2 of the
Maryland General Corporation Law to be made without the affirmative vote of the
stockholders of the Corporation
The Vice President acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that to the best of her knowledge,
information and belief the matters and facts set forth in these Articles with
respect to the authorization and approval of the amendment of the Corporation's
charter are true in all material respects, and that this statement is made under
the penalties of perjury.
IN WITNESS WHEREOF, The Infinity Mutual Funds, Inc. has caused this
instrument to be signed in its name and on its behalf by its Vice President, and
witnessed by its Secretary, on the 8th day of February, 1996.
THE INFINITY MUTUAL FUNDS, INC.
BY:
Ann E. Bergin,
Vice President
WITNESS:
George O. Martinez,
Secretary
<PAGE>
EXHIBIT 5(c)(i)
ADMINISTRATION AGREEMENT
Administration Agreement made as of March 29, 1995 between THE
INFINITY MUTUAL FUNDS, INC., a Maryland corporation having its principal office
and place of business at 125 West 55th Street, 11th Floor, New York, New York
10019 (herein called the "Fund"), and CONCORD HOLDING CORPORATION, a Delaware
corporation having its principal office and place of business at 125 West 55th
Street, 11th Floor, New York, New York 10019 (herein called "Holding").
WHEREAS, the Fund is an open-end, management investment
company, registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), and consisting of the portfolios set forth on Schedule 1 hereto, as
such Schedule may be revised from time to time (each, a "Series"); and
WHEREAS, the Fund intends from time to time to employ certain
entities (in addition to those named below), some of which may be affiliated
with Holding, to provide services to one or more Series (each, a "Service
Provider");
WHEREAS, the Fund intends to employ Concord Financial Group,
Inc. (the "Distributor") to act as distributor for each Series' shares of common
stock, par value $.001 per share (the "Shares"); and
WHEREAS, the Fund desires to retain Holding as its
Administrator to provide it with administrative services with respect to each
Series, and Holding is willing to render such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants set forth herein, the parties hereto agree as follows:
I. DELIVERY OF DOCUMENTS
The Fund has delivered to Holding copies of each of the
following documents and will deliver to it all future amendments and supplements
thereto, if any:
(a) The Fund's Articles of Incorporation and all
amendments and supplements thereto (as presently in effect and as
from time to time amended or supplemented, herein called the
"Charter");
(b) The Fund's By-laws (as presently in effect
and as from time to time amended, herein called the "By-laws");
(c) Resolutions of the Board of Directors of the
Fund authorizing the execution and delivery of this Agreement;
(d) The Fund's Registration Statement under the
Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act on Form
N-1A most recently filed with the Securities and Exchange Commission (the
"Commission") relating to the Shares, and all subsequent amendments or
supplements thereto (the "Registration Statement");
(e) The Fund's Notification of Registration under
the 1940 Act on Form N-8A as filed with the Commission; and
(f) The Fund's current Prospectuses and
Statements of Additional Information pertaining to the Series (as presently in
effect and as from time to time amended and supplemented, herein called the
"Prospectus").
II. ADMINISTRATION
1. Appointment of Administrator. The Fund hereby appoints
Holding as its Administrator for each of the Series on the terms and for the
period set forth in this Agreement and Holding hereby accepts such appointment
and agrees to perform the services and duties set forth in this Section II for
the compensation provided in this Section. The Fund understands that Holding now
acts, and that from time to time hereafter Holding may act, as administrator of
various investment companies or fiduciary for other managed accounts, and the
Fund has no objection to Holding's so acting. In addition, it is understood that
the persons employed by Holding to assist in the performance of its duties
hereunder will not devote their full time to such services and nothing herein
contained shall be deemed to limit or restrict the right of Holding or any
affiliate of Holding to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
2. Services and Duties.
(a) As Administrator, and subject to the
supervision and control of the Fund's Board of Directors, Holding will provide
office facilities, equipment, statistical and research data, clerical,
accounting and bookkeeping services, internal compliance services relating to
accounting and legal matters, and personnel to carry out all administrative
services required for operation of the business and affairs of the Series, other
than those management, investment advisory and sub-advisory functions which are
to be performed by certain Service Providers pursuant to their respective
agreements with the Fund, the services of the Distributor, those services to be
performed by the Fund's custodian and transfer agent, and those services
normally performed by the Fund's legal counsel and independent auditors.
