PROSPECTUS
May 1, 1996
LOGO
THE INFINITY MUTUAL FUNDS, INC.
Alpha Government Securities Portfolio
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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, shares of the
Fund's Alpha Government Securities Portfolio (the "Portfolio") are being
offered.
The Portfolio is a diversified, money market mutual fund that seeks to
provide investors with as high a level of current income as is consistent with
the preservation of capital and the maintenance of liquidity. The Portfolio
invests only in short-term securities issued or guaranteed as to principal and
interest by the U.S. Government, its agencies or instrumentalities and
repurchase agreements in respect thereof.
The Portfolio's shares are offered only to clients of certain financial
institutions which have entered into service agreements with the Fund. You can
invest, reinvest or redeem shares of the Portfolio at any time without charge or
penalty.
BEA Associates (the "Adviser") serves as the Portfolio's investment adviser.
Concord Holding Corporation (the "Administrator") serves as the Portfolio's
administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned subsidiary
of the Administrator, serves as the distributor of the Portfolio's shares.
An investment in the Portfolio is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that the Portfolio will be able to
maintain a stable net asset value of $1.00 per share.
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This Prospectus sets forth concisely information about the Fund and the
Portfolio that an investor should know before investing. It should be read and
retained for future reference.
The Statement of Additional Information, dated May 1, 1996, which may be
revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, write to the Fund at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, contact your sales representative or call
1-800-442-3809.
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Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other governmental
agency. Portfolio shares involve certain investment risks, including the
possible loss of principal.
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TABLE OF CONTENTS
Page
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Expense Summary.............................................. 2
Financial Highlights......................................... 3
Yield Information............................................ 4
Description of the Portfolio................................. 4
Management of the Portfolio.................................. 8
How to Buy Shares............................................ 11
How to Redeem Shares......................................... 13
Dividends, Distributions and Taxes........................... 13
General Information.......................................... 15
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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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Expense Summary
(as a percentage of average daily net assets)
Management Fees........................................ .10%
Other Expenses (net of fee waivers).................... .84%
Total Operating Expenses (net of fee waivers)..... .94%
Example: 1 Year $ 10
You would pay the following expenses on a $1,000 investment, 3 Years $ 30
assuming (1) 5% annual return and (2) redemption at the 5 Years $ 52
end of each time period: 10 Years $115
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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, the 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 you in understanding the
costs and expenses borne by the Portfolio, the payment of which will reduce
investors' annual return. Other Expenses noted above have been restated to
reflect estimated amounts, net of fee waivers, for the current fiscal year. The
expenses noted above, without fee waivers, are estimated for the current fiscal
year to be: Other Expenses -- 1.19% and Total Operating Expenses -- 1.29%. For
the prior fiscal year, Other Expenses were .66%, net of fee waivers, and 1.01%,
without fee waivers, and Total Operating Expenses were .76%, net of fee waivers,
and 1.11%, without fee waivers. Financial institutions also may charge their
customers fees in connection with the operation of the "sweep" program which are
for services unrelated to those provided pursuant to Shareholder Services
Agreements. For a further description of the various costs and expenses incurred
in the Portfolio's operation, see "Management of the Portfolio."
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Financial Highlights
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net assets
and other supplemental data for each period indicated. The information in the
table has been audited by KPMG Peat Marwick LLP, the Portfolio's independent
auditors, whose report thereon appears in the Statement of Additional
Information. Further financial data and related notes are included in the
Statement of Additional Information, available upon request.
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------- Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1992 1991 1990*
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $ 0.9994 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
------------ ------------ ------------ ------------ ------------ ------------
Income from investment
operations:
Net investment income....... 0.0484 0.0362 0.0270 0.0333 0.0540 0.0201
Net realized and unrealized
gains/(losses) on
securities transactions... 0.0001 (0.0037) -- 0.0001 -- --
------------ ------------ ------------ ------------ ------------ ------------
Net gains from investment
operations.................... 0.0485 0.0325 0.0270 0.0334 0.0540 0.0201
------------ ------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Dividends from net
investment income............. (0.0484) (0.0362) (0.0270) (0.0333) (0.0540) (0.0201)
Distributions from net
realized gains on
securities transactions... -- -- -- (0.0001) -- --
------------ ------------ ------------ ------------ ------------ ------------
Total dividends and
distributions................. (0.0484) (0.0362) (0.0270) (0.0334) (0.0540) (0.0201)
------------ ------------ ------------ ------------ ------------ ------------
Increase due to voluntary
capital contribution from
affiliates.................... -- 0.0031 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net change in net asset
value ...................... 0.0001 (0.0006) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net Asset Value, End of
Period........................ $ 0.9995 $ 0.9994 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Total Return.................. 4.95% 3.65% 2.73% 3.39% 5.54% 2.02%+
Ratios/Supplemental Data:
Net assets, end of period
(000's)....................... $ 54,881 $ 43,104 $ 39,069 $ 43,124 $ 62,489 $ 62,557
Ratio of expenses to average
net assets.................... 0.76% 0.60% 0.56% 0.60% 0.57% 0.69%++
Ratio of net investment
income to average net
assets........................ 4.83% 3.61% 2.70% 3.40% 5.39% 7.11%++
Ratio of expenses to average
net assets**.................. 1.11% 1.06% 1.06% 1.10% 1.07% 1.19%++
Ratio of net investment
income to average net
assets**...................... 4.48% 3.15% 2.20% 2.90% 4.89% 6.61%++
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* For the period September 20, 1990 (commencement of operations) through
December 31, 1990.
** During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
++ Annualized.
</TABLE>
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Yield Information
From time to time, the Portfolio will advertise its yield and effective
yield. Both yield figures are based on historical earnings and are not intended
to indicate future performance. It can be expected that these yields will
fluctuate substantially. The yield of the Portfolio refers to the income
generated by an investment in the Portfolio over a seven-day period (which
period will be stated in the advertisement). This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Portfolio is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Yield information is useful in reviewing the Portfolio's performance, but
because yields will fluctuate, such information under certain conditions may not
provide a basis for comparison with domestic bank deposits, other investments
which pay a fixed yield for a stated period of time, or other investment
companies which may use a different method of computing yield.
Comparative performance information may be used from time to time in
advertising or marketing the Portfolio's shares, including data from Lipper
Analytical Services, Inc., Bank Rate Monitor, N. Palm Beach, Fla. 33408,
IBC/Donoghue's Money Fund Report, Morningstar, Inc., other industry publications
and national financial publications, including Money, Forbes, Barron's, The Wall
Street Journal and The New York Times, or local or regional publications.
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Description of the Portfolio
Investment Objective
The Portfolio seeks to provide investors with as high a level of current
income as is consistent with the preservation of capital and the maintenance of
liquidity. The Portfolio's investment objective cannot be changed without
approval by the holders of a majority (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of the Portfolio's outstanding voting
shares. There can be no assurance that the Portfolio's investment objective will
be achieved. Securities in which the Portfolio invests may not earn as high a
level of current income as long-term or lower quality securities which generally
have less liquidity, greater market risk and more fluctuation in market value.
Management Policies
The Portfolio invests only in short-term securities issued or guaranteed as
to principal and interest by the U.S. Government, its agencies or
instrumentalities and may enter into repurchase agreements and reverse
repurchase agreements with respect to such securities. The Portfolio also may
lend securities from its portfolio as described below.
The Portfolio seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Fund uses the amortized cost of method
of valuing the Portfolio's securities pursuant to Rule 2a-7 under the 1940 Act.
In accordance with Rule 2a-7, the Portfolio is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities. The Board of Directors has delegated to the
Adviser the day-to-day operations of the Portfolio; however, the Board of
Directors retains ultimate responsibility for compliance with Rule 2a-7 under
the 1940 Act. For further information regarding the amortized cost method of
valuing securities, see "Determination of Net Asset Value" in the Portfolio's
Statement of Additional Information. There can be no assurance that the
Portfolio will be able to maintain a stable net asset value of $1.00 per share.
Portfolio Securities
U.S. Government Obligations. The Portfolio may invest in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities. Such
securities include U.S. Treasury securities, such as bills, notes, bonds and
certificates of indebtedness, which differ only in their interest rates,
maturities and times of issuance, and issues of U.S. Government agencies and
instrumentalities established under the authority of an act of Congress. Some
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued by
the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Interest may
fluctuate based on generally recognized reference rates or the relationship of
rates. While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Portfolio
will invest in such securities only when it is satisfied that the credit risk
with respect to the issuer is minimal.
Repurchase Agreements. The Portfolio may enter into repurchase agreements.
Repurchase agreements involve the acquisition by the Portfolio of an underlying
debt instrument, subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the instrument at a fixed price usually not more than one
week after its purchase. Certain costs may be incurred in connection with the
sale of the securities if the seller does not repurchase them in accordance with
the repurchase agreement. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the securities, realization on the securities by
the Portfolio may be delayed or limited.
Investment Practices
Portfolio Lending. From time to time, the Portfolio may lend securities
from its portfolio to brokers, dealers and other financial institutions needing
to borrow securities to complete certain transactions. Such loans may not exceed
33 1/3% of the Portfolio's total assets. In connection with such loans, the
Portfolio will receive collateral consisting of cash or U.S. Government
securities. Such collateral will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. The
Portfolio can increase its income through the investment of such collateral. The
Portfolio continues to be entitled to the interest or other distributions
payable on the loaned security and receives interest on the amount of the loan.
Such loans will be terminable at any time upon specified notice. The Portfolio
might experience risk of loss if the institution with which it has engaged in a
portfolio loan transaction breaches its agreement with the Portfolio.
Reverse Repurchase Agreements. The Portfolio, to a limited extent, may
borrow for investment purposes. This borrowing, which is known as leveraging,
will be on a secured basis through the entering into reverse repurchase
agreements with banks, brokers or dealers. Reverse repurchase agreements involve
the transfer by the Portfolio of an underlying debt instrument in return for
cash proceeds based on a percentage of the value of the security. The Portfolio
retains the right to receive interest and principal payments on the security.
The Portfolio will use the proceeds of reverse repurchase agreements only to
make investments which generally either mature or have a demand feature to
resell to the issuer at a date simultaneous with or prior to the expiration of
the reverse repurchase agreement. At an agreed upon future date, the Portfolio
repurchases the security at principal plus accrued interest. In certain types of
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based on the prevailing overnight repurchase rate. As a
result of these transactions, the Portfolio may be exposed to greater potential
fluctuations in the value of its assets. Interest costs on the money borrowed
may exceed the return received on the securities purchased. The Fund's Directors
have considered the risks to the Portfolio and its shareholders which may result
from the entry into reverse repurchase agreements and have determined that the
entry into such agreements is consistent with the Portfolio's investment
objective and management policies.
When-Issued Securities. The Portfolio may purchase U.S. Government
securities on a when-issued or forward commitment basis, which means that
delivery and payment for such securities ordinarily take place within 45 days
after the date of the commitment to purchase. The payment obligation and the
interest rate that will be received on the securities are fixed at the time the
buyer enters into the commitment. The Portfolio will make commitments to
purchase such securities only with the intention of actually acquiring the
securities, but the Portfolio may sell these securities before the settlement
date if it is deemed advisable. The Portfolio will not accrue income in respect
of a security purchased on a when-issued or forward commitment basis prior to
its stated delivery date.
Illiquid Securities. The Portfolio will not invest more than 10% of the
value of its net assets in illiquid securities. The term "illiquid securities"
for this purpose means securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at which the
Portfolio has valued the securities and includes, among other instruments,
certain restricted securities. As to these securities, the Portfolio is subject
to a risk that should the Portfolio desire to sell them when a ready buyer is
not available at a price the Portfolio deems representative of their value, the
value of the Portfolio's net assets could be adversely affected.
