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PROSPECTUS MAY 1, 1995
As Revised, February 13, 1996
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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
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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").
Concord Holding Corporation (the "Administrator") serves as each
Portfolio's administrator.
<PAGE>
Concord Financial Group, Inc. (the "Distributor"), a wholly-
owned subsidiary of the Administrator, serves as distributor of each Portfolio's
shares.
Investor Shares are subject to a sales charge imposed at the
time of purchase and bear certain costs of distribution pursuant to a plan
adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940.
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, 1995,
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.
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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.
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<PAGE>
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TABLE OF CONTENTS
Page
Fee Table . . . . . . . . . . . . . . . . . . . .
Financial Highlights . . . . . . . . . . . . . .
Description of the Portfolios . . . . . . . . . .
Management of the Portfolios . . . . . . . . . .
How to Buy Shares . . . . . . . . . . . . . . . .
How to Redeem Shares . . . . . . . . . . . . . .
Shareholder Privileges . . . . . . . . . . . . .
Dividends, Distributions and Taxes . . . . . . .
Performance Information . . . . . . . . . . . . .
General Information. . . . . . . . . . . . . . .
Appendix . . . . . . . . . . . . . . . . . . . .
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Distributed by: Investment Adviser:
Concord Financial Group, First American National
Inc. 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) 852-0045
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
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<PAGE>
<TABLE><CAPTION>
FEE TABLE*
Short-Intermediate Tennessee
Capital Duration Investment Grade Tax Exempt
Growth Portfolio Bond Portfolio Bond Portfolio Bond Portfolio
----------------- ------------------- ---------------- --------------
Trust Investor Trust Investor Trust Investor Trust Investor
Shares Shares Shares Shares Shares Shares Shares Shares
------ ------ ------ -------- ------ -------- ------ -------
<S> <C> <C> <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% None 3.0%
Annual Operating Expenses
(as a percentage of average
daily net assets)
Management Fees (after
expense reimbursement) . . . . . .50% .50% .37% .37% .50% .50% .42% .42%
12b-1 Fees (after expense
reimbursement) . . . . . . . . . None .00% None .00% None .00% None .00%
Other Expenses (after expense
reimbursement) . . . . . . . . . .52% .52% .46% .46% .51% .51% .40% .40%
Total Portfolio Operating
Expenses (after expense
reimbursement)**. . . . . . . . 1.02% 1.02% .83% .83% 1.01% 1.01% .82% .82%
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 . . . . . . . $10 $40 $8 $38 $10 $40 $8 $38
3 Years . . . . . . . $32 $61 $26 $55 $32 $61 $26 $55
</TABLE>
________________________
* 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.
-4-
<PAGE>
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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%.
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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 are based
on estimated amounts for the current fiscal year. 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." The
expenses noted above, without reimbursement, would be:
<TABLE><CAPTION>
Capital Growth Short-Intermediate Tennessee
Duration Bond Investment Grade Tax Exempt
Portfolio Portfolio Bond Portfolio Bond Portfolio
---------------- -------------------- ----------------- --------------------
Trust Investor Trust Investor Trust Investor Trust Investor
Shares Shares Shares Shares Shares Shares Shares Shares
------ ------ ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees .65% .65% .50% .50% .50% .50% .50% .50%
12b-1 Fees . . None .25% None .25% None .25% None .25%
Other Expenses .52% .52% .53% .53% .51% .51% .43% .43%
Total Portfolio
Operating
Expenses . . . 1.17% 1.42% 1.03% 1.28% 1.01% 1.26% .93% 1.18%
</TABLE>
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
the period from March 28, 1994 (commencement of operations) through December 31,
1994. 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
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<PAGE>
information is available for the Capital Growth Portfolio or Investment Grade
Bond Portfolio, which had not commenced operations as of the date of this
Prospectus.
VALUESTAR SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
Period Ended
December 31,
1994*
------------
Net asset value, beginning of period . . . . . . . . . . . . . . . $ 10.00
-------
Income from investment operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . 0.38
Net realized and unrealized loss on securities transactions . . . (0.34)
------
Total income from investment operations . . . . . . . . . . . . . 0.04
Dividends from net investment income . . . . . . . . . . . . . . . (0.38)
------
Net change in net asset value . . . . . . . . . . . . . . . . . . . (0.34)
------
Net asset value, end of period . . . . . . . . . . . . . . . . . . $ 9.66
======
Total return . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.42%+
Ratios/supplemental data:
Net assets, end of period (000s) . . . . . . . . . . . . . . . . $93,189
Ratio of expenses to average net assets** . . . . . . . . . . . . 0.83%++
Ratio of net investment income to average net assets** . . . . . 5.27%++
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . . . 6%
____________________
* For the period March 28, 1994 (commencement of operations) through December
31, 1994.
** 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 0.45% (annualized).
+ The total return figure listed does not include the effect of the maximum
3.00% sales charge and is not annualized.
++ Annualized.
-6-
<PAGE> VALUESTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
Period Ended
December 31,
1994*
------------
Net asset value, beginning of period . . . . . . . . . . . . . . . $ 10.00
-------
Income from investment operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . 0.34
Net realized and unrealized loss on securities transactions . . . (0.60)
------
Total income from investment operations . . . . . . . . . . . . (0.26)
Dividends from net investment operations . . . . . . . . . . . . . (0.34)
------
Net change in net asset value . . . . . . . . . . . . . . . . . . . (0.60)
------
Net asset value, end of period . . . . . . . . . . . . . . . . . . $ 9.40
======
Total return . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.63)%+
Ratios/supplemental data:
Net assets, end of period (000s) . . . . . . . . . . . . . . . . $86,127
Ratio of expenses to average net assets** . . . . . . . . . . . . 0.82%++
Ratio of net investment income to average net assets** . . . . . 4.61%++
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . . . 41%
____________________
* For the period March 28, 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 0.36% (annualized).
+ The total return figure listed does not reflect the effect of the maximum
3.00% sales charge and is not annualized.
++ Annualized.
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
General
The Fund is a "series fund," which is a mutual fund divided into
separate portfolios. Each portfolio for many purposes is treated as a separate
entity under the Investment Company Act of 1940, as amended (the "1940 Act"),
and for other purposes, and a shareholder of one portfolio is not deemed to be a
shareholder of any other portfolio. As described below, 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
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<PAGE>
established and sold pursuant to other offering documents. See "General
Information."
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 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 equity securities in which the
Capital Growth 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 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 Portfolio also may invest in debt securities of domestic and foreign issuers
when the Adviser believes that such securities offer opportunities on capital
growth. See "Appendix--Portfolio Securities." 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.
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 "Risk Factors--Lower
Rated Securities" below, and "Appendix" in the Statement of Additional
Information.
-8-
<PAGE>
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 Capital Growth 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 "Risk Factors" below, and "Appendix--
Investment Techniques." The Capital Growth 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.
-9-
<PAGE>
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 "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 Short-Intermediate Duration Bond Portfolio invests.
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<PAGE>
Investment Grade Bond Portfolio--The Investment Grade Bond Portfolio's
management policies are identical to those of the Short-Intermediate 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 coupon-bearing 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
5.65 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 and at least 65% of the value of its total assets (except when
maintaining a temporary defensive position) will be invested in bonds,
debentures and other debt securities. Under normal circumstances, at least 65%
of the value of the Portfolio's total assets will be invested in 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 "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 "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
-11-
<PAGE>
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 "Risk Factors--Fixed-Income Securities"
below, and "Appendix" in the Statement of Additional Information.
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.
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
-12-
<PAGE>
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 "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.
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, and provided further that there
is no such limitation on the purchase of Municipal Obligations by the Tennessee
Tax Exempt Bond Portfolio. 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
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outstanding voting shares. See "Investment Objectives and Management Policies--
Investment Restrictions" in the Statement of Additional Information.
Certain Additional Non-Fundamental Policies
Each Portfolio may (i) purchase securities of any company having less
than three years' continuous operation (including operations of any
predecessors) if such purchase does not cause the value of such Portfolio's
investments in all such companies to exceed 5% of the value of its total assets;
(ii) pledge, hypothecate, mortgage or otherwise encumber its assets, but only to
secure permitted borrowings; and (iii) invest up to 10% of the value of its net
assets in repurchase agreements providing for settlement in more than seven days
after notice and in other illiquid securities. See "Investment Objectives and
Management Policies--Investment Restrictions" in the Statement of Additional
Information.
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,
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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.
For the Capital Growth, Short-Intermediate Duration Bond and
Investment Grade Bond Portfolios, 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. 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."
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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.