Holding's responsibilities include without limitation the following services:
(1) Providing a facility to receive purchase and
redemption orders via toll-free IN-WATTS telephone lines;
(2) Providing for the preparing, supervision and
mailing of confirmations for all purchase and redemption
orders;
(3) Providing and supervising the operation of an
automated data processing system to process purchase and redemption
orders received by the Distributor (Holding assumes responsibility for
the accuracy of the data transmitted for processing or storage);
(4) Overseeing the performance of the Fund's
custodian and transfer agent;
(5) Making available information concerning each
Series to its shareholders; distributing written communications to each
Series' shareholders such as periodic listings of each Series'
securities, annual and semi-annual reports, and the Prospectus and
supplements thereto; and handling shareholder problems and calls
relating to administrative matters; and
(6) Providing and supervising the services of
employees ("relationship coordinators") whose principal responsibility
and function shall be to preserve and strengthen each Series'
relationships with its shareholders.
(b) Holding shall assure that persons are
available to receive redemption requests to the Fund's transfer
agent as promptly as practicable.
(c) Holding shall assure that persons are
available to receive orders accepted for the purchase of Shares to the transfer
agent as promptly as practicable.
(d) Holding shall participate in the periodic
updating of the Prospectus and shall accumulate information for and, subject to
approval by the Fund's Treasurer and legal counsel, coordinate the preparation,
filing, printing and dissemination of reports to the Series' shareholders and
the Commission, including but not limited to annual reports and semi-annual
reports on Form N-SAR, notices pursuant to Rule 24f-2 and proxy materials.
(e) Holding shall pay all costs and expenses of
maintaining the offices of the Fund, wherever located, and shall arrange for
payment by the Series of all expenses payable by the Series.
(f) Holding, after consultation with legal
counsel for the Fund, shall determine the jurisdictions in which the Shares
shall be registered or qualified for sale and, in connection therewith, shall be
responsible for the maintenance of the registration or qualification of the
Shares for sale under the securities laws of any state. Payment of share
registration fees and any fees for qualifying or continuing the qualification of
the Series shall be made by the Series.
(g) Holding shall provide the services of certain
persons who may be appointed as officers of the Fund by the
Fund's Board of Directors.
(h) Holding shall oversee the maintenance by the
Fund's custodian and transfer agent of the books and records of the Fund
required under the 1940 Act in connection with the performance of the Fund's
agreements with such entities, and shall maintain, or provide for the
maintenance of, such other books and records (other than those required to be
maintained by the Service Providers) as may be required by law or may be
required for the proper operation of the business and affairs of the Series. In
compliance with the requirements of Rule 31a-3 under the 1940 Act, Holding
agrees that all such books and records which it maintains, or is responsible for
maintaining, for the Series are the property of the Fund and further agrees to
surrender promptly to the Fund any of such books and records upon the Fund's
request. Holding further agrees to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act said books and records required to be maintained by
Rule 31a-1 under said Act.
(i) Holding shall prepare the Series' federal,
state and local income tax returns.
(j) Holding shall prepare and, subject to
approval of the Fund's Treasurer, disseminate to the Fund's Directors the Fund's
and each Series' quarterly financial statements and schedules of investments,
and shall prepare such other reports relating to the business and affairs of the
Fund and each Series (not otherwise appropriately prepared by the Service
Providers, the Fund's legal counsel or its independent auditors) as the officers
and Directors of the Fund may from time to time reasonably request in connection
with the performance of their duties.
(k) Holding shall assist with the coordination of
the provision of investment management, advisory and sub-advisory services by
the Service Providers to the Series, and shall provide other administration
assistance to said entities as required to carry out the business and operations
of the Series.
(l) Holding shall recommend, implement and
monitor all specialized services and programs that are necessary or appropriate
in order for the Series to serve properly the investment needs of the fiduciary
accounts investing in their Shares.
(m) In performing its duties as Administrator for
the Series, Holding will act in conformity with the Charter, By-laws and
Prospectus and with the instructions and directions of the Board of Directors of
the Fund and will conform to and comply with the requirements of the 1940 Act
and all other applicable federal or state laws and regulations.
3. Subcontractors. It is understood that Holding may from time
to time employ or associate with itself such person or persons as Holding may
believe to be particularly fitted to assist in the performance of this
Agreement; provided, however, that the compensation of such person or persons
shall be paid by Holding and that Holding shall be as fully responsible to the
Fund for the acts and omissions of any subcontractor as it is for its own acts
and omissions.
4. Expenses Assumed as Administrator. Except as otherwise
stated in this subsection 4, Holding shall pay all expenses incurred by it in
performing its services and duties as Administrator. All other expenses incurred
in the operation of the Fund will be borne by the Fund, except to the extent
specifically assumed by others. The expenses to be borne by the Fund include,
without limitation, the following: organizational costs, taxes, interest,
brokerage fees and commissions, if any, fees of Directors who are not officers,
directors, employees or holders of 5% or more of the outstanding voting
securities of any Service Provider or Holding, or any of their affiliates,
Commission fees, state Blue Sky qualification fees, management, advisory,
sub-advisory, administration and other shareholder services fees, charges of
custodians, transfer and dividend disbursing agents' fees, certain insurance
premiums, industry association fees, auditing and legal expenses, costs of
maintaining corporate existence, costs of independent pricing services, costs
attributable to investor services (including, without limitation, telephone and
personnel expenses), costs of calculating the net asset value of the Series'
shares, costs of shareholders' reports and corporate meetings, costs of
preparing and printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders (unless
otherwise provided pursuant to a plan adopted in accordance with Rule 12b-1
under the 1940 Act), and any extraordinary expenses.