Certain Fundamental Policies
The Portfolio may (i) borrow money, but only (a) from banks for temporary
or emergency (not leveraging) purposes, in an amount up to 15% of the value of
the Portfolio's total assets (including the amount borrowed) valued at the
lesser of cost or market, less liabilities (not including the amount borrowed)
at the time the borrowing is made (borrowings repaid within 60 days and not
renewed or extended are presumed to be for temporary purposes) (while borrowings
exceed 5% of the value of the Portfolio's total assets, the Portfolio will not
make any additional investments), and (b) in connection with the entry into
reverse repurchase agreements. At no time may total borrowings exceed 33 1/3% of
the value of the Portfolio's total assets; (ii) pledge, hypothecate, mortgage or
otherwise encumber its assets, but only (a) to secure borrowings for temporary
or emergency purposes and (b) in connection with the entry into reverse
repurchase agreements in an amount equal to the aggregate amount of its reverse
repurchase obligations, plus accrued interest in certain cases; and (iii)invest
up to 10% of its net assets in repurchase agreements providing for settlement in
more than seven days after notice and in securities that are illiquid. This
paragraph describes fundamental policies that cannot be changed without approval
by the holders of a majority (as defined in the 1940 Act) of the Portfolio's
outstanding voting shares. See "Investment Objective and Management Policies --
Investment Restrictions" in the Portfolio's Statement of Additional Information.
Investment Considerations
General. The Portfolio will attempt to increase yields by trading to take
advantage of short-term market variations. This policy is expected to result in
high portfolio turnover but should not adversely affect the Portfolio since it
usually will not pay brokerage commissions on purchases of U.S. Government
securities. The value of the portfolio securities held by the Portfolio will
vary inversely to changes in prevailing interest rates. Thus, if interest rates
have increased from the time a security was purchased, such security, if sold,
might be sold at a price less than its cost. Similarly, if interest rates have
declined from the time a security was purchased, such security, if sold, might
be sold at a price greater than its purchase cost. In either instance, if the
security was purchased at face value and held to maturity, no gain or loss will
be realized.
Simultaneous Investments. Investment decisions for the Portfolio are made
independently from those of the Fund's other portfolios and other investment
companies or accounts managed by the Adviser. However, if such other entities
desire to invest in, or dispose of, the same securities as the Portfolio,
available investments or opportunities for sales will be allocated equitably to
each of them. In some cases, this procedure may adversely affect the size of
the position obtained for or disposed of by the Portfolio or the price paid or
received by the Portfolio.
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Management of the Portfolio
Board of Directors
The business affairs of the Fund are managed under the general supervision
of its Board of Directors. The Portfolio's Statement of Additional Information
contains the name and general business experience of each Director.
Investment Adviser
BEA Associates, located at One Citicorp Center, 153 East 53rd Street, New
York, New York 10022, serves as the Portfolio's investment adviser. The Adviser
is a New York general partnership comprised of Credit Suisse Capital Corporation
("CSCC"), an indirect, wholly-owned subsidiary of Credit Suisse, and Basic
Appraisals, Inc. (which formerly was known as BEA Associates, Inc., the
Portfolio's predecessor sub-investment adviser). The Adviser is a registered
investment adviser which, together with its predecessor companies, has been in
the money management business for over 50 years and currently manages
approximately $29 billion in assets. The Adviser manages global equity,
balanced, fixed-income and derivative securities accounts for other investment
companies and private individuals, corporate pension and profit-sharing plans,
state pension funds, union funds, endowments and charitable institutions.
The Adviser supervises and assists in the overall management of the
Portfolio's affairs under an Investment Advisory Agreement with the Fund,
subject to the overall authority of the Fund's Board of Directors in accordance
with Maryland law.
For the fiscal year ended December 31, 1995, the Portfolio paid the Adviser
a monthly fee at the annual rate of .10 of 1% of the value of the Portfolio's
average daily net assets.
Administrator
Concord Holding Corporation, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, serves as the Portfolio's administrator. The Administrator currently
provides administrative or sub-administrative services to other investment
companies with over $60 billion in assets. The Administrator is a wholly-owned
subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator
generally assists in all aspects of the Fund's operations, other than providing
investment advice, subject to the overall authority of the Fund's Board of
Directors in accordance with Maryland law. In connection therewith, the
Administrator provides the Fund with office facilities, personnel and certain
clerical and bookkeeping services (e.g., preparation of reports to shareholders
and the Securities and Exchange Commission and filing of Federal, state and
local income tax returns) that are not being furnished by The Bank of New York,
the Fund's Custodian.
Under the terms of the Administration Agreement, the Portfolio has agreed
to pay the Administrator a monthly fee based on the Portfolio's assets as shown
below:
Portfolio's Average
Annual Rate Daily Net Assets
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.13% Less than $200 million
.12% $200 million to less than $300 million
.11% $300 million to less than $350 million
.10% $350 million and over
For the fiscal year ended December 31, 1995, the Portfolio paid the
Administrator a monthly fee at the effective annual rate of .08 of 1% of the
value of the Portfolio's average daily net assets pursuant to an undertaking by
the Administrator.
Shareholder Services Agreement
The Fund may enter into Shareholder Services Agreements with one or more
financial institutions (which may include banks), with respect to certain
services to be provided to the Portfolio's shareholders. Under a Shareholder
Services Agreement, the financial institution would agree to: develop and
monitor the investor programs that are offered from time to time in connection
with effecting transactions in Portfolio shares; provide dedicated walk-in and
telephone facilities to handle shareholder inquiries and investor needs; develop
and maintain specialized systems for the automatic investment of such
institution's client account balances; pay for the operation of arrangements
that facilitate same-day share purchases by such institution's clients; and
provide a facility to receive purchase and redemption orders and various other
services for the Portfolio's shareholders. To date, the Fund has entered into a
Shareholder Services Agreement with one financial institution.
For the services provided and expenses assumed pursuant to a Shareholder
Services Agreement, the Portfolio will agree to pay the financial institution a
monthly fee at the annual rate of .45 of 1% of the average daily value of the
Portfolio's shares owned by shareholders who are clients of the financial
institution. For the fiscal year ended December 31, 1995, the Portfolio paid the
financial institution a monthly fee at the effective annual rate of .13 of 1% of
the value of the Portfolio's average daily net assets pursuant to an undertaking
by the financial institution.
The Glass-Steagall Act and other applicable laws prohibit Federally
chartered or supervised banks and savings and loan associations from engaging
in certain aspects of the business of issuing, underwriting, selling and/or
distributing securities. Nevertheless, these financial institutions are
permitted to act as agents for their customers by making securities, such as
mutual fund securities, available to their customers. Accordingly, these
financial institutions will be engaged under a Shareholder Services Agreement
only to perform administrative and shareholder servicing functions. These
financial institutions are permitted to receive compensation for such services.
However, judicial or administrative decisions or interpretations of such laws,
as well as changes in either Federal or state statutes or regulations relating
to the permissible activities of these financial institutions or their
subsidiaries or affiliates, could prevent such an entity from continuing to
perform all or part of its activities pursuant to a Shareholder Services
Agreement. If such an entity were prohibited from so acting, its shareholder
clients would be permitted to remain Fund shareholders and alternative means
for continuing the services provided to such shareholders would be sought.
Distributor
Concord Financial Group, Inc., located at 125 West 55th Street, New York,
New York 10019, serves as the Fund's principal underwriter and distributor of
the Portfolio's shares. The Distributor, a wholly-owned subsidiary of the
Administrator, was organized to distribute shares of mutual funds to
institutional and retail investors. The Distributor currently distributes the
shares of other investment companies with over $80 billion in assets. The
Distributor is the Fund's sponsor.
The Distributor makes a continuous offering of the Portfolio's shares and
bears the costs and expenses of printing and distributing to prospective
investors copies of any prospectuses, statements of additional information and
annual and interim reports of the Portfolio (after such items have been prepared
and set in type by the Fund) which are used in connection with the offering of
shares, and the costs and expenses of preparing, printing and distributing any
other literature used by the Distributor in connection with the offering of the
Portfolio's shares for sale to the public.
Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286, is
the Fund's Custodian. BISYS Fund Services Ohio, Inc., an affiliate of the
Administrator, located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, is the
Fund's Transfer and Dividend Disbursing Agent (the "Transfer Agent").
Expenses
All expenses incurred in the operation of the Fund are borne by the Fund,
except to the extent specifically assumed by others. The expenses borne by the
Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator, or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory, administration
and other shareholder services fees, charges of custodians, transfer and
dividend disbursing agents' fees, certain insurance premiums, industry
association fees, auditing and legal expenses, costs of maintaining corporate
existence, costs of independent pricing services, costs ttributable to
investor services (including, without limitation, telephone and personnel
expenses), costs of calculating the net asset value of the Portfolio's shares,
costs of shareholders' reports and corporate meetings, costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders, and any extraordinary
expenses.
Expenses attributable to the Portfolio are charged against the assets of
the Portfolio; other expenses of the Fund are allocated among the Fund's
portfolios on the basis determined by the Board of Directors, including, but not
limited to, proportionately in relation to the net assets of each portfolio.
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How to Buy Shares
General
Portfolio shares may be purchased only by clients of certain financial
institutions (which may include banks) and their affiliates that have entered
into a Shareholder Services Agreement with the Fund. You should consult your
financial institution to see if you are eligible to purchase Portfolio shares.
The Fund does not impose any sales load in connection with the purchase of
Portfolio shares. Certificates representing shares of the Portfolio will not be
issued. The Fund reserves the right to reject any purchase order.
The minimum initial investment in the Portfolio is $1,000. Subsequent
investments must be at least $100. The Fund reserves the right to offer the
Portfolio's shares through certain "sweep" programs without regard to minimum
purchase requirements. When purchasing shares, be sure to indicate the name of
the Portfolio and the amount to be invested.
Shares are sold on a continuous basis at the net asset value per share next
determined after an order in proper form and Federal Funds (monies of member
banks within the Federal Reserve System which are held on deposit at a Federal
Reserve Bank) are received by the Transfer Agent. See "Terms of Purchase" below.
If you do not remit Federal Funds, your payment must be converted into Federal
Funds. This usually occurs within one business day of receipt of a bank wire or
within two business days of receipt of a check drawn on a member bank of the
Federal Reserve System. Checks drawn on banks which are not members of the
Federal Reserve System may take considerably longer to convert into Federal
Funds. Prior to receipt of Federal Funds, your money will not be invested.
Wire Orders
If you desire to purchase shares by wire, you should request your bank to
transmit immediately available funds by wire to The Bank of New York, DDA
#8900118830, for purchases of shares in your name. It is important that the wire
include your name, address and Taxpayer Identification Number, indicate whether
a new account is being established or a subsequent payment is being made to an
established account and indicate the name of the Fund and Portfolio. If a
subsequent payment is being made, your Fund account number should be included.
Information on remitting funds in this manner may be obtained from your bank,
which must be a commercial bank that is either a member of the Federal Reserve
System or has a correspondent bank located in New York City.
Automatically Through "Sweep" Programs
You may be eligible for an automatic investment privilege through your
account with your financial institution, commonly called a "sweep," under which
amounts in excess of a certain minimum held in your account will be invested
automatically in shares of the Portfolio at predetermined intervals at the next
determined net asset value. If you desire to use this privilege, you should
consult your financial institution for details. It is your financial
institution's responsibility to transmit your order on a timely basis. The
"sweep" program may be modified or terminated at any time by the Fund.
Terms of Purchase
If your purchase order is received by the Transfer Agent by 12:00 noon,
Eastern time, on a business day (which, as used herein, shall include each day
that the New York Stock Exchange and the Fund's Custodian are open for
business), shares will be purchased as of 12:00 noon, Eastern time, on such
business day if payment is received in, or is converted into, Federal Funds by
4:00 p.m., Eastern time, by the Transfer Agent on that day. If your purchase
order is received after 12:00 noon, Eastern time, or if payment in Federal Funds
is not received by 4:00 p.m., Eastern time, shares will be purchased as of 12:00
noon, Eastern time, on the business day on which Federal Funds are available. If
you effect transactions in shares of the Portfolio through your financial
institution, it is your financial institution's responsibility to transmit
orders so that they will be received by the Transfer Agent in time to receive
the next determined net asset value as described above.