Investing in Municipal Obligations--(Tennessee Tax Exempt Bond Portfolio)
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 Statement of Additional Information which sets forth other
considerations.
Investing in Foreign Securities--(Capital Growth Portfolio, Short-Intermediate
Duration Bond Portfolio and Investment Grade
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<PAGE>
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. The issuers of some of these securities, such as 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.
Because evidences of ownership of such securities usually are held outside
the United States, these Portfolios 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, interest and
dividends on the foreign securities or might restrict the payment of principal,
interest and dividends to investors located outside the country of the issuers,
whether from currency blockage or otherwise. Custodial expenses for a portfolio
of non-U.S. securities generally are higher than for a portfolio of U.S.
securities.
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.
Furthermore, some of these securities may be subject to brokerage
taxes levied by foreign governments, which have the effect of increasing the
cost of such investment and reducing the realized gain or increasing the
realized loss on such securities at the time of sale. Income received by these
Portfolios from sources within foreign countries may be reduced by withholding
or other taxes imposed by such countries. Tax conventions between certain
countries and the United States, however, may reduce or eliminate such taxes.
All such taxes paid by a Portfolio will reduce its net income available for
distribution to its shareholders.
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
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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 Portfolio) 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 (commonly
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 are prepared to invest in, or desire to dispose of,
securities in which a Portfolio invests, available investments or opportunities
for sales will be
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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, 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 investment officer of the Capital
Growth Portfolio is Charles E. Winger, Jr., who has been a Trust Officer of the
Adviser since 1988. The primary investment officer of the Short-Intermediate
Duration Bond Portfolio and Investment Grade Bond Portfolio is Donald F. Turk,
who has been a Trust Officer of the Adviser since 1980. The Tennessee Tax
Exempt Bond Portfolio's primary investment officer
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<PAGE>
is 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 security 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 period March 28, 1994 (commencement of operations) through December 31,
1994, the Fund paid the Adviser a monthly fee at the effective annual rate of
.37 of 1% of the value of Short-Intermediate Duration Bond Portfolio's average
daily net assets and .42 of 1% of the value of 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 at the time such amounts are waived or assumed, as the case may
be. 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 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
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daily net assets. For the period March 28, 1994 (commencement of operations)
through December 31, 1994, the Fund paid the Administrator a monthly fee at the
effective annual rate of .11 of 1% of the value of Short-Intermediate Duration
Bond Portfolio's average daily net assets and .13 of 1% of the value of the
Tennessee Tax Exempt Bond Portfolio's average daily net assets.
Distributor
Concord Financial Group, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, 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.
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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, 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
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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.,
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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
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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
----------------
As a % of As a % of Dealers'
Offering Net Asset Reallowance as a %
Amount of 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
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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
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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 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
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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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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.
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
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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
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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, 1994 as a "regulated investment company"
under the Code. Each Portfolio intends to continue to so qualify if such
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<PAGE>
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
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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
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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. Each
Portfolio's performance will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Average Annual Total Return
----------------------------------------------
Since
Capital Growth Portfolio 1 Year 3 Years 5 Years 10 Years 12/31/80
------ ------- ------- -------- --------
Maximum Offering Price 28.30% 10.05% 11.98% 11.50% 10.49%
Net Asset Value 32.26% 11.17% 12.67% 11.84% 10.71%
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%
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 of institutions. As of the
date of this Prospectus, Trust Shares had 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,
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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.
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.
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<PAGE> 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.
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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-
- -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. 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.
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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 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. 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
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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
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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
assembled for sale to investors by various governmental agencies, such as the
Government National Mortgage Association and government-related organizations
such as the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, as well as by private issuers such as commercial banks,
savings and loan institutions, mortgage banks and private mortgage insurance
companies, and similar foreign entities. 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 so 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
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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. In addition, regular payments received in respect of
mortgage-related securities include both interest and principal. No assurance
can be given as to the return each of these Portfolios will receive when these
amounts are reinvested. For further discussion concerning the investment
considerations involved, see "Description of the Portfolios--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. Credit card receivables are generally unsecured
and the debtors are entitled to the protection of a number of state and Federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by automobile receivables permit
the servicers of such receivables to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of
the holders of the related asset-backed securities. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of asset-backed
securities backed by automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on the underlying collateral may not, in some
cases, be available to support payments on these securities.
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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 may not
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 Portfolio, 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.
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.
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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
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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
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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
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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.
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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 and 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 (the
"CFTC"). 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
A-12
<PAGE>
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.
In addition, to the extent a Portfolio is engaging in a futures
transaction as a hedging device, due to 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 in that, for example, losses on the portfolio
securities may be in excess of gains on the futures contract or losses on the
futures contract may be in excess of gains on the portfolio securities that were
the subject of the hedge. In futures contracts based on indexes, the risk of
imperfect
A-13
<PAGE>
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.
In addition, in such situations, if the Portfolio has insufficient cash, it may
have to sell securities to meet daily variation margin requirements. Such sales
of securities may, but will not necessarily, be at increased prices which
reflect the rising market. The Portfolio may have to sell 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
A-14
<PAGE>
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
A-15
<PAGE>
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.
Securities purchased on a when-issued or forward commitment basis and
certain other securities held by the Portfolio are subject to changes in value
(both 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 when-
issued or forward
A-16
<PAGE>
commitment basis may expose the relevant Portfolio to risk because they may
experience such fluctuations prior to their actual delivery. Purchasing
securities on a when-issued or forward commitment 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. A
segregated account of each Portfolio consisting of cash, cash equivalents or
U.S. Government securities or other high quality liquid debt securities of the
type in which the Portfolio invests at least equal at all times to the amount of
the when-issued or forward commitments will be established and maintained at the
Fund's custodian bank. Purchasing securities on a forward commitment basis when
a Portfolio is fully or almost fully invested may result in greater potential
fluctuation in the value of such Portfolio's net assets and its net asset value
per share.
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.
A-17
<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, 1995
AS REVISED, FEBRUARY 13, 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, 1995, 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.
Concord Holding Corporation (the "Administrator") serves as
each Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly-
owned subsidiary 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-16
Management Arrangements . . . . . . . . . . . . . . . . B-19
Purchase and Redemption of Shares . . . . . . . . . . . B-22
Determination of Net Asset Value . . . . . . . . . . . B-24
Performance Information . . . . . . . . . . . . . . . . B-25
Dividends, Distributions and Taxes . . . . . . . . . . B-27
Portfolio Transactions . . . . . . . . . . . . . . . . B-29
Information About the Portfolios . . . . . . . . . . . B-30
Custodian, Transfer and Dividend Disbursing
Agent, Counsel and Independent Auditors . . . . . . . B-31
Appendix . . . . . . . . . . . . . . . . . . . . . . . B-33
Financial Statements . . . . . . . . . . . . . . . . . B-39
Independent Auditors' Report . . . . . . . . . . . . . B-65
B-1
<PAGE>
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
- --------------------
The average distribution of investments (at value) in
Municipal Obligations by ratings for the period March 28, 1994
(commencement of operations) through December 31, 1994, computed on
a monthly basis, for the Tennessee Tax Exempt Bond Portfolio was as
follows:
Moody's Standard
Investors Fitch Investors & Poor's
Service, Inc. Service, L.P. Ratings Group Percentage
("Moody's") ("Fitch") ("S&P") of Value
- ------------- --------------- ------------- --------
Aaa AAA AAA 31%
Aa AA AA 50%
A A A 19%
----
100%
====
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
B-2
<PAGE>
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
B-3
<PAGE>
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.
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
B-4
<PAGE>
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. 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
B-5
<PAGE>
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
B-6
<PAGE>
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.
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
B-7
<PAGE>
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
B-8
<PAGE>
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
B-9
<PAGE>
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.
B-10
<PAGE>
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
B-11
<PAGE>
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--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
B-12
<PAGE>
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
B-13
<PAGE>
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.
Lower rated zero coupon securities involve special
considerations. 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.
B-14
<PAGE>
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.
B-15
<PAGE>
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 and Officers of the Fund
- ----------------------------------
*RICHARD E. STIERWALT, Chairman of the Board and Chief Executive
-----------------------------------------
Officer. President and Chief Executive Officer of the
-------
Administrator and Distributor. Mr. Stierwalt is also an
officer of other investment companies administered by the
Administrator and is a director and Chief Operating
Officer of Vista Broker/Dealer Services, Inc. and BNY
Hamilton Distributors, Inc., registered broker/dealers.
He is 41 years old and his address is 3435 Stelzer Road,
Columbus, Ohio 43219.