5. Compensation. In consideration of services rendered
pursuant to this Agreement, the Fund will pay Holding on the first business day
of each month the fee at the annual rate set forth opposite each Series' name on
Schedule 1 hereto, based upon the value of each Series' average daily net assets
for the previous month. Net asset value shall be computed on such days and at
such time or times as described in the Prospectus. The fee for the period from
the date of the commencement of the initial public sale of each Series' shares
to the end of the month during which such sale shall have been commenced shall
be pro-rated according to the proportion which such period bears to the full
monthly period, and upon any termination of this Agreement before the end of any
month, the fee for such part of a month shall be pro-rated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to Holding, the
value of each Series' net assets shall be computed in the manner specified in
the Charter for the computation of the value of each Series' net assets.
Notwithstanding anything to the contrary herein, if in any
fiscal year the aggregate expenses of any Series, exclusive of taxes, brokerage,
interest on borrowings and (with the prior written consent of the necessary
state securities commissions) extraordinary expenses, but including the
management, investment advisory, sub-advisory and administration fees, exceed
the expense limitation of any such state having jurisdiction over the Series,
the Fund may deduct from the fees to be paid hereunder, or Holding will bear, to
the extent required by state law, that portion of such excess which bears the
same relation to the total of such excess as Holding's fee hereunder bears to
the total fee otherwise payable for the fiscal year by the Series pursuant to
this Agreement and the Fund's management, investment advisory and sub-advisory
or similar agreements. Holding's obligation is limited to the amount of its fees
hereunder. Such deduction or payment, if any, will be estimated daily, and
reconciled and effected or paid, as the case may be, on a monthly basis.
6. Confidentiality. Holding will treat confidentially and as
proprietary information of the Fund all records and other information relative
to the Fund and each Series' prior or present shareholders or those persons or
entities who respond to inquiries concerning investment in a Series and, except
as provided below, will not use such records or information for any other
purpose other than for the performance of its responsibilities and duties with
regard to the Series which now exist or which may be added in the future. Any
other use by Holding of the records and information referred to above may be
made only after prior notification to and approval in writing by the Fund. Such
approval shall not be unreasonably withheld and may not be withheld where (i)
Holding may be exposed to civil or criminal contempt proceedings for failure to
divulge such information; (ii) Holding is requested to divulge such information
by duly constituted authorities; or (iii) Holding is so requested by the Fund.
III. LIMITATION OF LIABILITY
Holding shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of
Holding's duties or from its reckless disregard of its obligations and duties
under this Agreement. Any person, even though also an officer, director,
partner, employee or agent of Holding, who may be or become an officer,
Director, employee or agent of the Fund, shall be deemed, when rendering
services to the Fund or to any Series, or acting on any business of the Fund or
of any Series (other than services or business in connection with Holding's
duties as Administrator hereunder) to be rendering such services to or acting
solely for the Fund or Series and not as an officer, director, partner, employee
or agent or one under the control or direction of Holding even though paid by
Holding.
IV. TERM
As to each Series, this Agreement shall continue until the
date set forth opposite such Series' name on Schedule 1 hereto (the "Reapproval
Date"), and thereafter shall continue automatically for successive annual
periods ending on the day of each year set forth opposite the Series' name on
Schedule 1 hereto (the "Reapproval Day"), provided such continuance is
specifically approved as to the Series at least annually by (a) the Fund's Board
of Directors or (b) vote of a majority (as defined in the 1940 Act) of such
Series' outstanding voting securities, provided that in either event its
continuance also is approved by a majority of the Fund's Directors who are not
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. As to each Series, this Agreement is terminable without
penalty, at any time if for "cause," by the Fund's Directors or by vote of
holders of a majority of such Series' shares or, upon not less than 90 days'
written notice to the Fund, by Holding. This Agreement also will terminate
automatically, as to the relevant Series, in the event of its assignment (as
defined in the 1940 Act). "Cause" shall mean a material breach by Holding of its
obligations under this Agreement which shall not have been cured within 30 days
after the date on which Holding shall have received written notice setting forth
in detail the facts alleged to give rise to the breach.