The Portfolio's net asset value per share is determined as of 12:00 noon,
Eastern time, on each business day. Net asset value per share is computed by
dividing the value of the Portfolio's net assets (i.e., the value of its assets
less liabilities) by the total number of its shares outstanding. See
"Determination of Net Asset Value" in the Portfolio's Statement of Additional
Information.
Federal regulations require that you provide a certified Taxpayer
Identification Number upon opening or reopening an account. See "Dividends,
Distributions and Taxes" for further information concerning this requirement.
- --------------------------------------------------------------------------------
How to Redeem Shares
General
You may request redemption of your shares at any time. Redemptions may be
made automatically through "sweep" programs. See "How to Buy
Shares--Automatically Through 'Sweep' Programs." When a request is received in
proper form, the Fund will redeem the shares at the next determined net asset
value.
The Fund ordinarily will make payment for all shares redeemed within seven
days after receipt by the Transfer Agent of a redemption request in proper form,
except as provided by the rules of the Securities and Exchange Commission.
The Fund 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.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
The Portfolio declares dividends from net investment income on each day
that the Portfolio is open for business. Dividends usually are paid on the last
calendar day of each month, and are automatically reinvested in additional
shares at net asset value or, at your option, paid in cash. The Portfolio's
earnings for Saturdays, Sundays and holidays are declared as dividends on the
preceding business day. Shares begin accruing dividends on the day the purchase
order is received in proper form by the Transfer Agent, if received by 12:00
noon, New York time, on such day, and continue to earn dividends through the day
before a redemption order for such shares is processed by the Transfer Agent. If
you redeem all shares in your account at any time during the month, all
dividends to which you are entitled will be paid to you along with the proceeds
of the redemption.
Distributions from net realized securities gains, if any, are declared and
paid once a year, but the Portfolio may make distributions on a more frequent
basis to comply with the distribution requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), and in all events in a manner consistent with
the provisions of the 1940 Act. You may choose whether to receive distributions
in cash or to reinvest in additional shares at net asset value. All expenses are
accrued daily and deducted before declaration of dividends to investors.
If you elect to receive distributions in cash and your distribution checks
(1) are returned to the Fund marked "undeliverable" or (2) remain uncashed for
six months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in Portfolio shares
at the net asset value determined as of the date of payment of the distribution.
In addition, any such undeliverable checks or checks that remain uncashed for
six months will be canceled and will be reinvested in Portfolio shares at the
net asset value determined as of the date of cancellation.
Dividends derived from interest and distributions from any net realized
short-term securities gains generally are taxable to investors as ordinary
income, whether received in cash or reinvested in additional Portfolio shares.
Distributions from net realized long-term securities gains, if any, generally
are taxable as long-term capital gains regardless of how long shareholders have
held their shares and whether such distributions are received in cash or
reinvested in additional Portfolio shares. No dividend will qualify for the
dividends-received deduction allowable to certain corporations.
Dividends derived from net investment income and distributions from net
realized short-term securities gains paid by the Portfolio to a foreign investor
generally are subject to U.S. nonresident withholding taxes at the rate of 30%,
unless the investor claims the benefit of a lower rate specified in a tax
treaty. Distributions from net realized long-term securities gains paid by the
Portfolio to a foreign investor generally will not be subject to U.S.
nonresident withholding tax. However, such distributions may be subject to
backup withholding, as described below, unless the foreign investor certifies
his non-U.S. residency status.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends and distributions
from net realized securities gains of the Portfolio paid to a shareholder if
such shareholder fails to certify either that the Taxpayer Identification Number
furnished in connection with opening an account is correct, or that such
shareholder has not received notice from the Internal Revenue Service of being
subject to backup withholding as a result of a failure to properly report
taxable dividend or interest income on a Federal income tax return. Furthermore,
the Internal Revenue Service may notify the Fund to institute backup withholding
if the Internal Revenue Service determines a shareholder's Taxpayer
Identification Number is incorrect or if a shareholder has failed to properly
report taxable dividend and interest income on a Federal income tax return.
A Taxpayer Identification Number is either the Social Security number or
employer identification number of the record owner of the account. Any tax
withheld as a result of backup withholding does not constitute an additional tax
imposed on the record owner of the account, and may be claimed as a credit on
the record owner's Federal income tax return.
Notice as to the tax status of your dividends and distributions will be
mailed to you annually. You also will receive periodic summaries of your account
which will include information as to income dividends and distributions from
securities gains, if any, paid during the year. Dividends and distributions
attributable to interest from direct obligations of the United States and paid
by the Portfolio to individuals currently are not subject to tax in most states.
Dividends and distributions attributable to interest from other securities in
which the Portfolio may invest may be subject to state tax. The Fund intends to
provide shareholders with a statement which sets forth the percentage of
dividends and distributions paid by the Portfolio that is attributable to
interest income from direct obligations of the United States.
Management of the Fund believes that the Portfolio qualified for the
fiscal year ended December 31, 1995 as a "regulated investment company" under
the Code. The Portfolio intends to continue to so qualify if such qualification
is in the best interests of its shareholders. Such qualification relieves the
Portfolio of any liability for Federal income tax to the extent its earnings
are distributed in accordance with applicable provisions of the Code. The Code
subjects regulated investment companies, such as the Portfolio, to a
non-deductible 4% excise tax to the extent that such investment companies do
not distribute a very substantial portion of their taxable investment income
and capital gains, generally determined on a calendar year basis.
You should consult your tax adviser regarding specific questions as to
Federal, state or local taxes.
- --------------------------------------------------------------------------------
General Information
The Fund was incorporated under Maryland law on March 6, 1990, and the
Portfolio commenced operations on September 20, 1990. The Fund is authorized to
issue 11 billion shares of Common Stock (with 1 billion allocated to the
Portfolio), par value $.001 per share. Each share has one vote.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Fund to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of Directors or the
appointment of auditors. However, pursuant to the Fund's By-Laws, the holders of
at least 10% of the shares outstanding and entitled to vote may require the Fund
to hold a special meeting of shareholders for purposes of removing a Director
from office or for any other purpose. Shareholders may remove a Director by the
affirmative vote of a majority of the Fund's outstanding voting shares. In
addition, the Board of Directors will call a meeting of shareholders for the
purpose of electing Directors if, at any time, less than a majority of the
Directors then holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios, each of which is treated as a separate entity for certain matters
under the 1940 Act and for other purposes. A shareholder of one portfolio is not
deemed to be a shareholder of any other portfolio. For certain matters Fund
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, shares of the Alpha Government Securities
Portfolio are being offered. From time to time, other portfolios may be
established and sold pursuant to other offering documents.
To date, 12 portfolios of shares have been authorized. The other portfolios
are not being offered by this Prospectus. All consideration received by the Fund
for shares of one of the portfolios and all assets in which such consideration
is invested, belong to that portfolio (subject only to the rights of creditors
of the Fund) and will be subject to the liabilities related thereto. The income
and expenses attributable to one portfolio (and as to classes within a
portfolio) are treated separately from those of the other portfolios (and
classes).
The Transfer Agent maintains a record of your ownership and sends
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
<PAGE>
PROSPECTUS
May 1, 1996
LOGO
THE INFINITY MUTUAL FUNDS, INC.
BEA Short Duration Portfolio
- --------------------------------------------------------------------------------
The Infinity Mutual Funds, Inc. (the "Fund") is an open-end, management
investment company, known as a series fund. By this Prospectus, shares of the
BEA Short Duration Portfolio (the "Portfolio") are being offered.
The Portfolio is a non-diversified mutual fund that seeks to provide
investors with as high a level of current income as is consistent with the
preservation of capital. The Portfolio's duration, under normal circumstances,
will not exceed 1.5 years. The Portfolio's investment adviser will seek to
maintain a duration of approximately one year, but may vary the Portfolio's
duration depending upon market conditions. Under normal circumstances, the
dollar-weighted average life of the Portfolio's investment securities will be
longer than six months and less than three years. Since the Portfolio ordinarily
will invest in securities with longer maturities than those found in money
market funds, its total return is expected to be higher and fluctuations in its
net asset value are expected to be greater.
By this Prospectus, BEA Client Shares, BEA Investor Shares and BEA Service
Shares of the Portfolio are being offered. BEA Client Shares are offered only to
certain clients and employees of the Portfolio's investment adviser and its
affiliates. BEA Investor Shares are offered to any investor. BEA Service Shares
are offered only to clients of certain financial institutions, securities
dealers and other industry professionals. The BEA Client Shares, BEA Investor
Shares and BEA Service Shares are identical, except as to the services offered
to and the expenses borne by each class and certain voting rights, as more fully
set forth under "Expense Summary," "Management of the Portfolio" and "General
Information."
The Portfolio's investment adviser is BEA Associates (the "Adviser").
Concord Holding Corporation (the "Administrator") serves as the Portfolio's
administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned subsidiary
of the Administrator, serves as distributor of the Portfolio's shares.
------------------------
This Prospectus sets forth concisely information about the Fund and the
Portfolio that an investor should know before investing. It should be read and
retained for future reference.
The Statement of Additional Information, dated May 1, 1996, which may be
revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, write to the Fund at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, contact your sales representative or call
1-800-442-3809.
-----------------------
Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other governmental
agency. Portfolio shares involve certain investment risks, including the
possible loss of principal. The Portfolio's share price and investment return
fluctuate and are not guaranteed.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Expense Summary
(as a percentage of average daily net assets)
BEA Short Duration Portfolio
<TABLE>
<CAPTION>
BEA Client BEA Investor BEA Service
Shares* Shares Shares
------------- ------------- ---------------
<S> <C> <C> <C>
Management Fees.................................................. .15% .15% .15%
12b-1 Fees....................................................... None None .25%
Other Expenses (after expense reimbursement)..................... .39% .48% .55%
Total Portfolio Operating Expenses (after expense
reimbursement)................................................... .54% .63% .95%
- ---------------
* BEA Client Shares are offered only to clients of the Adviser and its
affiliates who have entered into separate advisory account agreements with the
Adviser and to employees of the Adviser and its affiliates.
</TABLE>
<TABLE>
<CAPTION>
BEA Client BEA Investor BEA Service
Shares* Shares Shares
--------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Example:
You would pay the following expenses on a $1,000 1 Year $ 6 $ 6 $ 10
investment, assuming (1) 5% annual return and (2) 3 Years $ 17 $ 20 $ 30
redemption at the end of each time period: 5 Years $ 30 $ 35 $ 53
10 Years $ 68 $ 79 $ 117
</TABLE>
- --------------------------------------------------------------------------------
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. Moreover, while the example assumes a 5% annual
return, the Portfolio's actual performance will vary and may result in an actual
return greater or less than 5%.
- --------------------------------------------------------------------------------
The purpose of the foregoing table is to assist you in understanding the
costs and expenses borne by the Portfolio, the payment of which will reduce
investors' annual return. Other Expenses and Total Portfolio Operating Expenses
noted above, without expense reimbursements, would be: .61% and .76%,
respectively, for BEA Investor Shares; and 1.66% and 2.06%, respectively, for
BEA Service Shares. Certain Service Organizations (as defined below) and other
institutions may charge their clients direct fees for effecting transactions in
Portfolio shares; such fees are not reflected in the foregoing table. The
Adviser has undertaken until such time as it gives investors at least 60 days'
notice to the contrary that if, in any fiscal year, certain expenses, including
the investment advisory fee, exceed .55%, .70% and .95% of the average net
assets of the BEA Client Class, BEA Investor Class and BEA Service Class,
respectively, for the fiscal year, the Adviser may waive a portion of its
investment advisory fee or bear other expenses to the extent of such excess
expense. Long-term investors in BEA Service Shares could pay more in 12b-1 fees
than the economic equivalent of paying a front-end sales charge. For a further
description of the various costs and expenses incurred in the Portfolio's
operation, see "Management of the Portfolio."