B-16
<PAGE>
*WILLIAM B. BLUNDIN, President and Director. An employee
----------------------
of the Administrator. Mr. Blundin also is an officer of
other investment companies administered by the
Administrator 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 Not Listed Above
- -------------------------------------
WILLIAM TOMKO, Vice President. An employee of BISYS Fund Services,
--------------
Inc., an affiliate of the Administrator, and an officer of
B-17
<PAGE>
other investment companies administered by the
Administrator. 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. 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. 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.
GEORGE O. MARTINEZ, Secretary. Senior Vice President and
---------
Director of Legal and Compliance Services with BISYS Fund
Services, Inc., since April 1995, and an officer of other
investment companies administered by the Administrator.
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.
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.
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. 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
February 8, 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
B-18
<PAGE>
any of their affiliates. The aggregate amount of compensation paid
to each such Director by the Fund for year ended December 31, 1994
was as follows:
<TABLE><CAPTION>
(3) (5)
(2) Pension or (4) Total Compensation
(1) Aggregate Retirement Benefits Estimated Annual From Fund and
Name of Board Compensation from Accrued as Part of Benefits Upon Fund Complex Paid
Member Fund* Fund's Expenses Retirement to Board Member*
-------------------- ----------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Norma A. Coldwell $16,250 None None $16,250
John H. Forsgren $16,250 None None $16,250
Richard H. Francis $16,250 None None $16,250
William W. McInnes $ 7,500** None None $ 7,500**
Robert A. Robinson $ 2,500** None None $ 2,500**
</TABLE>
______________________________
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $7,274 for all Directors as a
group.
** Estimated amount for the year ended December 31, 1995.
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).
B-19
<PAGE>
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, $193,049 was payable by the Short-Intermediate
Duration Bond Portfolio and $326,848 was payable by the Tennessee Tax
Exempt Bond Portfolio pursuant to the Agreement. The Adviser waived
$49,660 and $55,056, respectively, of such fees, 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 March 29, 1995 with
the Fund. As to each Portfolio, the Administration 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 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. As to each Portfolio, the
Administration 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 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, $57,915 was payable by the
Short-Intermediate Duration Bond Portfolio and $98,054 was payable by
the Tennessee Tax Exempt Bond Portfolio pursuant to the
Administration Agreement. The Administrator waived $13,997 and
$16,134, respectively, of such fees, resulting in net fees being paid
to the Administrator 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
B-20
<PAGE>
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. 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
-----------------
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).
B-21
<PAGE>
For the period March 28, 1994 (commencement of operations)
through December 31, 1994, the Distributor waived receipt of $96,464
payable by the Short-Intermediate Duration Bond Portfolio and
$163,372 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
B-22
<PAGE>
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. The term "purchaser" shall not include an
individual and/or spouse purchasing securities for his, her or their
own account or for the account of any minor children and such
individual and/or spouse purchasing securities on behalf of his or
her IRA, Keogh Plan or 403(b)(7) Plan to the extent such 403(b)(7)
Plan is subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), custodial account or
under certain employee benefit plans or other programs due to
concerns that such aggregation might constitute a prohibited
transaction under the Code or ERISA.
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
B-23
<PAGE>
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
B-24
<PAGE>
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
B-25
<PAGE>
December 31, 1994 was 6.13%. The Tennessee Tax Exempt Bond
Portfolio's yield, with respect to Investor Shares, for the 30-day
period ended December 31, 1994 was 4.96%. 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, 1994
would have been 5.88% for the Short-Intermediate Duration Bond
Portfolio and 4.72% 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 1994 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, 1994 was
8.53%. Absent the expense absorption and fee waiver then in effect,
the Portfolio's tax equivalent yield for such period would have been
8.12%. 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, 1994, 62.5% 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
3.75%. 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.
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
B-26
<PAGE>
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, 1994 was
- -2.60%. 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, 1994 was -5.55%.
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, 1994 was 0.42% and -2.63%,
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, 1994. 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
B-27
<PAGE>
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 financi-
al 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
B-28
<PAGE>
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
B-29
<PAGE>
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
B-30
<PAGE>
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 17, 1995, 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 95.79%
Attn: Cash Management
800 First American Center
Nashville, TN 37237
TENNESSEE TAX EXEMPT BOND PORTFOLIO:
First American Trust Company 94.95%
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, Inc., an affiliate of the
Administrator, 3435 Stelzer Road, Columbus, Ohio 43219, acts as
B-31
<PAGE>
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 dividend 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, 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.
B-32
<PAGE>
APPENDIX
Description of certain ratings assigned by Standard &
Poor's Ratings Group, a division of The McGraw Hill Companies,
Inc. ("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.
B-33
<PAGE>
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
B-34
<PAGE>
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.
B-35
<PAGE>
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.
B-36
<PAGE>
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.
B-37
<PAGE>
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.
B-38
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
VALUESTAR SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
Portfolio of Investments
December 31, 1994
Principal
Maturity Amount Value
Rate Date (000) (Note 2)
---- ---- ----- --------
LONG-TERM INVESTMENTS--70.2%
U.S. Government Obligations--19.0%
U.S. Treasury Notes--19.0%
U.S. Treasury Note 6.875% 7/31/99 $2,100 $ 2,023,875
U.S. Treasury Note 6.375 7/15/99 4,500 4,253,940
U.S. Treasury Note 6.00 11/30/97 3,400 3,243,158
U.S. Treasury Note 5.875 3/31/99 3,000 2,789,130
U.S. Treasury Note 5.50 2/28/99 2,500 2,297,375
U.S. Treasury Note 5.125 4/30/98 1,300 1,198,626
U.S. Treasury Note 4.75 9/30/98 2,100 1,892,793
-----------
Total U.S. Government Obligations
(cost $18,315,008) 17,698,897
-----------
U.S. Government Agency Notes--13.3%
Federal National Mortgage Assoc. 7.64 6/16/04 1,250 1,180,250
Government National Mortgage Assoc.,
Pool #376589 8.50 9/15/09 2,040 2,043,824
Government National Mortgage Assoc.,
Pool #392814 8.50 12/15/09 1,480 1,483,079
Government National Mortgage Assoc.,
Pool #392770 8.50 12/15/09 1,038 1,039,802
Government National Mortgage Assoc.
Midget 8.00 8/15/08 1,986 1,948,378
Government National Mortgage Assoc.
Midget 8.00 11/15/09 1,955 1,917,277
Government National Mortgage Assoc.,
Pool #392085 7.50 4/15/09 974 934,103
Government National Mortgage Assoc.,
Pool #368641 7.50 4/15/09 933 894,753
Government National Mortgage Assoc.,
Pool #345752 7.50 6/15/09 960 920,489
-----------
Total U.S. Government Agency Notes
(cost $12,614,386) 12,361,955
-----------
See Notes to Financial Statements.
B-39
<PAGE>
Principal
Moody's/S&P Maturity Amount Value
Ratings Rate Date (000) (Note 2)
------- ---- ---- ----- --------
Corporate Obligations--37.9%
Corporate Bonds--26.1%
Bell Atlantic Financial
Services, Inc. A1/A 6.625% 11/30/97 $2,700 $ 2,588,625
Dow Capital BV A1/A 8.25 2/15/96 1,300 1,309,750
Gannett Co. Aa3/AA- 5.25 3/01/98 2,700 2,484,000
General Electric Co. Aaa/AAA 7.875 5/01/96 1,000 1,005,000
Houston Industries, Inc. Baa2/BBB 7.25 12/01/96 3,350 3,295,562
International Lease
Financial Corp. NR/A+ 5.625 3/01/98 2,250 2,089,687
MCI Communications Corp. A2/A- 7.625 11/07/96 2,250 2,238,750
New England Telephone &
Telegraph Aa2/AA- 6.25 12/15/97 1,700 1,615,000
Norwest Financial, Inc. Aa3/AA- 6.00 8/15/97 2,100 2,000,250
Pepsico, Inc. A1/A 6.125 1/15/98 1,000 952,500
Public Service Electric &
Gas Co. A2/A- 6.875 6/01/97 600 585,750
Union Pacific Corp.,
Equipment Trust Aa1/AA+ 6.44 1/15/98 2,700 2,585,250
Wal-Mart Stores Aa1/AA 5.50 3/01/98 1,700 1,578,875
-----------
24,328,999
-----------
Medium Term Notes--11.8%
Associates Corp. of
North America A1/AA- 6.59 1/12/98 2,400 2,301,000
Cooper Industries A2/A 7.67 10/15/96 1,300 1,293,500
Florida Power & Light Co. A2/A 6.20 2/02/98 2,000 1,902,500
Ford Motor Credit Corp. A2/A 6.65 1/26/98 500 480,625
General Electric
Capital Corp. Aaa/AAA 6.875 4/15/00 500 475,625
Kansas City Power & Light A1/A- 5.75 3/03/98 2,750 2,578,125
Southwestern Bell
Telephone Co. A1/A+ 5.08 10/13/98 2,200 1,977,250
-----------
11,008,625
-----------
Total Corporate Obligations
(cost $36,226,752) 35,337,624
-----------
Total Long-Term Investments
(cost $67,156,146) 65,398,476
-----------
SHORT-TERM INVESTMENTS--28.7%
Corporate Obligations--6.9%
Medium Term Notes--6.9%
Eastman Kodak Credit Corp. A3/A- 7.95% 8/21/95 $1,800 $ 1,811,250
Ford Motor Credit Corp. A2/A 8.75 1/15/95 500 500,000
Public Service Electric &
Gas Co. A2/A- 6.00 6/01/95 500 498,750
Salomon Inc. A3/A- 4.33 2/16/95 3,100 3,092,250
Virginia Electric & Power A2/A 8.55 5/15/95 500 502,500
-----------
Total Corporate Obligations
(cost $6,422,620) 6,404,750
-----------
U.S. Government Agency Note--4.3%
Federal National Mortgage Assoc.