V. MISCELLANEOUS
1. Amendments. No provision of this Agreement may be changed,
waived, discharged or terminated, except by an instrument in writing signed by
the party against whom an enforcement of the change, waiver, discharge or
termination is sought.
2. Construction. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Article IV hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and shall be governed by New York law; provided,
however, that nothing herein shall be construed in a manner inconsistent with
the 1940 Act or any rule or regulation of the Commission thereunder.
3. Notice. Any notice or other instrument in writing,
authorized or required by this Agreement to be given to the Fund shall be
sufficiently given if addressed to the Fund and mailed or delivered to it at its
office at the address first above written, or at such other place as the Fund
may from time to time designate in writing. Any notice or other instrument in
writing, authorized or required by this Agreement to be given to Holding shall
be sufficiently given if addressed to Holding and mailed or delivered to it at
its office at the address first above written, or at such other place as Holding
may from time to time designate in writing.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers designated below as of the day and
year first above written.
THE INFINITY MUTUAL FUNDS, INC.
By:
Richard E. Stierwalt,
Chairman of the Board and
Chief Executive Officer
Attest:
Domenick Pugliese,
Secretary
CONCORD HOLDING CORPORATION
By:
William B. Blundin,
Vice Chairman
Attest:
Susan L. West,
Chief Operating Officer
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Annual Fee as
a Percentage of
Average Daily
Name of Series Net Assets Reapproval Date Reapproval Day
<S> <C> <C> <C>
Alpha Government .13% of assets less December 31, 1997 December 31
Securities Portfolio than $200 million
.12% of assets from
$200 million to less
than $300 million
.11% of assets from
$300 million to less
than $350 million
.10% of assets $350
million and over
BEA Short Duration
Portfolio .12 of 1% December 31, 1997 December 31
Correspondent Cash .10 of 1% December 31, 1997 December 31
Reserves Money Market
Portfolio
Correspondent Cash .10 of 1% December 31, 1997 December 31
Reserves Municipal
Portfolio
</TABLE>
As Revised: April 25, 1996
<PAGE>
EXHIBIT 5(c)(ii)
ADMINISTRATION AGREEMENT
Administration Agreement made as of April 25, 1996 between
certain portfolios of THE INFINITY MUTUAL FUNDS, INC., a Maryland corporation
having its principal office and place of business at 125 West 55th Street, 11th
Floor, New York, New York 10019 (herein called the "Fund"), and BISYS FUND
SERVICES LIMITED PARTNERSHIP, an Ohio limited partnership having its principal
office and place of business at 3435 Stelzer Road, Columbus, Ohio 43219-3035
(herein called "BISYS").
WHEREAS, the Fund is an open-end, management investment
company, registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), and consisting of, among others, the portfolios set forth on
Schedule 1 hereto, as such Schedule may be revised from time to time (each, a
"Series");
WHEREAS, the Fund intends from time to time to employ certain
entities (in addition to those named below), some of which may be affiliated
with BISYS, to provide services to one or more Series (each, a "Service
Provider");
WHEREAS, the Fund employs Concord Financial Group, Inc. and, in the
future, an affiliate of such entity (the "Distributor") to act as distributor
for each Series' shares of common stock, par value $.001 per share (the
"Shares");
WHEREAS, the Fund, in respect of the Series, previously
had employed an affiliate of BISYS as its administrator; and
WHEREAS, the Fund desires to retain BISYS as its Administrator
to provide it with administrative services with respect to each Series, and
BISYS is willing to render such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants set forth herein, the parties hereto agree as follows:
I. DELIVERY OF DOCUMENTS
The Fund has delivered to BISYS copies of each of the
following documents and will deliver to it all future amendments and supplements
thereto, if any:
(a) The Fund's Articles of Incorporation and all
amendments and supplements thereto (as presently in effect and as
from time to time amended or supplemented, herein called the
"Charter");
(b) The Fund's By-laws (as presently in effect
and as from time to time amended, herein called the "By-laws");
(c) Resolutions of the Board of Directors of the
Fund authorizing the execution and delivery of this Agreement;
(d) The Fund's Registration Statement under the
Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act on Form
N-1A most recently filed with the Securities and Exchange Commission (the
"Commission") relating to the Shares, and all subsequent amendments or
supplements thereto (the "Registration Statement");
(e) The Fund's Notification of Registration under
the 1940 Act on Form N-8A as filed with the Commission; and
(f) The Fund's current Prospectuses and
Statements of Additional Information pertaining to the Series (as presently in
effect and as from time to time amended and supplemented, herein called the
"Prospectus").