- --------------------------------------------------------------------------------
Financial Highlights
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net assets
and other supplemental data for each period indicated. The information in the
following table has been audited by KPMG Peat Marwick LLP, the Portfolio's
independent auditors, whose report thereon appears in the Statement of
Additional Information. Further financial data and related notes are included in
the Statement of Additional Information, available upon request. Before December
10, 1992, the Portfolio operated as a money market mutual fund, with a stable
net asset value of $1.00 per share. See "General Information."
BEA CLIENT SHARES:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------------------------- Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1992 1991+++ 1990*+++
<S> <C> <C> <C> <C> <C> <C>
------------ ------------ ------------ ------------ ------------ -------------
Net Asset Value, Beginning of
Period............................... $ 4.89 $ 5.01 $ 5.00 $ 5.00 $ 5.00 $ 5.00
------------ ------------ ------------ ------------ ------------ -------------
Income from investment operations:
Net investment income.............. 0.30 0.25 0.22 0.20 0.32 0.14
Net realized and unrealized
gains/(losses) on securities
transactions......................... 0.10 (0.12) 0.05 0.01 -- --
------------ ------------ ------------ ------------ ------------ -------------
Total from investment operations..... 0.40 0.13 0.27 0.21 0.32 0.14
------------ ------------ ------------ ------------ ------------ -------------
Less dividends and distributions:
Dividends from net investment
income............................... (0.28) (0.25) (0.22) (0.20) (0.32) (0.14)
Return of capital distributions.... (0.02) -- -- -- -- --
Distributions from net realized
gains on securities transactions..... -- -- (0.04) (0.01) -- --
------------ ------------ ------------ ------------ ------------ -------------
Total dividends and distributions.... (0.30) (0.25) (0.26) (0.21) (0.32) (0.14)
------------ ------------ ------------ ------------ ------------ -------------
Net change in net asset value........ 0.10 (0.12) 0.01 -- -- --
------------ ------------ ------------ ------------ ------------ -------------
Net Asset Value, End of Period....... $ 4.99 $ 4.89 $ 5.01 $ 5.00 $ 5.00 $ 5.00
------------ ------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ ------------ -------------
Total Return......................... 8.30% 2.75% 5.06% 4.28% 6.55% 2.62%+
Ratios/Supplemental Data:
Net assets, end of period (000).... $ 76,354 $ 106,659 $ 119,854 $ 126,619 $ 205,302 $ 911
Ratio of expenses to average net
assets............................... 0.54% 0.48% 0.50% 0.16% 0.15% 0.15%++
Ratio of net investment income to
average net assets................... 5.98% 5.12% 4.44% 4.09% 6.34% 6.07%++
Ratio of expenses to average net
assets**............................. 0.54% 0.48% 0.51% 0.27% 0.26% 0.36%++
Ratio of net investment income to
average net assets**................. 5.98% 5.12% 4.43% 3.98% 6.23% 5.86%++
Portfolio Turnover................. 69% 263% 407% 70% -- --
</TABLE>
- ---------------
* For the period August 28, 1990 (commencement of operations) through December
31, 1990.
** During the period, certain fees were voluntarily reduced and/or certain
expenses were reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been as indicated.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
++ Annualized.
+++ Immediately after the close of business on December 9, 1992 the Portfolio
underwent a reverse 5 for 1 stock split. As such, the per share data in the
table above has been restated to reflect a reverse 5 for 1 stock split.
Subsequently, the Portfolio changed its investment objective from that of a
money market with a stable net asset value of $1.00 per share, to a
non-money market fund with a fluctuating net asset value.
BEA SERVICE SHARES:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------ Period Ended
December 31, December 31, December 31, December 31,
1995 1994 1993 1992*
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................ $ 4.89 $ 5.01 $ 5.00 $ 5.01
------------- ------------- ------------ -------------
Income from investment operations:
Net investment income............................. 0.27 0.23 0.20 --
Net realized and unrealized gains/(losses) on
securities transactions............................. 0.10 (0.12) 0.05 --
------------- ------------- ------------ -------------
Total from investment operations.................... 0.37 0.11 0.25 --
------------- ------------- ------------ -------------
Less dividends and distributions:
Dividends from net investment income.............. (0.25) (0.23) (0.20) --
Return of capital distributions................... (0.02) -- -- --
Distributions from net realized gains on
securities transactions......................... -- -- (0.04) (0.01)
------------- ------------- ------------ -------------
Total Distributions................................. (0.27) (0.23) (0.24) (0.01)
------------- ------------- ------------ -------------
Net change in net asset value....................... 0.10 (0.12) 0.01 (0.01)
------------- ------------- ------------ -------------
Net Asset Value, End of Period...................... $ 4.99 $ 4.89 $ 5.01 $ 5.00
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
Total Return........................................ 7.67% 2.25% 4.62% 0.33%+
Ratios/Supplemental Data:
Net assets, end of period (000)................... $ 1 $ 5,566 $ 36,821 $ 1,085
Ratio of expenses to average net assets........... 0.95% 0.95% 0.93% 0.79%++
Ratio of net investment income to average net
assets.............................................. 5.58% 4.46% 4.01% 4.77%++
Ratio of expenses to average net assets**......... 2.06% 1.29% 0.98% 0.79%++
Ratio of net investment income to average net
assets**............................................ 4.48% 4.12% 3.96% 4.77%++
Portfolio Turnover................................ 69% 263% 407% 70%
</TABLE>
- ---------------
* For the period December 29, 1992 (initial sale) through December 31, 1992.
** During the period, certain fees were voluntarily reduced and/or certain
expenses were reimbursed. if such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been as indicated.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
++ Annualized.
BEA INVESTOR SHARES:
<TABLE>
<CAPTION>
Years Ended Period
-------------------------- Ended
December 31, December 31, December 31,
1995 1994 1993*
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 4.89 $ 5.00 $ 5.04
------------ ------------ ------------
Income from investment operations:
Net investment income......................... 0.29 0.25 0.03
Net realized and unrealized gains/(losses) on
securities transactions......................... 0.10 (0.11) --
------------ ------------ ------------
Total income from investment operations......... 0.39 0.14 0.03
------------ ------------ ------------
Less dividends and distributions:
Dividends from net investment income.......... (0.27) (0.25) (0.03)
Return of capital distributions............... (0.02) -- --
Distributions from net realized gains on
securities transactions......................... -- -- (0.04)
------------ ------------ ------------
Total Distributions............................. (0.29) (0.25) (0.07)
------------ ------------ ------------
Net change in net asset value................... 0.10 (0.11) (0.04)
------------ ------------ ------------
Net Asset Value, End of Period.................. $ 4.99 $ 4.89 $ 5.00
------------ ------------ ------------
------------ ------------ ------------
Total Return.................................... 8.21% 2.88% 0.59%+
Ratios/Supplemental Data:
Net assets, end of period (000)............... $ 33,479 $ 30,861 $ 24,847
Ratio of expenses to average net assets....... 0.63% 0.55% 0.55%++
Ratio of net investment income to average net
assets.......................................... 5.90% 5.03% 4.48%++
Ratio of expenses to average net assets**..... 0.76% 0.71% 0.70%++
Ratio of net investment income to average net
assets**........................................ 5.77% 4.87% 4.33%++
Portfolio Turnover............................ 69% 263% 407%
</TABLE>
- ---------------
* For the period November 4, 1993 (initial sale) through December 31, 1993.
** During the period, certain fees were voluntarily reduced and/or certain
expenses were reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been as indicated.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
++ Annualized.
Further information about the Portfolio's performance is contained in the
Portfolio's annual report, which may be obtained without charge by writing to
the address set forth on the cover page of this Prospectus.
- --------------------------------------------------------------------------------
Description of the Portfolio
Investment Objective
The Portfolio seeks to provide investors with as high a level of current
income as is consistent with the preservation of capital. The Portfolio's
investment objective cannot be changed without approval by the holders of a
majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Portfolio's outstanding voting shares. There can be no
assurance that the Portfolio's investment objective will be achieved.
Management Policies
The Portfolio will invest primarily in U.S. Dollar and foreign currency
denominated debt securities and securities with debt-like characteristics (e.g.,
bearing interest or having a stated principal), such as bonds, debentures,
notes, mortgage-related securities (including stripped mortgage-backed
securities), asset-backed securities, municipal obligations and convertible debt
obligations of domestic and foreign issuers throughout the world, including
supranational entities. These securities also include money market instruments
consisting of U.S. Government securities, certificates of deposit, time
deposits, bankers' acceptances, short-term investment grade corporate bonds,
participation interests and other short-term debt instruments, and repurchase
agreements, as described in the "Appendix -- Portfolio Securities." The
Portfolio also may purchase shares of other investment companies that invest in
these securities to the extent permitted under the 1940 Act. The Adviser will
endeavor to hedge foreign currency denominated debt using various investment
techniques in an effort to minimize fluctuations in the Portfolio's net asset
value resulting from fluctuations in currency exchange rates relative to the
U.S. dollar. See "Appendix -- Investment Techniques and Practices."
The maturity of any single instrument held by the Portfolio is not limited.
The duration of the Portfolio, however, under normal circumstances, will not
exceed 1.5 years. The Adviser will seek to maintain a duration of approximately
one year, but may vary the Portfolio's duration depending upon market
conditions. As a measure of a fixed-income security's cash flow, duration is an
alternative to the concept of "term to maturity" in assessing the price
volatility associated with changes in interest rates. Generally, the longer the
duration, the more volatility an investor should expect. For example, the market
price of a bond with a duration of two years would be expected to decline 2% if
interest rates rose 1%. Conversely, the market price of the same bond would be
expected to increase 2% if interest rates fell 1%. Duration is a way of
measuring a security's maturity in terms of the average time required to receive
the present value of all interest and principal payments as opposed to its term
to maturity. The maturity of a security measures only the time until final
payment is due; it does not take account of the pattern of a security's cash
flows over time, which would include how cash flow is affected by prepayments
and by changes in interest rates. Incorporating a security's yield, coupon
interest payments, final maturity and option features into one measure, duration
is computed by determining the weighted average maturity of a bond's cash flows,
where the present values of the cash flows serve as weights. In computing the
duration of the Portfolio, the Adviser will estimate the duration of obligations
that are subject to prepayment or redemption by the issuer, taking into account
the influence of interest rates on prepayments and coupon flows. This method of
computing duration is known as option-adjusted duration. Since the Portfolio
ordinarily will invest in securities with longer maturities than those found in
money market funds, its total return is expected to be higher and fluctuations
in its net asset value are expected to be greater.
The average dollar-weighted credit rating of the securities held by the
Portfolio will be at least A- by Moody's Investors Service, Inc.("Moody's"),
Standard & Poor's Ratings Group ("S&P"), Fitch Investors Service, L.P.
("Fitch") or Duff & Phelps Credit Rating Co., ("Duff"). To further limit risk,
each security in which the Portfolio invests must be rated at least Baa by
Moody's or BBB by S&P, Fitch or Duff or, if unrated, deemed to be of comparable
quality by the Adviser. The average dollar-weighted portfolio credit rating
will be measured on the basis of the dollar value of the securities purchased
and their credit rating without reference to rating subcategories. See
"Investment Considerations and Risk Factors -- Fixed-Income Securities" below,
and "Appendix" in the Portfolio's Statement of Additional Information.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
As set forth above, the Portfolio may engage in currency exchange
transactions to protect against uncertainty in the level of future exchange
rates. In addition, the Portfolio may utilize various other investment
techniques and practices, such as options and futures transactions, buying and
selling interest rate and currency swaps, caps, floors and collars, which are
forms of derivative securities, and short sales to further hedge against the
overall risk to the Portfolio. The Portfolio also may engage in leveraging,
lending portfolio securities, purchasing securities on a when-issued or forward
commitment basis and purchasing illiquid securities. For a discussion of these
investment techniques and their related risks, see "Appendix -- Investment
Techniques and Practices" and "Investment Considerations and Risk Factors --
Investment Techniques" below.