(cost $3,997,378) 5.90 1/05/95 4,000 3,997,378
-----------
Commercial Paper--3.2%
General Electric Capital Corp.
(cost $2,982,150) P1/A1+ 5.95 2/06/95 3,000 2,982,150
-----------
U.S. Government Obligation--1.8%
U.S. Treasury Note
(cost $1,733,908) 8.50 11/15/95 1,700 1,719,550
-----------
B-40
<PAGE>
Principal
Moody's/S&P Maturity Amount Value
Ratings Rate Date (000) (Note 2)
------- ---- ---- ----- --------
Repurchase Agreement--6.4%
Repurchase Agreement with
J.P. Morgan & Co., dated
12/30/94, with a maturity
value of $6,003,967
(See Footnote A)
(cost $6,000,000) 5.95 1/03/95 6,000 6,000,000
-----------
See Notes to Financial Statements.
B-41
<PAGE>
Shares Value
(000) (Note 2)
----- --------
Regulated Investment Companies--6.1%
AIM Stic Prime Portfolio 2,783 $ 2,783,140
Emerald Prime Fund 2,916 2,916,402
-----------
Total Regulated Investment Companies
(cost $5,699,542) 5,699,542
-----------
Total Short-Term Investments (cost $26,835,598) 26,803,370
-----------
Total Investments in Securities
(cost $93,991,744)--98.9% 92,201,846
Other assets in excess of liabilities--1.1% 987,464
-----------
NET ASSETS--100.0% $93,189,310
===========
Footnote A:
Collateralized by $7,070,141 Government National Mortgage Association
(GNMAs) with various coupon rates and maturities ranging from 12/15/08 to
8/15/24; with an aggregate value of $6,121,405.
See Notes to Financial Statements.
B-42
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.--
VALUESTAR SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
Statement of Assets and Liabilities
December 31, 1994
Assets
Investments in securities, at value
(cost $87,991,744) $86,201,846
Repurchase agreement (cost $6,000,000) 6,000,000
Interest receivable 1,166,046
Receivable for Portfolio shares sold 120,307
Receivable for securities sold 10,236
Deferred organization costs and prepaid expenses 57,244
-----------
Total assets 93,555,679
-----------
Liabilities
Advisory fees payable 38,116
Administration fees payable 11,435
Dividends payable 244,151
Payable for Portfolio shares redeemed 31,000
Accrued expenses 41,667
-----------
Total liabilities 366,369
-----------
Net Assets $93,189,310
===========
Shares Outstanding ($0.001 par value, 250 million
shares authorized) 9,643,891
=========
Calculation of Maximum Offering Price
Net asset value per share $9.66
Sales charge--3.0% of public offering price 0.30
-----
Maximum Offering Price $9.96
=====
Composition of Net Assets:
Shares of common stock, at par $ 9,644
Additional paid-in capital 95,001,369
Net unrealized depreciation of investments (1,789,898)
Accumulated net realized losses (31,805)
-----------
Net Assets, December 31, 1994 $93,189,310
===========
See Notes to Financial Statements.
B-43
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
VALUESTAR SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
Statement of Operations
For the period March 28, 1994 (commencement of operations) through
December 31, 1994
Investment Income
Interest $2,353,102
Expenses
Advisory fees $ 193,049
Administration fees 57,915
Distribution expenses 96,464
Custodian fees and expenses 44,811
Audit fees 25,364
Transfer agent fees and expenses 22,931
Legal fees 15,292
Reports to shareholders 15,219
Registration fees 10,014
Amortization of organization expenses 4,905
Directors' fees 3,275
Other expenses 4,231
---------
493,470
Less: Fee waivers and expense reimbursements by the
Adviser, Administrator and Distributor (172,180) 321,290
--------- ----------
Net Investment Income 2,031,812
----------
Realized and Unrealized Loss on Investments
Net realized loss on securities transactions (31,805)
Net change in unrealized depreciation of investments (1,789,898)
----------
Net Loss on Investments (1,821,703)
----------
Net Increase in Net Assets Resulting from Operations $ 210,109
==========
See Notes to Financial Statements.
B-44
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
VALUESTAR SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
Statement of Changes in Net Assets
For the period March 28, 1994 (commencement of operations) through December 31,
1994
Increase (Decrease) in Net Assets
Operations
Net investment income $ 2,031,812
Net realized loss on securities transactions (31,805)
Net change in unrealized depreciation of investments (1,789,898)
------------
Net increase in net assets resulting from operations 210,109
------------
Dividends to shareholders from net investment income (2,031,812)
------------
Portfolio Share Transactions
Net proceeds from shares subscribed 105,102,765
Net asset value of shares issued to shareholders in
reinvestment of dividends 1,407,537
Cost of shares redeemed (11,499,289)
------------
Net increase in net assets from Portfolio share transactions 95,011,013
------------
Total Increase 93,189,310
Net Assets
Beginning of period 0
------------
End of period $ 93,189,310
============
See Notes to Financial Statements.