II. ADMINISTRATION
1. Appointment of Administrator. The Fund hereby appoints
BISYS as its Administrator for each of the Series on the terms and for the
period set forth in this Agreement and BISYS hereby accepts such appointment and
agrees to perform the services and duties set forth in this Section II for the
compensation provided in this Section. The Fund understands that BISYS now acts,
and that from time to time hereafter BISYS may act, as administrator of various
investment companies or fiduciary for other managed accounts, and the Fund has
no objection to BISYS' so acting. In addition, it is understood that the persons
employed by BISYS to assist in the performance of its duties hereunder will not
devote their full time to such services and nothing herein contained shall be
deemed to limit or restrict the right of BISYS or any affiliate of BISYS to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
2. Services and Duties.
(a) As Administrator, and subject to the
supervision and control of the Fund's Board of Directors, BISYS will provide
office facilities, equipment, statistical and research data, clerical,
accounting and bookkeeping services, internal compliance services relating to
accounting and legal matters, and personnel to carry out all administrative
services required for operation of the business and affairs of the Series, other
than those management, investment advisory and sub-advisory functions which are
to be performed by certain Service Providers pursuant to their respective
agreements with the Fund, the services of the Distributor, those services to be
performed by the Fund's custodian and transfer agent, and those services
normally performed by the Fund's legal counsel and independent auditors. BISYS'
responsibilities include without limitation the following services:
(1) Providing a facility to receive purchase and
redemption orders via toll-free IN-WATTS telephone lines;
(2) Providing for the preparing, supervision and
mailing of confirmations for all purchase and redemption
orders;
(3) Providing and supervising the operation of an automated
data processing system to process purchase and redemption orders received by the
Distributor (BISYS assumes responsibility for the accuracy of the data
transmitted for processing or storage);
(4) Overseeing the performance of the Fund's custodian and
transfer agent;
(5) Making available information concerning each Series to
its shareholders; distributing written communications to each Series'
shareholders such as periodic listings of each Series' securities, annual and
semi-annual reports, and the Prospectus and supplements thereto; and handling
shareholder problems and calls relating to administrative matters; and
(6) Providing and supervising the services of employees
("relationship coordinators") whose principal responsibility and function shall
be to preserve and strengthen each Series' relationships with its shareholders.
(b) BISYS shall assure that persons are available to receive
redemption requests to the Fund's transfer agent as promptly as practicable.
(c) BISYS shall assure that persons are available to receive
orders accepted for the purchase of Shares to the transfer agent as promptly as
practicable.
(d) BISYS shall participate in the periodic updating of the
Prospectus and shall accumulate information for and, subject to approval by the
Fund's Treasurer and legal counsel, coordinate the preparation, filing, printing
and dissemination of reports to the Series' shareholders and the Commission,
including but not limited to annual reports and semi-annual reports on Form
N-SAR, notices pursuant to Rule 24f-2 and proxy materials.
(e) BISYS shall pay all costs and expenses of maintaining
the offices of the Fund, wherever located, and shall arrange for payment by the
Series of all expenses payable by the Series.
(f) BISYS, after consultation with legal counsel for the
Fund, shall determine the jurisdictions in which the Shares shall be registered
or qualified for sale and, in connection therewith, shall be responsible for the
maintenance of the registration or qualification of the Shares for sale under
the securities laws of any state. Payment of share registration fees and any
fees for qualifying or continuing the qualification of the Series shall be made
by the Series.
(g) BISYS shall provide the services of certain persons who
may be appointed as officers of the Fund by the Fund's Board of Directors.
(h) BISYS shall oversee the maintenance by the Fund's
custodian and transfer agent of the books and records of the Fund required under
the 1940 Act in connection with the performance of the Fund's agreements with
such entities, and shall maintain, or provide for the maintenance of, such other
books and records (other than those required to be maintained by the Service
Providers) as may be required by law or may be required for the proper operation
of the business and affairs of the Series. In compliance with the requirements
of Rule 31a-3 under the 1940 Act, BISYS agrees that all such books and records
which it maintains, or is responsible for maintaining, for the Series are the
property of the Fund and further agrees to surrender promptly to the Fund any of
such books and records upon the Fund's request. BISYS further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act said books and
records required to be maintained by Rule 31a-1 under said Act.
(i) BISYS shall prepare the Series' federal, state and local
income tax returns.
(j) BISYS shall prepare and, subject to approval of the
Fund's Treasurer, disseminate to the Fund's Directors the Fund's and each
Series' quarterly financial statements and schedules of investments, and shall
prepare such other reports relating to the business and affairs of the Fund and
each Series (not otherwise appropriately prepared by the Service Providers, the
Fund's legal counsel or its independent auditors) as the officers and Directors
of the Fund may from time to time reasonably request in connection with the
performance of their duties.