Certain Fundamental Policies
The Portfolio may (i) borrow money to the extent permitted under the 1940
Act, which currently limits borrowing to no more than 33 1/3% of the value of
the Portfolio's total assets; and (ii) invest up to 25% of the value of its
total assets in the securities of issuers in a single industry, provided there
is no limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. This paragraph describes
fundamental policies that cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
shares. See "Investment Objective and Management Policies -- Investment
Restrictions" in the Portfolio's Statement of Additional Information.
Investment Considerations and Risk Factors
General. The net asset value of the Portfolio's shares should be expected
to fluctuate. Investors should consider the Portfolio as a supplement to an
overall investment program and should invest only if they are willing to
undertake the risks involved.
Fixed-Income Securities. Investors should be aware that even though
interest-bearing securities are investments which promise a stable stream of
income, the prices of such securities generally are inversely affected by
changes in interest rates and, therefore, are subject to the risk of market
price fluctuations. The values of fixed-income securities also may be affected
by changes in the credit rating or financial condition of the issuing entities.
Once the rating of a portfolio security has been adversely changed, the
Portfolio will consider all circumstances deemed relevant in determining
whether to continue to hold the security.
Debt securities which are rated Baa by Moody's are considered medium grade
obligations; they are neither highly protected nor poorly secured, and are
considered by Moody's to have speculative characteristics. Debt securities rated
BBB by S&P are regarded as having adequate capacity to pay interest and repay
principal, and while such debt securities normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt securities in this category than in higher rated categories. Fitch
considers the obligor's ability to pay interest and repay principal on debt
securities rated BBB to be adequate; adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these debt
securities and, therefore, impair timely payment. Debt securities rated BBB by
Duff are considered to have below average protection factors but still
considered sufficient for prudent investment. See "Appendix" in the Portfolio's
Statement of Additional Information.
Investing in Foreign Securities and Commodities. Foreign securities markets
generally are not as developed or efficient as those in the United States.
Securities of some foreign issuers are less liquid and more volatile than
securities of comparable U.S. issuers. Similarly, volume and liquidity in most
foreign securities markets are less than in the United States and, at times,
volatility of price can be greater than in the United States.
Because evidences of ownership of such securities usually are held outside
the United States, the Portfolio will be subject to additional risks which
include possible adverse political and economic developments, possible seizure
or nationalization of foreign deposits and possible adoption of governmental
restrictions that might adversely affect the payment of principal and interest
on the foreign securities or restrict the payment of principal and interest to
investors located outside the country of the issuers, whether from currency
blockage or otherwise.
Since foreign securities often are purchased with and payable in currencies
of foreign countries, the value of these assets as measured in U.S. dollars may
be affected favorably or unfavorably by changes in currency rates and exchange
control regulations.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the Commodity Futures Trading Commission
(the "CFTC") and may be subject to greater risks than trading on domestic
exchanges. For example, some foreign exchanges are principal markets so that no
common clearing facility exists and a trader may look only to the broker for
performance of the contract.
Investment Techniques. The investment techniques and practices in which the
Portfolio may engage, such as those described under "Management Policies" above
involve risk. See "Appendix -- Investment Techniques and Practices."
Using certain investment techniques may produce higher than normal
portfolio turnover and may affect the degree to which the Portfolio's net asset
value fluctuates. Higher portfolio turnover rates are likely to result in
comparatively greater brokerage commissions. In addition, short-term gains
realized from portfolio transactions are taxable to shareholders as ordinary
income. The amount of portfolio activity will not be a limiting factor when
making portfolio decisions. Under normal market conditions, the Portfolio's
turnover rate generally will not exceed 500%. See "Portfolio Transactions" in
the Portfolio's Statement of Additional Information.
Use of Derivatives. The Portfolio may invest in derivatives
("Derivatives"). These are financial instruments which derive their performance,
at least in part, from the performance of an underlying asset, index or interest
rate. The Derivatives the Portfolio may use include, options and futures,
mortgage-related securities and asset-backed securities. While Derivatives can
be used effectively in furtherance of the Portfolio's investment objective,
under certain market conditions, they can increase the volatility of of the
Portfolio's net asset value, can decrease the liquidity of the Portfolio's
investments and make more difficult the accurate pricing of the Portfolio's
investments.
Illiquid Securities. The Portfolio may invest up to 15% of the value of its
net assets in illiquid securities. As to these securities, the Portfolio is
subject to a risk that should the Portfolio desire to sell them when a ready
buyer is not available at a price the Portfolio deems representative of their
value, the value of the Portfolio's net assets could be adversely affected.
Non-Diversified Status. The classification of the Portfolio as a
"non-diversified" investment company means that the proportion of the
Portfolio's assets that may be invested in the securities of a single issuer is
not limited by the 1940 Act. A "diversified" investment company is required by
the 1940 Act generally to invest, with respect to 75% of its total assets, not
more than 5% of such assets in the securities of a single issuer. Since a
relatively high percentage of the Portfolio's assets may be invested in the
securities of a limited number of issuers, some of which may be within the same
industry the Portfolio's investments may be more sensitive to changes in the
market value of a single issuer or industry. However, to meet Federal tax
requirements, at the close of each quarter the Portfolio may not have more than
25% of its total assets invested in any one issuer and, with respect to 50% of
total assets, not more than 5% of its total assets invested in any one issuer.
These limitations do not apply to U.S. Government securities or the securities
of other regulated investment companies.
Simultaneous Investments. Investment decisions for the Portfolio are made
independently from those of other investment companies advised by the Adviser.
However, if such other investment companies desire to invest in, or dispose of,
the same securities as the Portfolio, available investments or opportunities for
sales will be allocated equitably to each investment company. In some cases,
this procedure may adversely affect the size of the position obtained for or
disposed of by the Portfolio or the price paid or received by the Portfolio.
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Management of the Portfolio
Board of Directors
The business affairs of the Fund are managed under the general supervision
of its Board of Directors. The Portfolio's Statement of Additional Information
contains the name and general business experience of each Director.
Investment Adviser
BEA Associates, located at One Citicorp Center, 153 East 53rd Street, New
York, New York 10022, serves as the Portfolio's investment adviser. The Adviser
is a New York general partnership comprised of Credit Suisse Capital
Corporation ("CSCC"), an indirect, wholly-owned subsidiary of Credit Suisse,
and Basic Appraisals, Inc. (which formerly was known as BEA Associates, Inc.,
the Portfolio's predecessor investment adviser). The Adviser is a registered
investment adviser which, together with its predecessor companies, has been in
the money management business for over 50 years and currently manages
approximately $29 billion in assets. The Adviser manages global equity,
balanced, fixed-income and derivative securities accounts for other investment
companies and private individuals, corporate pension and profit-sharing plans,
state pension funds, union funds, endowments and charitable institutions.
The Adviser supervises and assists in the overall management of the
Portfolio's affairs under an Investment Advisory Agreement between the Adviser
and the Fund, subject to the overall authority of the Fund's Board of Directors
in accordance with Maryland law. The Portfolio's primary investment officer is
Mark Silverstein. He has held that position since November 1994 and has been a
Vice President of the Adviser since 1991. Prior thereto, he was employed in the
fixed-income research department of The First Boston Corporation. The Adviser
also provides research services for the Portfolio through a professional staff
of portfolio managers and securities analysts.
For the fiscal year ended December 31, 1995, the Portfolio paid the Adviser
a monthly fee at the annual rate of .15 of 1% of the value of the Portfolio's
average daily net assets. From time to time, the Adviser may waive receipt of
its fees and/or voluntarily assume certain expenses of the Portfolio, which
would have the effect of lowering the overall expense ratio of the Portfolio and
increasing yield to investors. The Portfolio will not pay the Adviser at a later
time for any amounts it may waive, nor will the Portfolio reimburse the Adviser
for any amounts it may assume.
Administrator
Concord Holding Corporation, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, serves as the Portfolio's administrator. The Administrator currently
provides administrative services or sub-administrative services to other
investment companies with over $60 billion in assets. The Administrator is a
wholly-owned subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator
generally assists in all aspects of the Fund's operations, other than providing
investment advice, subject to the overall authority of the Fund's Board of
Directors in accordance with Maryland law. In connection therewith, the
Administrator provides the Fund with office facilities, personnel, and certain
clerical and bookkeeping services (e.g., preparation of reports to shareholders
and the Securities and Exchange Commission and filing of Federal, state and
local income tax returns) that are not being furnished by The Bank of New York,
the Fund's Custodian.
For the fiscal year ended December 31, 1995, the Portfolio paid the
Administrator a monthly administration fee at the annual rate of .12 of 1% of
the value of the Portfolio's average daily net assets.
Distributor
Concord Financial Group, Inc., located at 125 West 55th Street, New York,
New York 10019, serves as the Fund's principal underwriter and distributor of
the Portfolio's shares. The Distributor, a wholly-owned subsidiary of the
Administrator, was organized to distribute shares of mutual funds to
institutional and retail investors. The Distributor distributes the shares of
other investment companies with over $80 billion in assets. The Distributor is
the Fund's sponsor.
The Distributor makes a continuous offering of the Portfolio's shares and
bears the costs and expenses of printing and distributing to prospective
investors copies of any prospectuses, statements of additional information and
annual and interim reports of the Portfolio (after such items have been prepared
and set in type by the Fund) which are used in connection with the offering of
shares, and the costs and expenses of preparing, printing and distributing any
other literature used by the Distributor in connection with the offering of the
Portfolio's shares for sale to the public.
Special Investors Services Plan
The Fund has adopted a Special Investors Services Plan (the "Special
Services Plan") pursuant to which the Fund has agreed to pay one or more
financial institutions, securities dealers and other industry professionals,
including BEA Associates (collectively, "Service Organizations"), at an annual
rate of up to .15% of the value of the average daily net assets of the BEA
Investor Class and BEA Service Class, respectively, for certain services to be
provided to holders of the BEA Investor Shares and BEA Service Shares. Holders
of the BEA Investor Shares and BEA Service Shares bear all fees paid for
services under the Special Services Plan. The Special Services Plan does not
cover, and the fees thereunder are not payable with respect to, the BEA Client
Shares.
The services provided by Service Organizations may include providing
personal services relating to shareholder accounts, such as answering
shareholder inquiries regarding the Portfolio and providing reports and other
information, and providing services related to the maintenance of shareholder
accounts. Each Service Organization is required to disclose to its clients any
compensation payable to it by the Fund pursuant to the Special Services Plan and
any other compensation payable by its clients in connection with the investment
of their assets in Portfolio shares. Clients of Service Organizations should
read this Prospectus in light of the terms governing their accounts with such
Service Organizations. The Fund understands that Service Organizations may
charge fees to their clients who are the beneficial owners of BEA Investor
Shares or BEA Service Shares in connection with their client accounts. These
fees would be in addition to any amounts which may be received by Service
Organizations pursuant to the Special Services Plan.