B-45
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
VALUESTAR TENNESSEE TAX EXEMPT BOND FUND
Portfolio of Investments
December 31, 1994
Principal
Moody's/S&P Maturity Amount Value
Ratings Rate Date (000) (Note 2)
------- ---- ---- ----- --------
LONG-TERM INVESTMENTS--98.4%
MUNICIPAL BONDS--98.4%
California--1.8%
California Public Works Board,
Various Universities, Ser. A A1/A 6.375% 11/01/14 $600 $ 556,500
Gilroy Unified School District,
Certificates of Participation Aaa/AAA 6.25 9/01/12 500 474,375
Gilroy Unified School District,
Certificates of Participation Aaa/AAA 6.00 9/01/07 500 476,875
----------
1,507,750
----------
Georgia--1.2%
Metropolitan Atlanta Rapid
Transit Authority, Sales
Tax Revenue, Ser. K A1/AA- 7.30 7/01/05 1,000 1,062,500
----------
Hawaii--0.5%
Honolulu City & County
Refunding & Improvement,
Ser. B Aa/AA 5.20 10/01/04 500 460,625
----------
Illinois--2.9%
Illinois Regional
Transportation Authority,
General Obligation, Ser. D
(FGIC Insured) Aaa/AAA 7.00 6/01/13 1,000 1,026,250
Illinois State Sales Tax
Revenue, Ser. O Aa/AAA 6.50 6/15/13 1,500 1,466,250
----------
2,492,500
----------
Indiana--0.6%
Indianapolis Local Public
Improvement Board, Ser. B Aa/AA+ 6.00 1/10/13 600 558,000
----------
Louisiana--0.7%
Louisiana Public Facilities
Authority, Hospital Revenue
Refunding, Lafayette
General Medical Center
Project Aaa/AAA 6.10% 10/01/05 $600 $ 597,750
----------
Nevada--0.9%
Washoe County School
District, Ser. A
(AMBAC Insured) Aaa/AAA 6.20 4/01/10 725 743,125
----------
North Carolina--0.8%
North Carolina Eastern
Municipal Power Agency,
Ser. B A/A- 6.125 1/01/09 775 707,188
----------
B-46
<PAGE>
Principal
Moody's/S&P Maturity Amount Value
Ratings Rate Date (000) (Note 2)
------- ---- ---- ----- --------
Pennsylvania--2.4%
Pennsylvania State Higher
Educational Facilities
Authority, College &
University Revenues,
Temple University
(MBIA Insured) Aaa/AAA 7.40 10/01/10 2,000 2,067,500
----------
South Dakota--0.7%
South Dakota Housing
Development Authority,
Home Ownership
Mortgage, Ser. D Aa1/AA+ 6.25 5/01/06 600 591,000
----------
Tennessee--68.4%
Anderson County Health and
Education Facility Board
Revenue, Methodist
Medical Center, Oakridge A1/NR 7.00 7/01/11 300 302,625
Anderson County Health and
Education Facility Board
Revenue, Methodist
Medical Center, Oakridge A1/NR 5.70 7/01/08 1,100 984,500
Anderson County Health and
Education Facility Board
Revenue, Methodist
Medical Center, Oakridge A1/NR 4.85 7/01/00 750 706,875
Anderson County Rural High
School (Prerefunded
1/01/98 @ 102) A1/NR 6.85 1/01/07 220 232,375
Blount County Hospital
Revenue, Ser. B
(MBIA Insured) Aaa/AAA 6.20 7/01/99 300 303,375
Bradley County Hospital
Revenue, Ser. A
(AMBAC Insured) Aaa/AAA 5.50% 3/01/10 $ 500 $ 452,500
Bradley County Hospital
Revenue, Ser. A
(AMBAC Insured) Aaa/AAA 5.50 3/01/11 300 267,750
Bradley County Hospital
Revenue, Ser. A
(AMBAC Insured) Aaa/AAA 5.50 3/01/12 500 444,375
Chattanooga Health,
Education and Housing
Facilities, Memorial
Hospital Project,
Ser. A (MBIA Insured) Aaa/AAA 6.30 9/01/06 300 302,250
Clarksville Electric System
Revenue Refunding and
Improvement (Prerefunded
9/01/00 @ 102) A/NR 6.65 9/01/05 105 111,300
Clarksville Electric System
Revenue Refunding and
Improvement A/NR 5.00 9/01/05 300 268,875
Clarksville Electric System
Revenue Refunding and
Improvement A/NR 4.50 9/01/01 400 368,500
Clarksville Public Building
Authority, Refunding-
Pooled Loan Program NR/AA 4.00 12/01/96 1,215 1,186,144
Clarksville Water, Sewer and
Gas Revenue (MBIA Insured) Aaa/AAA 5.50 2/01/98 150 150,750
B-47
<PAGE>
Principal
Moody's/S&P Maturity Amount Value
Ratings Rate Date (000) (Note 2)
------- ---- ---- ----- --------
Franklin Special School
District Limited Tax,
Schools Refunding Boards,
Ser. B (Prerefunded
6/01/97 @ 102) A1/NR 6.60 6/01/05 510 533,587
Hamilton County General
Obligation Bond, Ser. A Aa/NR 5.50 10/01/07 200 186,500
Hamilton County Industrial
Development Board, Lease
Rental Revenue (FGIC Insured) Aaa/AAA 5.50 9/01/02 1,000 965,000
Harpeth Valley Utilities
District, Davidson and
Williamson Counties A1/A 5.625 9/01/07 350 326,812
Harpeth Valley Utilities
District, Davidson and
Williamson Counties A1/A 5.50 9/01/11 600 531,000
Hawkins County General
Obligation Bond A/NR 6.25 5/01/03 300 303,375
Jackson Water and Sewer
Revenue Refunding (AMBAC
Insured) Aaa/AAA 5.00 1/01/07 535 467,456
Johnson City School Sales Tax
(AMBAC Insured) Aaa/AAA 6.60 5/01/10 1,000 1,010,000
Kingsport Public Improvement,
General Obligation A1/A+ 5.90% 9/01/07 $1,300 $ 1,261,000
Kingsport Public Improvement,
General Obligation Bond A1/A+ 5.80 9/01/06 615 597,319
Kingsport Water System
Improvement Refunding,
General Obligation Bond A1/NR 6.90 4/01/03 105 112,087
Kingsport Water System
Improvement Refunding,
General Obligation Bond A1/NR 6.85 4/01/02 100 106,375
Kingsport Water System
Improvement Refunding,
General Obligation Bond A1/NR 6.80 4/01/01 300 317,625
Knox County First Utility
District, A286 Water and
Sewer, Ser. A (MBIA Insured) A1/AA- 6.00 12/01/11 1,000 941,250
Knox County Health and
Education Housing Facility
Board, Hospital Facility
Revenue, Fort Sanders
Alliance Obligation
(MBIA Insured) Aaa/AAA 7.25 1/01/09 600 641,250
Knox County Health and
Education Housing Facility
Board, Hospital Facility
Revenue, Fort Sanders
Alliance Obligation,
Ser. C (MBIA Insured) Aaa/AAA 7.00 1/01/08 1,300 1,397,500
Knox County, Ser. A Aa/NR 6.40 4/01/08 400 414,500
Knoxville Airport General
Obligation, Ser. G A1/AA- 4.65 7/01/01 300 280,125
Knoxville Gas Revenue,
Refunding and Improvement,
Ser. E A1/AA 5.90 3/01/10 305 284,413
Knoxville Gas Revenue,
Refunding and Improvement,
Ser. E A1/AA 5.90 3/01/11 305 282,125
Knoxville Gas Revenue,
Refunding and Improvement,
Ser. E A1/AA 5.90 3/01/12 1,315 1,206,512
B-48
<PAGE>
Principal
Moody's/S&P Maturity Amount Value
Ratings Rate Date (000) (Note 2)
------- ---- ---- ----- --------
Knoxville Gas Revenue,
Refunding and Improvement,
Ser. E A1/AA 5.90 3/01/13 695 633,319
Knoxville Refunding and
Improvement, Ser. A A1/AA- 6.50 5/01/07 300 301,875
Knoxville Refunding and
Improvement, Ser. A A1/AA- 6.20 5/01/04 300 301,875
Knoxville Refunding and
Improvement, Ser. A A1/AA- 5.90 5/01/00 750 758,438
Knoxville Sewer General
Obligation Bond A1/AA- 5.50% 4/01/99 $ 260 $ 260,975
Knoxville Water Revenue,
Refunding and Improvement,
Ser. M Aa/AA 5.25 3/01/13 1,410 1,216,125
Madison County Hospital
Authority Revenue, Jackson
Madison General Hospital A1/A 6.60 4/01/97 300 306,750
Madison County Hospital
Authority Revenue, Jackson
Madison General Hospital A1/A 6.40 4/01/96 300 303,750
Memphis Electric System
Revenue Refunding Aa/AA 5.80 1/01/03 1,000 1,005,000
Memphis Electric System
Revenue Refunding Aa/AA 4.20 1/01/01 720 652,500
Memphis Electric System
Revenue Refunding, Ser. A Aa/AA 4.60 1/01/97 750 740,625
Memphis General Obligation
Bond, Ser. A (Prerefunded
7/01/98 @ 100.75) Aa/AA 6.40 7/01/01 165 170,981
Memphis General Obligation
Bond Aa/AA 5.90 5/01/99 150 150,187
Memphis General Obligation
Bond Aa/AA 5.25 3/01/12 635 549,275
Memphis General Obligation
Bond Aa/AA 5.25 3/01/13 285 244,031
Memphis General Obligation
Bond Aa/AA 5.10 3/01/09 150 131,063
Memphis Sanitation and Sewer
System Revenue (Prerefunded
8/01/97 @ 101.75) Aa/NR 7.00 8/01/02 300 315,375
Memphis Sanitation and Sewer
System Revenue Aa/AA 5.50 10/01/13 1,300 1,132,625
Memphis Sanitation and Sewer
System Revenue Ser. A Aa/AA 5.25 10/01/09 505 445,031
Memphis Sanitation and Sewer
System Revenue Ser. A Aa/AA 5.20 10/01/08 515 457,706
Memphis-Shelby County Airport
Authority Revenue Refunding
(MBIA Insured) Aaa/AAA 5.60 9/01/10 600 543,750
Memphis-Shelby County Airport
Authority Revenue Refunding
(MBIA Insured) Aaa/AAA 4.90 9/01/01 200 188,500
Memphis-Shelby County Airport