(k) BISYS shall assist with the coordination of the
provision of investment management, advisory and sub-advisory services by the
Service Providers to the Series, and shall provide other administration
assistance to said entities as required to carry out the business and operations
of the Series.
(l) BISYS shall recommend, implement and monitor all
specialized services and programs that are necessary or appropriate in order for
the Series to serve properly the investment needs of the fiduciary accounts
investing in their Shares.
(m) In performing its duties as Administrator for the
Series, BISYS will act in conformity with the Charter, By-laws and Prospectus
and with the instructions and directions of the Board of Directors of the Fund
and will conform to and comply with the requirements of the 1940 Act and all
other applicable federal or state laws and regulations.
3. Subcontractors. It is understood that BISYS may from time
to time employ or associate with itself such person or persons as BISYS may
believe to be particularly fitted to assist in the performance of this
Agreement; provided, however, that the compensation of such person or persons
shall be paid by BISYS and that BISYS shall be as fully responsible to the Fund
for the acts and omissions of any subcontractor as it is for its own acts and
omissions.
4. Expenses Assumed as Administrator. Except as otherwise
stated in this subsection 4, BISYS shall pay all expenses incurred by it in
performing its services and duties as Administrator. All other expenses incurred
in the operation of the Fund will be borne by the Fund, except to the extent
specifically assumed by others. The expenses to be borne by the Fund include,
without limitation, the following: organizational costs, taxes, interest,
brokerage fees and commissions, if any, fees of Directors who are not officers,
directors, employees or holders of 5% or more of the outstanding voting
securities of any Service Provider or BISYS, or any of their affiliates,
Commission fees, state Blue Sky qualification fees, management, advisory,
sub-advisory, administration and other shareholder services fees, charges of
custodians, transfer and dividend disbursing agents' fees, certain insurance
premiums, industry association fees, auditing and legal expenses, costs of
maintaining corporate existence, costs of independent pricing services, costs
attributable to investor services (including, without limitation, telephone and
personnel expenses), costs of calculating the net asset value of the Series'
shares, costs of shareholders' reports and corporate meetings, costs of
preparing and printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders (unless
otherwise provided pursuant to a plan adopted in accordance with Rule 12b-1
under the 1940 Act), and any extraordinary expenses.
5. Compensation. In consideration of services rendered
pursuant to this Agreement, the Fund will pay BISYS on the first business day of
each month the fee at the annual rate set forth opposite each Series' name on
Schedule 1 hereto, based upon the value of each Series' average daily net assets
for the previous month. Net asset value shall be computed on such days and at
such time or times as described in the Prospectus. The fee for the period from
the date of the commencement of the initial public sale of each Series' shares
to the end of the month during which such sale shall have been commenced shall
be pro-rated according to the proportion which such period bears to the full
monthly period, and upon any termination of this Agreement before the end of any
month, the fee for such part of a month shall be pro-rated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to BISYS, the
value of each Series' net assets shall be computed in the manner specified in
the Charter for the computation of the value of each Series' net assets.
Notwithstanding anything to the contrary herein, if in any
fiscal year the aggregate expenses of any Series, exclusive of taxes, brokerage,
interest on borrowings and (with the prior written consent of the necessary
state securities commissions) extraordinary expenses, but including the
management, investment advisory, sub-advisory and administration fees, exceed
the expense limitation of any such state having jurisdiction over the Series,
the Fund may deduct from the fees to be paid hereunder, or BISYS will bear, to
the extent required by state law, that portion of such excess which bears the
same relation to the total of such excess as BISYS' fee hereunder bears to the
total fee otherwise payable for the fiscal year by the Series pursuant to this
Agreement and the Fund's management, investment advisory and sub-advisory or
similar agreements. BISYS' obligation is limited to the amount of its fees
hereunder. Such deduction or payment, if any, will be estimated daily, and
reconciled and effected or paid, as the case may be, on a monthly basis.
6. Confidentiality. BISYS will treat confidentially and as
proprietary information of the Fund all records and other information relative
to the Fund and each Series' prior or present shareholders or those persons or
entities who respond to inquiries concerning investment in a Series and, except
as provided below, will not use such records or information for any other
purpose other than for the performance of its responsibilities and duties with
regard to the Series which now exist or which may be added in the future. Any
other use by BISYS of the records and information referred to above may be made
only after prior notification to and approval in writing by the Fund. Such
approval shall not be unreasonably withheld and may not be withheld where (i)
BISYS may be exposed to civil or criminal contempt proceedings for failure to
divulge such information; (ii) BISYS is requested to divulge such information by
duly constituted authorities; or (iii) BISYS is so requested by the Fund.