Distribution Plan
Under a plan adopted by the Fund's Board of Directors pursuant to Rule
12b-1 under the 1940 Act (the "Distribution Plan"), the Portfolio pays the
Distributor for advertising, marketing and distributing the BEA Service Shares
at an annual rate of .25 of 1% of the value of the average daily net assets of
the BEA Service Class. Under the Distribution Plan, the Distributor may make
payments to one or more Service Organizations in respect of these services. The
Distributor determines the amounts to be paid to Service Organizations. Service
Organizations receive such fees in respect of the average daily value of the
BEA Service Shares owned by their clients. The Distribution Plan also provides
that the Distributor may pay Service Organizations out of its past profits or
any other source available to it. From time to time, the Distributor may defer
or waive receipt of fees under the Distribution Plan while retaining the
ability to be paid by the Fund under the Distribution Plan thereafter. The fees
payable to the Distributor under the Distribution Plan for advertising,
marketing and distributing the BEA Service Shares are payable without regard to
actual expenses incurred.
The Fund understands that Service Organizations may charge fees to their
clients who are the beneficial owners of BEA Service Shares in connection with
their client accounts. These fees would be in addition to any amounts which may
be received by a Service Organization under its agreement with the Distributor.
Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286, is
the Fund's Custodian. BISYS Fund Services Ohio, Inc., an affiliate of the
Administrator, located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, is the
Fund's Transfer and Dividend Disbursing Agent (the "Transfer Agent").
Expenses
All expenses incurred in the operation of the Fund are borne by the Fund,
except to the extent specifically assumed by others. The expenses borne by the
Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator, or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory and administration
fees, Distribution Plan and Special Services Plan fees, charges of custodians,
transfer and dividend disbursing agents' fees, certain insurance premiums,
industry association fees, auditing and legal expenses, costs of maintaining
corporate existence, costs of independent pricing services, costs of calculating
the net asset value of the Portfolio's shares, costs of shareholders' reports
and corporate meetings, costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders, and any extraordinary expenses. Expenses
attributable to the Portfolio are charged against the assets of the Portfolio;
other expenses of the Fund are allocated among the Fund's portfolios on the
basis determined by the Board of Directors, including, but not limited to,
proportionately in relation to the net assets of each portfolio.
The Adviser has undertaken until such time as it gives investors at least
60 days' notice to the contrary that if, in any fiscal year, certain expenses,
including the investment advisory fee, exceed .55%, .70% and .95% of the
average net assets of the BEA Client Class, BEA Investor Class and BEA Service
Class, respectively, for the fiscal year, the Adviser may waive a portion of
its investment advisory fee or bear other expenses to the extent of such excess
expense.
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How to Buy Shares
General
The Portfolio's BEA Client Shares may be purchased only by clients of the
Adviser and its affiliates who have entered into separate advisory account
agreements with the Adviser and to employees of the Adviser and its affiliates.
BEA Investor Shares may be purchased by any investor. BEA Service Shares may be
purchased only by clients of Service Organizations. Service Organizations may
receive different compensation for selling BEA Client Shares than for selling
BEA Investor Shares or BEA Service Shares. Certificates representing shares of
the Portfolio will not be issued.
The minimum initial investment in the Portfolio's BEA Investor Shares and
BEA Service Shares is $100,000. However, with respect to BEA Service Shares,
there is no minimum initial investment if you are a customer of a Service
Organization which has made an aggregate minimum initial purchase of BEA Service
Shares for its customers of $100,000. There is no minimum initial investment in
the Portfolio's BEA Client Shares. Subsequent investments may be made in any
amount. The Fund reserves the right to vary the initial and subsequent
investment minimum requirements at any time. Investments by employees of the
Adviser and its affiliates and their advisory clients are not subject to minimum
investment requirements.
Shares are sold on a continuous basis at the net asset value per share next
determined after an order in proper form and Federal Funds (monies of member
banks within the Federal Reserve System which are held on deposit at a Federal
Reserve Bank) are received by the Transfer Agent. If you do not remit Federal
Funds, your payment must be converted into Federal Funds. This usually occurs
within one business day of receipt of a bank wire or within two business days of
receipt of a check drawn on a member bank of the Federal Reserve System. Checks
drawn on banks which are not members of the Federal Reserve System may take
considerably longer to convert into Federal Funds. Prior to receipt of Federal
Funds, your money will not be invested.
The Portfolio's net asset value per share is determined as of the close of
trading on the New York Stock Exchange (currently 4:00 p.m., Eastern time) on
each business day (which, as used herein, shall include each day that the New
York Stock Exchange and the Fund's Custodian are open for business). Net asset
value per share is computed by dividing the value of the Portfolio's net assets
(i.e., the value of its assets less liabilities) by the total number of shares
outstanding. The Portfolio's investments are valued each business day by an
independent pricing service approved by the Fund's Board of Directors and are
valued at fair value as determined by the pricing service under the general
supervision of the Board of Directors. For further information regarding the
methods employed in valuing Portfolio investments, see "Determination of Net
Asset Value" in the Portfolio's Statement of Additional Information.
Federal regulations require that you provide a certified Taxpayer
Identification Number upon opening or reopening an account. See "Dividends,
Distributions and Taxes" for further information concerning this requirement.
Written Orders
You may send your initial or subsequent purchase order (which may be sent
by ordinary letter), along with your check or money order payable to "The
Infinity Mutual Funds, Inc., BEA Short Duration Portfolio," to: The Infinity
Mutual Funds, Inc., BEA Short Duration Portfolio, c/o BISYS Fund Services, Inc.,
Department L-1687, Columbus, Ohio 43260-1687. 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.
The Fund reserves the right to reject any purchase order for Portfolio
shares in whole or in part, including purchases made with foreign checks and
third party checks not originally made payable to the order of the investor.
Wire Orders
If you desire to purchase shares by wire, you should request your bank to
transmit immediately available funds by wire to The Bank of New York, DDA #
8900118849, for purchases of shares in your name. It is important that the wire
include your name, address and Taxpayer Identification Number, indicate whether
a new account is being established or a subsequent payment is being made to an
established account and indicate the name of the Fund, Portfolio and Class
purchased. If a subsequent payment is being made, your Fund account number
should be included. Information on remitting funds in this manner may be
obtained from your bank, which must be a commercial bank that is either a member
of the Federal Reserve System or has a correspondent bank located in New York
City.
Automatically Through "Sweep" Programs
Certain investor accounts with the Adviser and its affiliates may be
eligible for an automatic investment privilege, commonly called a "sweep," under
which amounts in excess of a certain minimum held in these accounts will be
invested automatically in shares of the Portfolio at predetermined intervals at
the next determined net asset value. If you desire to use this privilege, you
should consult the Adviser for details. It is the responsibility of the
financial institution holding your funds to transmit your order on a timely
basis. The "sweep" program may be modified or terminated at any time by the
Fund.
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How to Redeem Shares
General
You may request redemption of your shares at any time. Redemption requests
may be made as described below. When a request is received in proper form, the
Fund will redeem the shares at the next determined net asset value.
The Fund ordinarily will make payment for all shares redeemed within seven
days after receipt by the Transfer Agent of a redemption request in proper form,
except as provided by the rules of the Securities and Exchange Commission.
However, if an investor has purchased shares by check and subsequently submits a
redemption request by mail, the redemption proceeds will not be transmitted to
the investor until the check used for investment has cleared, which may take up
to ten business days. Where redemption is requested other than by mail, the
redemption proceeds for shares purchased by check will not be transmitted for a
period of ten business days after their purchase. This procedure does not apply
to shares purchased by wire payment.
The Fund reserves the right to redeem your account at its option upon not
less than 45 days' written notice if your account's net asset value is $500 or
less, for reasons other than market conditions, and remains so during the notice
period.
Procedures
Written Orders. Written requests for redemption, indicating that the shares
are to be redeemed from the Portfolio, with signature appropriately guaranteed,
if required, and otherwise in accordance with the requirements listed below,
should be mailed to: The Infinity Mutual Funds, Inc., BEA Short Duration
Portfolio, c/o BISYS Fund Services, Inc., Department L-1687, Columbus, Ohio
43260-1687.
Redemption proceeds may be transmitted by wire to your account at your
bank. For identification purposes, the Transfer Agent may require such
information as it deems necessary. To change the account designated to receive
redemption proceeds, it will be necessary to send to the Transfer Agent a
written request, with your signature guaranteed and otherwise in compliance with
the redemption requirements set forth herein.
Automatically Through "Sweep" Programs. See page 14.
Redemption Requirements. Written redemption instructions, indicating the
name of the Portfolio, must be received by the Transfer Agent in proper form
and signed exactly as the shares are registered. Except as noted below, all
signatures must be guaranteed. The Fund's Transfer Agent has adopted standards
and procedures pursuant to which signature-guarantees in proper form generally
will be accepted from domestic banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations, as well as from participants in the New York Stock
Exchange Medallion Signature Program, the Securities Transfer Agents Medallion
Program ("STAMP") and the Stock Exchanges Medallion Program. If the signature
is guaranteed by a broker or dealer, such broker or dealer must be a member of
a clearing corporation and maintain net capital of at least $100,000.
Signature-guarantees may not be provided by notaries public. The signature
guarantee requirement will be waived if the following conditions apply: (1) the
redemption check is payable to the shareholder(s) of record; and (2) the
redemption check is mailed to the shareholder(s) at the address of record or
the proceeds are either mailed or wired to a financial institution account
previously designated. Redemption requests by corporate and fiduciary
shareholders must be accompanied by appropriate documentation establishing the
authority of the person seeking to act on behalf of the account. You may obtain
from the Adviser, the Fund or the Transfer Agent, forms of resolutions and
other documentation which have been prepared in advance to assist compliance
with the Portfolio's procedures.
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Dividends, Distributions and Taxes
The Portfolio declares dividends from net investment income on each day the
Portfolio is open for business. Dividends usually are paid on the last calendar
day of each month, and are automatically reinvested in additional Portfolio
shares at net asset value or, at your option, paid in cash. The Portfolio's
earnings for Saturdays, Sundays and holidays are declared as dividends on the
preceding business day. Shares begin accruing dividends on the day payment in
Federal Funds is received for such shares and continue to earn dividends through
the day before a redemption order for such shares is processed by the Transfer
Agent. Dividends on each BEA Client Share, BEA Investor Share and BEA Service
Share are determined in the same manner and are paid in the same amount
regardless of class, except that BEA Investor Shares and BEA Service Shares bear
the fees paid under the Special Services Plan described under "Management of the
Portfolio -- Special Investors Services Plan" and BEA Service Shares bear the
fees paid under the Distribution Plan described under "Management of the
Portfolio -- Distribution Plan" above. If you redeem all shares in your account
at any time during the month, all dividends to which you are entitled will be
paid to you along with the proceeds of the redemption.
Distributions from net realized securities gains, if any, are declared and
paid once a year, but the Portfolio may make distributions on a more frequent
basis to comply with the distribution requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), in all events in a manner consistent with the
provisions of the 1940 Act. You may choose whether to receive distributions in
cash or to reinvest in additional Portfolio shares at net asset value. All
expenses are accrued daily and deducted before declaration of dividends to
investors.
If you elect to receive distribution in cash and your distribution checks
(1) are returned to the Fund marked "undeliverable" or (2) remain uncashed for
six months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in Portfolio shares
at the net asset value determined as of the date of payment of the distribution.
In addition, any such undeliverable checks or checks that remain uncashed for
six months will be canceled and will be reinvested in Portfolio shares at the
net asset value determined as of the date of cancellation.
Dividends derived from interest, together with distributions from any net
realized short-term securities gains and all or a portion of any gain realized
from the sale or other disposition of certain market discount bonds, generally
are taxable to investors as ordinary income, whether received in cash or
reinvested in additional Portfolio shares. Distributions from net realized
long-term securities gains, if any, generally are taxable as long-term capital
gains regardless of how long shareholders have held their shares and whether
such distributions are received in cash or reinvested in additional Portfolio
shares. Dividends and distributions may be subject to certain state and local
taxes. No dividend will qualify for the dividends-received deduction allowable
to certain corporations.