Authority Revenue Refunding
(MBIA Insured) Aaa/AAA 4.75% 9/01/00 $ 100 $ 94,750
Memphis Water Revenue
Refunding Aa/AA 5.20 1/01/09 300 264,000
Memphis Water Revenue
Refunding Aa/AA 4.90 1/01/03 300 279,000
Memphis Water Revenue,
Ser. A Aa/AA 6.00 1/01/12 600 559,500
Metro Nashville & Davidson
County Airport Authority,
Ser. B (FGIC Insured)
(Prerefunded 7/01/01 @ 102) Aaa/AAA 6.50 7/01/11 600 633,750
Metro Nashville & Davidson
County Electric Revenue,
Ser. L Aaa/AAA 6.40 7/01/01 205 212,687
B-49
<PAGE>
Principal
Moody's/S&P Maturity Amount Value
Ratings Rate Date (000) (Note 2)
------- ---- ---- ----- --------
Metro Nashville & Davidson
County Electric Revenue,
Ser. A Aa/AA 6.00 5/15/12 300 282,375
Metro Nashville & Davidson
County Energy Facility
Revenue (BIG Insured) Aaa/AAA 6.90 7/01/97 300 311,625
Metro Nashville & Davidson
County General Obligation
Bond Aa/AA 6.60 12/01/08 600 608,250
Metro Nashville & Davidson
County General Obligation
Bond Aa/AA 6.20 12/01/09 600 590,250
Metro Nashville & Davidson
County General Obligation
Bond Aa/AA 6.30 12/01/01 700 724,500
Metro Nashville & Davidson
County Water and Sewer
Revenue (AMBAC Insured) Aaa/AAA 6.00 1/01/08 1,100 1,043,625
Metro Nashville & Davidson
County Water and Sewer
Revenue Aaa/AAA 5.75 1/01/15 3,200 2,876,000
Montgomery County School
Utility, General Obligation
Bond A/NR 6.10 1/01/02 250 251,875
Montgomery County School
Utility, General Obligation
Bond A/NR 6.00 1/01/01 250 251,563
Mursfreeboro Housing Authority,
Multi-Family Housing,
Westbrook Towers Project NR/A 5.875 1/15/10 1,625 1,486,875
Nashville New Public Housing
Authority Aaa/AAA 5.00 8/01/10 575 508,156
Shelby County General
Obligation Bond, Ser. A Aa/AA+ 6.50 3/01/05 225 235,406
Shelby County General
Obligation Bond, Ser. A Aa/AA+ 6.10% 3/01/01 $ 200 $ 202,500
Shelby County General
Obligation Bond, Ser. A Aa/AA+ 5.25 3/01/11 900 785,250
Shelby County General
Obligation Bond, Ser. B Aa/AA+ 6.00 3/01/09 600 578,250
Shelby County Health and
Education Facility Board
Revenue, Multifamily
Housing, Windsor Apts. NR/AA 6.50 10/01/07 600 591,750
Shelby County School Boards,
Ser. A Aa/AA+ 6.50 8/01/01 300 307,500
Shelby County Schools General
Obligation Bond, Ser. B Aa/AA+ 5.875 3/01/12 970 904,525
Sullivan County Health,
Education and Housing Board
Revenue, Holston Valley
Health Care (MBIA Insured) Aaa/AAA 6.80 2/15/99 300 315,750
Sullivan County Health,
Education and Housing Board
Revenue, Holston Valley
Health Care (MBIA Insured) Aaa/AAA 7.20 2/15/09 1,000 1,085,000
Sumner County General
Obligation Bond Aa/NR 4.60 6/01/01 1,425 1,330,594
Tennessee Housing Development
Agency, Homeownership Program Aa/AA 6.45 7/01/07 500 488,125
Tennessee Housing Development
Agency, Homeownership Program Aa/AA 6.40 7/01/06 750 735,937
Tennessee Housing Development
Agency, Homeownership Program Aa/AA 6.35 7/01/05 500 493,125
Tennessee Housing Development
Agency Mortgage, Ser. A A1/A+ 5.85 7/01/13 2,500 2,240,625
B-50
<PAGE>
Principal
Moody's/S&P Maturity Amount Value
Ratings Rate Date (000) (Note 2)
------- ---- ---- ----- --------
Tennessee Local Development
Authority Revenue, Community
Provider-Loan Program NR/A- 6.70 10/01/05 125 127,344
Tennessee Local Development
Authority Revenue, Community
Provider-Loan Program NR/A- 6.60 10/01/04 225 229,219
Tennessee Local Development
Authority Revenue, Community
Provider-Loan Program NR/A- 6.50 10/01/03 150 152,625
Tennessee Local Development
Authority Revenue, State
Loan Program, Ser. A A/AA- 6.95 3/01/07 325 329,062
Tennessee Local Development
Authority Revenue, State
Loan Program, Ser. A A/AA- 6.90% 3/01/06 $ 350 $ 355,688
Tennessee Local Development
Authority Revenue, State
Loan Program, Ser. A A/AA- 5.65 3/01/07 1,800 1,687,500
Tennessee School Board
Authority, Ser. A A1/AA 6.75 5/01/11 1,000 1,012,500
Tennessee School Board
Authority, Ser. A A1/AA 6.25 5/01/10 735 703,763
Tennessee School Board
Authority, Ser. A A1/AA 6.25 5/01/11 300 285,375
Tennessee School Board
Authority, Ser. A A1/AA 6.25 5/01/12 340 323,000
Tennessee School Board
Authority, Ser. A A1/AA 5.80 5/01/04 600 589,500
Tennessee School Board
Authority, Ser. A A1/AA 5.75 5/01/03 1,020 1,007,250
Tennessee School Board
Authority, Higher Education
Facilities Refunding, Ser. A A1/AA 6.30 5/01/00 750 765,938
Tennessee State General
Obligation Bond, Ser. B Aaa/AA+ 5.95 6/01/99 1,000 1,027,500
-----------
58,927,143
-----------
Texas--15.5%
Arlington Independent School
District Refunding and
Improvement (PSF Guaranteed) Aaa/NR 6.00 2/15/04 600 600,000
Arlington Hospital Authority
Revenue Refunding, Arlington
Memorial Hospital
(MBIA Insured) Aaa/AAA 5.40 12/01/12 500 436,250
Austin Utility System
Revenue, Ser. C A/A 6.90 5/15/00 600 635,250
Bexar County, Detention
Facilities Aa/AA 5.25 6/15/12 1,300 1,113,125
El Paso Housing Authority,
Multifamily Housing Revenue,
Assorted Projects, Ser. A A1/NR 6.25 12/01/09 300 279,750
Georgetown Higher Education
Financing, Southwestern
University Project A1/A+ 6.20 2/15/11 650 606,938
Grand Prairie Independent
School District
(PSF Guaranteed) Aaa/AAA 6.40 8/15/05 300 309,750
Greater Texoma Utility
Authority Revenue Refunding,
Sherman City Project
(MBIA Insured) Aaa/AAA 5.50% 10/01/08 $ 300 $ 275,625
B-51
<PAGE>
Principal
Moody's/S&P Maturity Amount Value
Ratings Rate Date (000) (Note 2)
------- ---- ---- ----- --------
Greater Texoma Utility
Authority Revenue Refunding,
Sherman City Project
(MBIA Insured) Aaa/AAA 5.50 10/01/10 300 270,750
Harris County Toll Roads,
Senior Lien, Ser. A
(MBIA Insured) Aaa/AAA 5.90 8/15/07 1,000 961,250
Houston Waterworks and Sewer
System Revenue Refunding,
Ser. B A/A 6.75 12/01/08 1,000 1,017,500
Keller Independent School
District, Limited Tax
Refunding, Ser. A Aaa/NR 6.00 8/15/07 600 585,000
Laredo Sewer System-
Certificates of Obligation,
General Obligation Bond
(MBIA Insured) Aaa/AAA 5.625 8/15/11 645 582,919
Mesquite Independent School
District, Ser. A
(PSF Guaranteed) Aaa/AAA 5.00 8/15/09 810 693,562
Montgomery County Hospital
District Revenue, Ser. B Aaa/AAA 6.55 4/01/09 1,100 1,159,125
New Braunfels Utility Revenue,
Ser. F (AMBAC Insured) Aaa/AAA 6.20 7/01/04 500 506,250
Plano Independent School
District (PSF Guaranteed) Aaa/AAA 5.50 2/15/10 600 539,250
Spring Branch Independent
School District, Limited
Tax Refunding (PSF Guaranteed) Aaa/AAA 6.80 2/01/06 500 512,500
Texas State Turnpike
Authority, Dallas North
Thruway Revenue Refunding
(AMBAC Insured) Aaa/AAA 5.00 1/01/08 500 419,375
Texas Refunding, Veteran's
Housing Assistance, Ser. C Aa/AA 6.40 6/01/09 400 393,500
University of Texas Revenue
Refunding, Ser. A Aa1/AA 7.00 8/15/07 500 527,500
Victoria County Hospital
Revenue, Citizens Medical
Center (AMBAC Insured) Aaa/AAA 6.20 1/01/10 1,000 958,750
-----------
13,383,919
-----------
Virginia--1.0%
Virginia College Building
Authority Refunding,
Hampton University Project NR/A+ 5.75% 4/01/14 $1,000 $ 861,250
Washington--1.0%
Seattle Water System Revenue
Refunding Aa/AA 5.50 6/01/14 1,000 862,500
Total Long-Term Municipal
Bonds (cost $88,493,148) 84,822,750
-----------
SHORT-TERM INVESTMENTS--2.6%
MUNICIPAL BOND--1.1%
Tennessee--1.1%
Memphis General Improvement,
Ser. B* (LOC: Industrial
Bank of Japan Ltd)
(cost $900,000) Aa3/A+ 5.55 1/03/95 900 900,000
B-52
<PAGE>
Shares
(000)
Regulated Investment Companies--1.5%
AIM Tax Free Investors Trust Shares 1,245 1,245,215
Emerald Tax-Exempt Fund 3 3,449
-----------
Total Regulated Investment Companies
(cost $1,248,664) 1,248,664
-----------
Total Short-Term Investments
(cost $2,148,664) 2,148,664
-----------
Total Investments
(cost $90,641,812)--101.0% 86,971,414
Liabilities in excess of other assets--(1.0%) (844,486)
-----------
NET ASSETS--100.0% $86,126,928
===========
* Variable rate security. The maturity date reflects the next rate
change date.