III. LIMITATION OF LIABILITY
BISYS shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of
BISYS' duties or from its reckless disregard of its obligations and duties under
this Agreement. Any person, even though also an officer, director, partner,
employee or agent of BISYS, who may be or become an officer, Director, employee
or agent of the Fund, shall be deemed, when rendering services to the Fund or to
any Series, or acting on any business of the Fund or of any Series (other than
services or business in connection with BISYS' duties as Administrator
hereunder) to be rendering such services to or acting solely for the Fund or
Series and not as an officer, director, partner, employee or agent or one under
the control or direction of BISYS even though paid by BISYS.
IV. TERM
As to each Series, this Agreement shall continue until the
date set forth opposite such Series' name on Schedule 1 hereto (the "Reapproval
Date"), and thereafter shall continue automatically for successive annual
periods ending on the day of each year set forth opposite the Series' name on
Schedule 1 hereto (the "Reapproval Day"), provided such continuance is
specifically approved as to the Series at least annually by (a) the Fund's Board
of Directors or (b) vote of a majority (as defined in the 1940 Act) of such
Series' outstanding voting securities, provided that in either event its
continuance also is approved by a majority of the Fund's Directors who are not
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. As to each Series, this Agreement is terminable without
penalty, at any time if for "cause," by the Fund's Directors or by vote of
holders of a majority of such Series' shares or, upon not less than 90 days'
written notice to the Fund, by BISYS. This Agreement also will terminate
automatically, as to the relevant Series, in the event of its assignment (as
defined in the 1940 Act). "Cause" shall mean a material breach by BISYS of its
obligations under this Agreement which shall not have been cured within 30 days
after the date on which BISYS shall have received written notice setting forth
in detail the facts alleged to give rise to the breach.
V. MISCELLANEOUS
1. Amendments. No provision of this Agreement may be
changed, waived, discharged or terminated, except by an instrument in writing
signed by the party against whom an enforcement of the change, waiver, discharge
or termination is sought.
2. Construction. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Article IV hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and shall be governed by New York law; provided,
however, that nothing herein shall be construed in a manner inconsistent with
the 1940 Act or any rule or regulation of the Commission thereunder.
3. Notice. Any notice or other instrument in writing,
authorized or required by this Agreement to be given to the Fund shall be
sufficiently given if addressed to the Fund and mailed or delivered to it at its
office at the address first above written, or at such other place as the Fund
may from time to time designate in writing. Any notice or other instrument in
writing, authorized or required by this Agreement to be given to BISYS shall be
sufficiently given if addressed to BISYS and mailed or delivered to it at its
office at the address first above written, or at such other place as BISYS may
from time to time designate in writing.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers designated below as of the day and
year first above written.
THE INFINITY MUTUAL FUNDS, INC.
By:
Attest:
BISYS FUND SERVICES LIMITED
PARTNERSHIP
By: BISYS Fund Services, Inc.,
General Partner
By:
Attest:
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Annual Fee as
a Percentage of
Average Daily
Name of Series Net Assets Reapproval Date Reapproval Day
<S> <C> <C> <C>
ValueStar Capital
Growth Portfolio .15 of 1% April 25, 2001 April 25
ValueStar Equity Income
Portfolio .15 of 1% April 25, 2001 April 25
ValueStar Investment
Grade Bond Portfolio .15 of 1% April 25, 2001 April 25
ValueStar Short-Inter-
mediate Duration Bond
Portfolio .15 of 1% April 25, 2001 April 25
ValueStar Tennessee Tax
Exempt Bond Portfolio .15 of 1% April 25, 2001 April 25
ValueStar Prime Money
Market Portfolio .10 of 1% April 25, 2001 April 25
ValueStar U.S. Treasury
Money Market Portfolio .10 of 1% April 25, 2001 April 25
</TABLE>
<PAGE>
EXHIBIT (11)
Independent Auditors' Consent
The Board of Directors
Alpha Government Securities Portfolio:
We consent to the use of our report dated February 9, 1996, included in the
Registration Statement on form N-1A and to the reference to our firm under the
heading "Financial Highlights" in the Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
April 30, 1996
<PAGE>
EXHIBIT (11)
Independent Auditors' Consent
The Board of Directors
BEA Short Duration Portfolio:
We consent to the use of our report dated February 9, 1996, included in the
Registration Statement on form N-1A and to the reference to our firm under the
heading "Financial Highlights" in the Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
April 30, 1996
<PAGE>
EXHIBIT (11)
Independent Auditors' Consent
The Board of Directors
Correspondent Cash Reserves
Money Market Portfolio:
We consent to the use of our report dated February 9, 1996, included in the
Registration Statement on form N-1A and to the reference to our firm under the
heading "Financial Highlights" in the Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
April 30, 1996
<PAGE>
EXHIBIT (11)
Independent Auditors' Consent
The Board of Directors
ValueStar Capital Growth Portfolio
ValueStar Investment Grade Bond Portfolio
ValueStar Short-Intermediate Duration
Bond Portfolio
ValueStar Tennessee Tax Exempt Bond
Portfolio:
We consent to the use of our report dated February 9, 1996, included in the
Registration Statement on form N-1A and to the reference to our firm under the
heading "Financial Highlights" in the Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
April 30, 1996
<PAGE>
EXHIBIT (11)
Independent Auditors' Consent
The Board of Directors
ValueStar Prime Money Market Portfolio
ValueStar U.S. Treasury Money Market
Portfolio:
We consent to the use of our report dated February 9, 1996, included in the
Registration Statement on form N-1A and to the reference to our firm under the
heading "Financial Highlights" in the Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
April 30, 1996
<PAGE>
EXHIBIT 18(ii)
THE INFINITY MUTUAL FUNDS, INC.