Dividends paid by the Portfolio derived from net investment income,
together with distributions from net realized short-term securities gains and
all or a portion of any gain realized from the sale or other disposition of
certain market discount bonds, paid by the Portfolio to a foreign investor
generally are subject to U.S. nonresident withholding taxes at the rate of 30%,
unless the investor claims the benefit of a lower rate specified in a tax
treaty. Distributions from net realized long-term securities gains paid by the
Portfolio to a foreign investor as well as the proceeds of any redemptions from
a foreign investor's account, regardless of the extent to which gain or loss
may be realized, generally will not be subject to U.S. nonresident withholding
tax. However, such distributions may be subject to backup withholding, as
described below, unless the foreign investor certifies his non-U.S. residency
status.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and the proceeds of any redemption,
regardless of the extent to which gain or loss may be realized, paid to a
shareholder if such shareholder fails to certify either that the Taxpayer
Identification Number furnished in connection with opening an account is
correct, or that such shareholder has not received notice from the Internal
Revenue Service of being subject to backup withholding as a result of a failure
to properly report taxable dividend or interest income on a Federal income tax
return. Furthermore, the Internal Revenue Service may notify the Fund to
institute backup withholding if the Internal Revenue Service determines a
shareholder's Taxpayer Identification Number is incorrect or if a shareholder
has failed to properly report taxable dividend and interest income on a Federal
income tax return.
A Taxpayer Identification Number is either the Social Security number or
employer identification number of the record owner of the account. Any tax
withheld as a result of backup withholding does not constitute an additional
tax imposed on the record owner of the account, and may be claimed as a credit
on the record owner's Federal income tax return.
Notice as to the tax status of your dividends and distributions is mailed
to you annually. You also will receive periodic summaries of your account which
will include information as to income dividends and distributions from
securities gains, if any, paid during the year.
Management of the Fund believes that the Portfolio qualified for the
fiscal year ended December 31, 1995 as a "regulated investment company" under
the Code. The Portfolio intends to continue to so qualify if such qualification
is in the best interests of its shareholders. Such qualification relieves the
Portfolio of any liability for Federal income tax to the extent its earnings
are distributed in accordance with applicable provisions of the Code. The Code
subjects regulated investment companies, such as the Portfolio, to a
non-deductible 4% excise tax to the extent that such investment companies do
not distribute a very substantial portion of their taxable investment income
and capital gains, generally determined on a calendar year basis.
You should consult your tax adviser regarding specific questions as to
Federal, state or local taxes.
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Performance Information
For purposes of advertising, performance may be calculated on several
bases, including current yield, average annual total return and/or total
return. The fees paid pursuant to the Special Services Plan will be borne by
the holders of the BEA Investor Shares and BEA Service Shares, and not the BEA
Client Shares, and those paid pursuant to the Distribution Plan will be borne
by the holders of the BEA Service Shares and not the BEA Client Shares or BEA
Investor Shares. As a result, at any given time, the performance of the BEA
Service Class should be expected to be lower than that of the BEA Investor
Class and the performance of the BEA Service Class and BEA Investor Class
should be expected to be lower than that of the BEA Client Class. Performance
for the BEA Client Class, BEA Investor Class and BEA Service Class will be
calculated separately.
Current yield refers to the Portfolio's annualized net investment income
per share over a 30-day period, expressed as a percentage of the net asset
value per share at the end of the period. For purposes of calculating current
yield, the amount of net investment income per share during that 30-day period,
computed in accordance with regulatory requirements, is compounded by assuming
that it is reinvested at a constant rate over a six-month period. An identical
result is then assumed to have occurred during a second six-month period which,
when added to the result for the first six months, provides an "annualized"
yield for an entire one-year period. Calculations of current yield may reflect
absorbed expenses pursuant to any undertaking that may be in effect. See
"Management of the Portfolio."
Average annual total return is calculated pursuant to a standardized
formula which assumes that an investment in the Portfolio was purchased with an
initial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends and
distributions during the period. The return is expressed as a percentage rate
which, if applied on a compounded annual basis, would result in the redeemable
value of the investment at the end of the period. Advertisements of the
Portfolio's performance will include the Portfolio's average annual total
return for one, five and ten year periods, or for shorter periods depending
upon the length of time during which the Portfolio has operated.
Total return is computed on a per share basis and assumes the reinvestment
of dividends and distributions. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the net asset value per share at
the beginning of the period. Advertisements may include the percentage rate of
total return or may include the value of a hypothetical investment at the end
of the period which assumes the application of the percentage rate of total
return.
Performance will vary from time to time and past results are not
necessarily representative of future results. You should remember that
performance is a function of portfolio management in selecting the type and
quality of portfolio securities and is affected by operating expenses.
Performance information, such as that described above, may not provide a basis
for comparison with other investments or other investment companies using a
different method of calculating performance.
Comparative performance information may be used from time to time in
advertising or marketing the Portfolio's shares, including data from Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar,
Inc., Moody's Bond Survey Bond Index, the Dow Jones Industrial Average,
Standard & Poor's 500 Composite Stock Price Index, Standard & Poor's MidCap 400
Index, Wilshire 5000 Index, Lehman Brothers Bond Indexes, Consumer Price Index,
Bond Buyer's 20-Bond Index, Mutual Fund Forcaster, Wiesenberger Investment
Companies Services, national financial publications such as Money, Forbes,
Barron's, The Wall Street Journal or The New York Times or publications of a
local or regional nature, and other industry publications. The Portfolio's
yield should generally be higher than money market funds (which offer a
stabilized price per share), and its price per share should fluctuate less than
long-term bond funds (which generally have somewhat higher yields).
- --------------------------------------------------------------------------------
General Information
The Fund was incorporated under Maryland law on March 6, 1990, and the
Portfolio commenced operations on August 28, 1990. Before December 10, 1992,
the Portfolio operated as a money market mutual fund, with a stable net asset
value of $1.00 per share, under the name "Pegasus Prime Portfolio." On December
10, 1992, the Portfolio commenced operations with its current investment
objective and management policies. Immediately prior to December 10, 1992, the
Portfolio's shares were reverse split, on the basis of 5 to 1, resulting in the
Portfolio's net asset value per share increasing to $5.00.
The Fund is authorized to issue 11 billion shares of Common Stock (with 1
billion allocated to the Portfolio), par value $.001 per share. The Portfolio's
shares are classified into BEA Client Shares (500 million), BEA Investor Shares
(250 million) and BEA Service Shares (250 million). Each share has one vote and
shareholders will vote in the aggregate and not by class except as otherwise
required by law. Only holders of the BEA Investor Shares and BEA Service
Shares, however, will be entitled to vote on matters submitted to shareholders
pertaining to the Special Services Plan and only holders of the BEA Service
Shares will be entitled to vote on matters submitted to shareholders pertaining
to the Distribution Plan.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Fund to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of Directors or the
appointment of auditors. However, pursuant to the Fund's By-Laws, the holders
of at least 10% of the shares outstanding and entitled to vote may require the
Fund to hold a special meeting of shareholders for purposes of removing a
Director from office or for any other purpose. Shareholders may remove a
Director by the affirmative vote of a majority of the Fund's outstanding voting
shares. In addition, the Board of Directors will call a meeting of shareholders
for the purpose of electing Directors if, at any time, less than a majority of
the Directors then holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios, each of which is treated as a separate entity for certain matters
under the 1940 Act and for other purposes. A shareholder of one portfolio is
not deemed to be a shareholder of any other portfolio. For certain matters Fund
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, three classes of shares of the Portfolio are
being offered -- BEA Client Shares, BEA Investor Shares and BEA Service Shares
(each such class being referred to as a "Class"). Shares of each Class are
identical, except that BEA Investor Shares and BEA Service Shares bear special
investors services fees payable by the Portfolio at an annual rate of .15% of
the value of the average daily net assets of the respective Class and BEA
Service Shares also bear fees pursuant to a 12b-1 plan adopted by the Portfolio
at an annual rate of .25% of value of the average daily net assets of the BEA
Service Class. Such fees are not payable with respect to the BEA Client Shares.
From time to time, other portfolios may be established and sold pursuant to
other offering documents.
To date, 12 portfolios of shares have been authorized. The other
portfolios are not being offered by this Prospectus. All consideration received
by the Fund for shares of one of the portfolios, and all assets in which such
consideration is invested, belong to that portfolio (subject only to the rights
of creditors of the Fund) and will be subject to the liabilities related
thereto. The income and expenses attributable to one portfolio (and as to
classes within a portfolio) are treated separately from those of the other
portfolios (and classes).
The Transfer Agent maintains a record of your ownership and sends
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
<PAGE>
Appendix
Portfolio Securities
U.S. Government Obligations. The Portfolio may invest in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities. Such
securities include U.S. Treasury securities and issues of U.S. Government
agencies and instrumentalities established under the authority of an act of
Congress. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued
by the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Principal and
interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance can
be given that it will always do so, since it is not so obligated by law.
Bank Obligations. The Portfolio may invest in certificates of deposit,
time deposits and bankers' acceptances issued by domestic banks, foreign
branches of domestic banks, foreign subsidiaries of domestic banks, and foreign
branches of foreign banks. The issuers of foreign bank obligations may be
subject to less stringent or different regulations than are U.S. issuers. In
addition, there may be less publicly available information about a non-U.S.
issuer, and non-U.S. issuers generally are not subject to uniform accounting
and financial reporting standards, practices and requirements comparable to
those applicable to U.S. issuers. See "Description of the Portfolio --
Investment Considerations and Risk Factors -- Investing in Foreign Securities."
Certificates of deposit are negotiable certificates representing the obligation
of a bank to repay funds deposited with it for a specified period of time. Time
deposits are non-negotiable deposits maintained in a bank for a specified
period of time at a stated interest rate. Time deposits which may be held by
the Portfolio will not benefit from insurance from the Bank Insurance Fund or
the Savings Association Insurance Fund administered by the Federal Deposit
Insurance Corporation. Bankers' acceptances are credit instruments evidencing
the obligation of a bank to pay a draft drawn on it by a customer. These
instruments reflect the obligation both of the bank and of the drawer to pay
the face amount of the instrument upon maturity. The Portfolio also may invest
in other short-term obligations issued by banks, which include uninsured,
direct obligations bearing fixed, floating or variable rates of interest.
Certain Corporate Obligations. The Portfolio may invest in commercial
paper, which consists of short-term, unsecured promissory notes issued by
domestic or foreign entities to finance short-term credit needs. The Portfolio
may purchase floating and variable rate demand notes and bonds, which are
obligations ordinarily having stated maturities in excess of one year, but
which permit the holder to demand payment of principal at any time or at
specified intervals. Variable rate demand notes include variable amount master
demand notes, which are obligations that permit the Portfolio to invest
fluctuating amounts at varying rates of interest pursuant to direct
arrangements between the Portfolio, as lender, and the borrower. These notes
permit daily changes in the amount borrowed. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there
generally is no established secondary market for these obligations, although
they are redeemable at face value, plus accrued interest, at any time.
Accordingly, where these obligations are not secured by letters of credit or
other credit support arrangements, the Portfolio's right to redeem is dependent
on the ability of the borrower to pay principal and interest on demand. In
connection with floating and variable rate demand obligations, the Adviser will
consider, on an ongoing basis, earning power, cash flow and other liquidity
ratios of the borrower, and the borrower's ability to pay principal and
interest on demand. Such obligations frequently are not rated by credit rating
agencies, and the Portfolio may invest in them only if at the time of an
investment the borrower meets the criteria set forth above for other commercial
paper issuers.
Loans. The Portfolio may invest in fixed and floating rate loans and
securities purchase and resale agreements denominated in various currencies
arranged through private negotiations between a foreign issuer and one or more
financial institutions.