AMBAC -- American Municipal Bond Assurance Company.
BIG -- Bond Investors Guaranty.
FGIC -- Financial Guaranty Insurance Company.
MBIA -- Municipal Bond Insurance Association.
PSF -- Texas Public School Endowment Fund.
LOC -- Letter of Credit.
See Notes to Financial Statements.
B-53
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
VALUESTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
Statement of Assets and Liabilities
December 31, 1994
Assets
Investments at value
(cost $90,641,812) $86,971,414
Interest receivable 1,605,484
Receivable for investment securities sold 3,087,072
Receivable for Portfolio shares sold 1,316,000
Deferred organization costs and prepaid expenses 57,716
-----------
Total assets 93,037,686
-----------
Liabilities
Advisory fees payable 36,556
Administration fees payable 10,985
Payable for investment securities purchased 6,102,493
Payable for Portfolio shares redeemed 345,481
Dividends payable 346,057
Accrued expenses 69,186
-----------
Total liabilities 6,910,758
-----------
Net Assets $86,126,928
===========
Shares Outstanding ($0.001 par value,
250 million shares authorized) 9,165,346
===========
Calculation of Maximum Offering Price
Net asset value per share $9.40
Sales charge--3.0% of public offering price 0.29
-----
Maximum Offering Price $9.69
=====
Composition of Net Assets:
Shares of common stock, at par $ 9,165
Additional paid-in capital 91,502,570
Net unrealized depreciation of investments (3,670,398)
Accumulated net realized losses (1,714,409)
-----------
Net Assets, December 31, 1994 $86,126,928
===========
B-54
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
VALUESTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
Statement of Operations
For the period March 28, 1994 (commencement of operations) through December 31,
1994
Investment Income
Interest $ 3,547,386
Expenses
Advisory fees $ 326,848
Administration fees 98,054
Distribution expenses 163,372
Custodian fees and expenses 61,838
Registration fees 29,678
Audit fees 25,364
Transfer agent fees and expenses 22,931
Legal fees 15,192
Reports to shareholders 11,179
Directors' fees 5,275
Amortization of organization expenses 4,905
Other expenses 4,917
---------
769,553
Less: Fee waivers by the Adviser, Administrator and
Distributor (234,563) 534,990
--------- -----------
Net Investment Income 3,012,396
-----------
Unrealized Loss on Investments
Net realized loss on securities transactions (1,714,409)
Net change in unrealized depreciation of investments (3,670,398)
-----------
Net Loss on Investments (5,384,807)
-----------
Net Decrease in Net Assets Resulting from Operations $(2,372,411)
===========
B-55
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
VALUESTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
Statement of Changes in Net Assets
For the period March 28, 1994 (commencement of operations) through December 31,
1994
Increase (Decrease) in Net Assets
Operations
Net investment income $ 3,012,396
Net realized loss on securities transactions (1,714,409)
Net change in unrealized depreciation of investments (3,670,398)
------------
Net decrease in net assets resulting from operations (2,372,411)
------------
Dividends to shareholders from net investment income (3,012,396)
------------
Portfolio Share Transactions
Net proceeds from shares subscribed 105,070,686
Net asset value of shares issued to shareholders in
reinvestment of dividends 29,074
Cost of shares redeemed (13,588,025)
------------
Net increase in net assets from Portfolio share transactions 91,511,735
------------
Total Increase 86,126,928
Net Assets
Beginning of period 0
------------
End of period $ 86,126,928
============
B-56
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
VALUESTAR FUNDS
Notes to Financial Statements
Note 1--General
The Infinity Mutual Funds, Inc. (the "Fund") was organized as a Maryland
corporation on March 6, 1990. The Fund is registered under the Investment
Company Act of 1940, as amended (the "Act"), as an open-end, management
investment company. The Fund operates as a series company currently comprising
twelve portfolios. The accompanying financial statements and notes relate to
the ValueStar Short-Intermediate Duration Bond Portfolio and the ValueStar
Tennessee Tax Exempt Bond Portfolio (the "Portfolios") only.
First American National Bank ("First American") serves as the Portfolios'
investment adviser. Concord Holding Corporation ("Concord") serves as the
Portfolios' administrator and Concord Financial Group, Inc. (the "Distributor"),
a wholly-owned subsidiary of Concord, serves as the distributor of the
Portfolios' shares.
The Portfolios are authorized to issue two classes of shares as follows:
Investor Shares and Trust Shares. Investor Shares and Trust Shares are
substantially the same, except that Investor Shares bear the fees that are
payable under a plan adopted by the Fund's Board of Directors pursuant to Rule
12b-1 under the Act (the "Distribution Plan") at an annual rate of 0.25% of the
average daily net assets of the outstanding Investor Shares. As of December 31,
1994, the Portfolios had only sold Investor Shares.
Note 2--Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Portfolios in the preparation of their financial statements.
A) Security Valuation:
The Portfolios' 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 matrix system to determine valuations.
Restricted securities and securities for which market quotations are not readily
available, if any, are valued at fair value using methods approved by the Board
of Directors. Debt securities with remaining maturities of 60 days or less are
normally valued at amortized cost, which approximates market value. The
amortized cost method involves valuing a security at its cost on the date of
purchase or, in the case of securities purchased more than 60 days to maturity,
at their market value each day until the 61st day prior to maturity, and
thereafter assuming a constant amortization to maturity of the difference
between the principal amount due at maturity and such valuation.
B) Security Transactions and Investment Income:
Security transactions are recorded on trade date. Realized gains and
losses on the sales of investments are calculated on the identified cost basis.
Interest income, including accretion of discount and amortization of premium on
investments, is accrued daily. Dividend income is recorded on the ex-dividend
date.
C) Repurchase Agreements:
The Portfolios' custodian and other banks acting in a sub-custodian
capacity take possession of the collateral pledged for investments in repurchase
agreements. The underlying collateral is valued daily on a mark-to-market basis
to determine that the value, including accrued interest, exceeds the repurchase
price. In the event of the seller's default on the obligation to repurchase,
the Portfolios have the right to liquidate the collateral and apply the proceeds
in satisfaction of the obligation. Under certain circumstances, in the event of
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
B-57
<PAGE>
D) Expenses:
The Portfolios incurred certain costs in connection with their
organization. These costs were deferred and are being amortized on a
straight-line basis through 1999. The Fund accounts separately for the assets,
liabilities and operations of each Portfolio. Direct expenses of a Portfolio
are charged to that Portfolio while general Fund expenses are allocated among
the Fund's respective portfolios.
E) Federal Income Taxes:
For federal income tax purposes, each Portfolio is treated as a separate
entity for the purpose of determining its qualification as a regulated
investment company under the Internal Revenue Code (the "Code"). It is the
policy of each Portfolio to meet the requirements of the Code applicable to
regulated investment companies, including the requirement that they distribute
substantially all of their income to shareholders. Therefore, no federal income
tax provision is required.