ValueStar Non-Money Market Funds
Rule 18f-3 Plan
Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), requires that the Board of an investment company
desiring to offer multiple classes pursuant to said Rule adopt a plan setting
forth the separate arrangement and expense allocation of each class, and any
related conversion features or exchange privileges.
The Board, including a majority of the non-interested Board
members, of The Infinity Mutual Funds, Inc. (the "Fund"), on behalf of each
series of the Fund listed on Schedule A attached hereto (each, a "Portfolio")
which offers multiple classes, has determined that the following plan is in the
best interests of each class individually and the Portfolio as a whole:
(a) Class Designation: Portfolio shares shall be
divided into Investor Shares and Trust Shares.
(b) Differences in Services: The services offered to
shareholders of each Class shall be substantially the same, except that
TeleTrade, Right of Accumulation, Letter of Intent, Automatic Investment Plan,
Directed Distribution Plan, Automatic Withdrawal Plan and Reinstatement
Privilege shall be available only to holders of Investor Shares.
(c) Differences in Distribution Arrangements: Investor
Shares of each Portfolio shall be offered with a front- end sales charge, as
such term is defined in Article III, Section 26(b), of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., and shall be
charged an annual distribution fee under a Distribution Plan adopted pursuant to
Rule 12b-1 under the 1940 Act. The amount of the sales charge and the amount of
the fees under the Distribution Plan pertaining to the Investor Shares are set
forth on Schedule B hereto. Trust Shares shall be offered at net asset value
with no front-end sales charge. Trust Shares shall be offered exclusively to
clients of First American Trust Company, N.A. for their qualified trust, custody
and/or agency accounts and to clients of affiliated and correspondent banks of
First American Trust Company, N.A. or certain other institutions for their
similar accounts maintained at such affiliates or institutions. (d) Expense
Allocation. The following expenses shall be allocated, to the extent
practicable, on a Class-by- Class basis: (a) fees under the Distribution Plan;
(b) printing and postage expenses related to preparing and distributing
materials, such as shareholder reports, prospectuses and proxies, to current
shareholders of a specific Class; (c) Securities and Exchange Commission and
Blue Sky registration fees incurred by a specific Class; (d) the expense of
administrative personnel and services as required to support the shareholders of
a specific Class; (e) litigation or other legal expenses relating solely to a
specific Class; (f) transfer agent fees identified by the Fund's transfer agent
as being attributable to a specific Class; and (g) Board members' fees incurred
as a result of issues relating to a specific Class.
Dated: April 26, 1995
Revised: February 8, 1996
<PAGE>
SCHEDULE A
ValueStar Capital Growth Portfolio
Investor Shares and Trust Shares
ValueStar Investment Grade Bond Portfolio
Investor Shares and Trust Shares
ValueStar Short-Intermediate Duration Bond Portfolio
Investor Shares and Trust Shares
ValueStar Tennessee Tax Exempt Bond Portfolio
Investor Shares and Trust Shares
<PAGE>
SCHEDULE B
Front-End Sales Charge--Investor Shares--The public offering price for Investor
Shares shall be the net asset value per share of that Class plus a sales load as
shown below:
<TABLE>
<CAPTION>
Total Sales Load
-----------------------------------------------------------
As a % of As a % of
offering net asset
price per value per
Amount of Transaction share share
------------------------ -------------------------
<S> <C> <C>
Less than $100,000.............................................. 3.00 3.09
$100,000 to less than $250,000.................................. 2.50 2.56
$250,000 to less than $500,000.................................. 2.00 2.04
$500,000 to less than $750,000.................................. 1.50 1.52
$750,000 to less than $1,000,000................................ 1.00 1.01
$1,000,000 and above............................................ 0.25 0.25
</TABLE>
Amount of Distribution Plan Fees--Investor Shares--.25 of 1% of the value of the
average daily net assets of the Investor Shares class.