At December 31, 1994, the Short-Intermediate Duration Bond Portfolio had a
capital loss carryover of approximately $32,000 and the Tennessee Tax Exempt
Bond Portfolio had a capital loss carryover of approximately $1,714,000 which
are available to offset future net realized capital gains on securities
transactions, to the extent provided for in the Code. Such capital loss
carryovers will expire in fiscal year 2002.
F) Dividends and Distributions to Shareholders:
Dividends are declared daily to shareholders of record at the close of
business on the day of declaration and are paid monthly. Distributions of net
realized gains, if any, will be paid at least annually. However, to the extent
that net realized gains of a Portfolio can be reduced by any capital loss
carryovers of that Portfolio, such gains will not be distributed. Dividends and
distributions are recorded on the ex-dividend date.
Note 3--Agreements and Other Transactions with Affiliates
The Portfolios have entered into an Investment Advisory Agreement with
First American, an Administration Agreement with Concord and a Distribution
Agreement with the Distributor.
As Investment Adviser, First American manages the investments of each
Portfolio and is responsible for all purchases and sales of each Portfolio's
investment securities. For its services, First American is entitled to receive
fees, computed daily and paid monthly, at an annual rate of 0.50% of each
Portfolio's average daily net assets. For the period March 28, 1994
(commencement of operations) through December 31, 1994, First American
voluntarily waived fees from the Short-Intermediate Duration Bond Portfolio and
the Tennessee Tax Exempt Bond Portfolio in the amount of $49,660 and $55,056,
respectively.
As Administrator, Concord assists in supervising the operations of the
Portfolios. For its services, Concord is entitled to receive fees, computed
daily and paid monthly, at the annual rate of 0.15% of each Portfolio's average
daily net assets. For the period March 28, 1994 (commencement of operations)
through December 31, 1994, Concord waived a portion of its administration fee
due from the Short-Intermediate Duration Bond Portfolio and Tennessee Tax Exempt
Bond Portfolio in the amount of $13,997 and $16,134, respectively.
Concord and First American have voluntarily agreed to limit the aggregate
expenses of the Short-Intermediate Duration Portfolio (generally including fees
payable to Concord and First American) to 0.80% of the Portfolio's average daily
net assets. If such expenses exceed this limitation, First American will
reimburse the Portfolio for any such expenses. For the period March 28, 1994
(commencement of operations) through December 31, 1994, First American agreed to
reimburse expenses in the amount of $12,059 so that the Portfolio could comply
with this voluntary limitation.
Pursuant to the Distribution Plan, each Portfolio pays the Distributor for
advertising, marketing and distributing Investor Shares at an annual rate of
0.25% of the average daily net assets of the outstanding Investor Shares. For
the period March 28, 1994 (commencement of operations) through December 31,
1994, the Distributor waived all
B-58
<PAGE>
of its distribution fees from the Short-Intermediate Duration Bond Portfolio and
the Tennessee Tax Exempt Bond Portfolio.
Certain officers of the Fund are "affiliated persons" (as defined in the
Act) of Concord or the Distributor. Each Director receives an annual fee of
$5,000 and a meeting fee of $1,250 per meeting for services relating to all the
portfolios constituting the Fund.
Note 4--Securities Transactions
For the period March 28, 1994 (commencement of operations) through
December 31, 1994, the cost of purchases and the proceeds from sales of
portfolio securities (excluding short-term investments) were as follows:
Short- Tennessee
Intermediate Tax
Duration Bond Exempt Bond
Portfolio Portfolio
--------- ---------
Purchase of U.S. Government securities $26,610,775 --
Purchase of other securities 45,612,954 $123,351,263
Sale of other securities 1,838,934 33,004,256
For the period March 28, 1994 (commencement of operations) through
December 31, 1994, the cost of each Portfolio's securities for federal income
tax purposes was substantially the same as for financial reporting purposes.
Accordingly, the Short-Intermediate Duration Bond Portfolio and the Tennessee
Tax Exempt Bond Portfolio had net unrealized depreciation of $1,789,898 and
$3,670,398, respectively, consisting of gross unrealized appreciation of $0 and
$84,731, respectively, and gross unrealized depreciation of $1,789,898 and
$3,755,129, respectively.
Note 5--Capital Share Transactions
At December 31, 1994, there were 1 billion shares of the Portfolios' $0.001
par value common stock authorized of which each Portfolio's Shares are
classified into Investor Shares (250 million shares authorized per Portfolio)
and Trust Shares (250 million shares authorized per Portfolio).
Transactions in Investor Shares of each Portfolio are summarized below:
SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
Period Ended
December 31,
1994*
-----
Shares sold 10,675,102
Shares issued to shareholders in reinvestment of dividends 143,800
Shares redeemed (1,175,021)
----------
Net increase 9,643,891
==========
TENNESSEE TAX EXEMPT BOND PORTFOLIO
Period Ended
December 31,
1994*
-----
Shares sold 10,586,359
Shares issued to shareholders in reinvestment of dividends 3,062
Shares redeemed (1,424,075)
----------
Net increase 9,165,346
==========
* For the period March 28, 1994 (commencement of operations) through
December 31, 1994.
B-59
<PAGE>
Note 6--Concentration of Credit Risk
The Tennessee Tax Exempt Bond Portfolio invests substantially all of its
assets in a non-diversified portfolio of tax exempt debt obligations primarily
consisting of securities issued by the State of Tennessee, its municipalities,
counties and other taxing districts. The issuers' abilities to meet their
obligations may be affected by Tennessee economic, regional and political
developments.
The Tennessee Tax Exempt Bond Portfolio had the following concentrations by
sector at December 31, 1994 (as a percentage of total investments):
General Obligations 40.9%
Educational Facilities 13.3%
Housing 12.3%
Hospital 9.7%
Utilities 7.0%
Sewer 3.7%
Short-Term Investments 2.2%
Turnpike, Road and Bridge Development 2.2%
Waste Water 2.0%
Sales Tax 1.7%
Transportation 1.2%
Airport 1.2%
Lease 1.1%
Water Projects 1.0%
Public Facilities 0.5%
-----
100.0%
=====
B-60
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
VALUESTAR SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
Financial Highlights
Period Ended
December 31,
1994*
-----
Net asset value, beginning of period $ 10.00
-------
Income from investment operations:
Net investment income 0.38
Net realized and unrealized loss on securities transactions (0.34)
-------
Total income from investment operations 0.04
Dividends from net investment income (0.38)
-------
Net change in net asset value (0.34)
-------
Net asset value, end of period $ 9.66
=======
Total return 0.42%+
Ratios/supplemental data:
Net assets, end of period (000s) $93,189
Ratio of expenses to average net assets** 0.83%++
Ratio of net investment income to average net assets** 5.27%++
Portfolio turnover 6%
* For the period March 28, 1994 (commencement of operations) through
December 31, 1994.
** 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 0.45% (annualized).
+ The total return figure listed does not include the effect of the maximum
3.00% sales charge and is not annualized.
++ Annualized.
See Notes to Financial Statements.
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<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
VALUESTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
Financial Highlights
Period Ended
December 31,
1994*
-----
Net asset value, beginning of period $ 10.00
-------
Income from investment operations:
Net investment income 0.34
Net realized and unrealized loss on securities transactions (0.60)
-------
Total income from investment operations (0.26)
Dividends from net investment income (0.34)
-------
Net change in net asset value (0.60)
-------
Net asset value, end of period $ 9.40
=======
Total return (2.63)%+
Ratios/supplemental data:
Net assets, end of period (000s) $86,127
Ratio of expenses to average net assets** 0.82%++
Ratio of net investment income to average net assets** 4.61%++
Portfolio turnover 41%
* For the period March 28, 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 0.36% (annualized).
+ The total return figure listed does not include the effect of the maximum
3.00% sales charge and is not annualized.
++ Annualized.
See Notes to Financial Statements.
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<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
The Infinity Mutual Funds, Inc.:
We have audited the accompanying statements of assets and liabilities of
the ValueStar Short-Intermediate Duration Bond Portfolio and the ValueStar
Tennessee Tax Exempt Bond Portfolio (two of the portfolios constituting The
Infinity Mutual Funds, Inc.), including the portfolios of investments as of
December 31, 1994, the related statements of operations, the related statements
of changes in net assets, and the financial highlights for the period March 28,
1994 (commencement of operations) through December 31, 1994. These financial
statements and financial highlights are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
ValueStar Short-Intermediate Duration Bond Portfolio and the ValueStar Tennessee
Tax Exempt Bond Portfolio as of December 31, 1994, the results of their
operations, the changes in their net assets, and the financial highlights for
the period March 28, 1994 (commencement of operations) through December
31, 1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 22, 1995
B-63