Participation Interests. The Portfolio may invest in corporate
obligations, denominated in U.S. Dollars or foreign currencies, that are
originated, negotiated and structured by a syndicate of lenders ("Co-Lenders")
consisting of commercial banks, thrift institutions, insurance companies,
finance companies or other financial institutions one or more of which
administers the security on behalf of the syndicate (the "Agent Bank").
Co-Lenders may sell such securities to third parties called "Participants." The
Portfolio may invest in such securities either by participating as a Co-Lender
at origination or by acquiring an interest in the security from a Co-Lender or
a Participant (collectively, "participation interests"). Co-Lenders and
Participants interposed between the Portfolio and the corporate borrower (the
"Borrower"), together with Agent Banks, are referred to herein as "Intermediate
Participants." The Portfolio also may purchase a participation interest in a
portion of the rights of an Intermediate Participant. The Portfolio will not
act as an Agent Bank, guarantor, sole negotiator or sole structuror with
respect to securities that are the subject of a participation interest.
A participation interest gives the Portfolio an undivided interest in the
security in the proportion that the Portfolio's participation interest bears to
the total principal amount of the security. These instruments may have fixed,
floating or variable rates of interest. If the participation interest is
unrated, or has been given a rating below that which is permissible for
purchase by the Portfolio, the participation interest will be backed by an
irrevocable letter of credit or guarantee of a bank the debt securities of
which would be permissible Portfolio investments, or the payment obligation
otherwise will be collateralized by U.S. Government securities, or, in the case
of unrated participation interest, the Adviser must have determined that the
instrument is of comparable quality to those instruments in which the Portfolio
may invest. The guarantor of a participation interest will be treated as a
separate issuer to the extent required by the 1940 Act. For certain
participation interests, the Portfolio will have the right to demand payment,
on not more than seven days' notice, for all or any part of the Portfolio's
participation interest in the security, plus accrued interest. As to these
instruments, the Portfolio intends to exercise its right to demand payment only
upon a default under the terms of the security, as needed to provide liquidity
to meet redemptions, or to maintain or improve the quality of its investment
portfolio. The Portfolio will not invest more than 15% of the value of its net
assets in participation interests maturing in more than seven days that do not
have this demand feature, and in other securities that are illiquid.
Repurchase Agreements. The Portfolio may enter into repurchase agreements,
which involve the acquisition by the Portfolio of an underlying debt
instrument, subject to an obligation of the seller, which may be a domestic or
foreign entity, to repurchase, and the Portfolio to resell, the instrument at a
fixed price usually not more than one week after its purchase. Certain costs
may be incurred in connection with the sale of the securities if the seller
does not repurchase them in accordance with the repurchase agreement. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the securities, realization on the securities by the Portfolio may be delayed
or limited.
Municipal Obligations. Municipal obligations are debt obligations issued
by states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, or
multistate agencies or authorities. While in general, municipal obligations are
tax exempt securities having relatively low yields as compared to taxable,
non-municipal obligations of similar quality, certain issues of municipal
obligations, both taxable and non-taxable, offer yields comparable and in some
cases greater than the yields available on other permissible investments.
Municipal obligations generally include debt obligations issued to obtain funds
for various public purposes as well as certain industrial development bonds
issued by or on behalf of public authorities. Dividends received by
shareholders on Portfolio shares which are attributable to interest income
received by the Portfolio from municipal obligations generally will be subject
to Federal income tax. It is currently the Portfolio's intention to invest no
more than 25% of its total assets in municipal obligations.
Convertible Securities. Convertible securities may be converted at a
stated price within a specified period of time into a specified number of
shares of common stock of the same or a different issuer. Convertible
securities are senior to common stock in a corporation's capital structure, but
usually are subordinated to non-convertible debt securities. While providing a
fixed-income stream (generally higher in yield than the income derivable from a
common stock but lower than that afforded by a non-convertible debt security),
a convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation of the common
stock into which it is convertible.
The Portfolio also may invest in debt securities with warrants attached or
in units with warrants. A warrant is an instrument issued by a corporation
which gives the holder the right to subscribe to a specified amount of the
corporation's capital stock at a set price for a specified period of time.
In connection with its purchases of convertible securities (which include
debt securities with warrants), the Portfolio from time to time may hold common
stock received upon the conversion of the security or the exercise of the
warrant. The Portfolio does not intend to retain the common stock in its
portfolio and will sell it as promptly as it can and in a manner which it
believes will reduce the risk to the Portfolio of loss in connection with the
sale.
Zero Coupon and Stripped Securities. The Portfolio may invest in zero
coupon U.S. Treasury securities, which are Treasury Notes and Bonds that have
been stripped of their unmatured interest coupons, the coupons themselves and
receipts or certificates representing interests in such stripped debt
obligations and coupons. The Portfolio also may invest in zero coupon
securities issued by corporations and financial institutions which constitute a
proportionate ownership of the issuer's pool of underlying U.S. Treasury
securities. A zero coupon security pays no interest to its holder during its
life and is sold at a discount to its face value at maturity. The amount of the
discount fluctuates with the market price of the security. The market prices of
zero coupon securities generally are more volatile than the market prices of
securities that pay interest periodically and are likely to respond to a
greater degree to changes in interest rates than non-zero coupon securities
having similar maturities and credit qualities.
Mortgage-Related Securities. Mortgage-related securities are a form of
Derivative collateralized by pools of mortgages. The mortgage-related
securities in which the Portfolio may invest include those with fixed, floating
and variable interest rates, those with interest rates that change based on
multiples of changes in interest rates and those with interest rates that
change inversely to changes in interest rates, as well as stripped
mortgage-backed securities. Stripped mortgage-backed securities usually are
structured with two classes that receive different proportions of interest and
principal distributions on a pool of mortgage-backed securities or whole loans.
A common type of stripped mortgage-backed security will have one class
receiving some of the interest and most of the principal from the mortgage
collateral, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive
all of the interest (the interest-only or "IO" class), while the other class
will receive all of the principal (the principal-only or "PO" class). Although
certain mortgage-related securities are guaranteed by a third party or
otherwise similarly secured, the market value of the security, which may
fluctuate, is not so secured. If the Portfolio purchases a mortgage-related
security at a premium, all or part of the premium may be lost if there is a
decline in the market value of the security, whether resulting from changes in
interest rates or prepayments in the underlying mortgage collateral. As with
other interest-bearing securities, the prices of certain mortgage-backed
securities are inversely affected by changes in interest rates, while others,
which the Portfolio may purchase, may be structured so that their interest
rates will fluctuate inversely (and thus their price will increase as interest
rates rise and decrease as interest rates fall) in response to changes in
interest rates. Though the value of a mortgage-related security may decline
when interest rates rise, the converse is not necessarily true, since in
periods of declining interest rates the mortgages underlying the security are
more likely to be prepaid. For this and other reasons, a mortgage-related
security's stated maturity may be shortened by unscheduled prepayments on the
underlying mortgages, and, therefore, it is not possible to predict accurately
the security's return to the Portfolio. Moreover, with respect to stripped
mortgage-backed securities, if the underlying mortgage securities experience
greater than anticipated prepayments of principal, the Portfolio may fail to
fully recoup its initial investment in these securities even if the securities
are rated in the highest rating category by a nationally recognized statistical
rating organization. See "Investment Techniques and Practices--Illiquid
Securities" below.
Asset-Backed Securities. The Portfolio may invest in asset-backed
securities. The securitization techniques used for asset-backed securities are
similar to those used for mortgage-related securities. Asset-backed securities
are a form of Derivative. These securities include debt securities and
securities with debt-like characteristics such as trust certificates with fixed
principal and interest amounts. The collateral for these securities has
included home equity loans, automobile and credit card receivables, boat loans,
computer leases, airplane leases, mobile home loans, recreational vehicle loans
and hospital account receivables. The Portfolio may invest in these and other
types of asset-backed securities that may be developed in the future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may provide the
Portfolio with a less effective security interest in the related collateral than
do mortgage-backed securities. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Investment Techniques and Practices
Foreign Currency Transactions. The Portfolio may engage in currency
exchange transactions to protect against uncertainty in the level of future
exchange rates in connection with hedging and other non-speculative strategies
involving specific settlement transactions. The Portfolio will conduct its
currency exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, or through entering into forward
contracts to purchase or sell currencies. A forward currency exchange contract
involves an obligation to purchase or sell a specific currency at a future
date, which must be more than two days from the date of the contract, at a
price set at the time of the contract. Transaction hedging is the purchase or
sale of forward currency with respect to specific receivables or payables of
the Portfolio generally arising in connection with the purchase or sales of its
portfolio securities. These contracts are entered into in the interbank market
conducted directly between currency traders (typically commercial banks or
other financial institutions) and their customers.
The Portfolio also may enter into swap agreements with currency traders to
hedge the Portfolio's foreign currency denominated investments. Under a
currency swap agreement, the Portfolio would acquire a foreign currency in
exchange for U.S. Dollars at an exchange rate fixed at the time of the
agreement, less a discount. The agreement grants the Portfolio the right,
though not the obligation, to repurchase the U.S. Dollars from the counterparty
at the expiration of the term of the contract at a price specified in the
agreement. See "Interest Rate Swaps, Caps, Floors and Collars" below.
Options on Foreign Currency. The Portfolio may purchase and sell call and
put options on foreign currency for the purpose of hedging against changes in
future currency exchange rates. These options, which are not considered by the
Portfolio as commodities, in the case of a call, convey the right to buy the
underlying currency at a price which is expected to be lower than the spot
price of the currency at the time the option expires, and, in the case of a
put, convey the right to sell the underlying currency at a price which is
anticipated to be higher than the spot prices of the currency at the time the
option expires. The Portfolio may use foreign currency options for the same
purposes as forward currency exchange and futures transactions, as described
herein.
Call and Put Options on Specific Securities. The Portfolio may invest up
to 5% of its assets, represented by the premium paid, in the purchase of call
and put options in respect of specific securities in which the Portfolio may
invest. The Portfolio may write covered call and put option contracts to the
extent of 20% of the value of its net assets at the time such option contracts
are written. A call option gives the purchaser of the option the right to buy,
and obligates the writer to sell, the underlying security at the exercise price
at any time during the option period. Conversely, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy, the
underlying security at the exercise price at any time during the option period.
A covered call option sold by the Portfolio, which is a call option with
respect to which the Portfolio owns the underlying security, exposes the
Portfolio during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or to
possible continued holding of a security which might otherwise have been sold
to protect against depreciation in the market price of the security. A covered
put option sold by the Portfolio exposes the Portfolio during the term of the
option to a decline in price of the underlying security. A put option sold by
the Portfolio is covered when, among other things, cash or liquid securities
are placed in a segregated account with the Portfolio's custodian to fulfill
the obligation undertaken.
To close out a position when writing covered options, the Portfolio may
make a "closing purchase transaction," which involves purchasing an option on
the same security with the same exercise price and expiration date as the
option which it has previously written on the security. To close out a position
as a purchaser of an option, the Portfolio may make a "closing sale
transaction," which involves liquidating the Portfolio's position by selling
the option previously purchased. The Portfolio will realize a profit or loss
from a closing purchase or sale transaction depending upon the difference
between the amount paid to purchase an option and the amount received from the
sale thereof.
Futures Transactions. The Portfolio will not be a commodity pool. However,
as a substitute for a comparable market position in the underlying securities
or for hedging purposes, the Portfolio may engage in futures and options on
futures transactions. In particular, the Portfolio intends to engage in
currency futures and interest rate futures transactions.
The Portfolio may trade futures contracts and options on futures contracts
in U.S. domestic markets or on exchanges located outside the United States. The
Portfolio's commodities transactions must constitute bona fide hedging or other
permissible transactions pursuant to regulations promulgated by the CFTC. In
addition, the Portfolio may not engage in such transactions if the sum of the
amount of initial margin deposits and premiums paid for unexpired commodity
options, other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of the Portfolio's assets, after taking into account
unrealized profits and unrealized losses on such contracts it has entered into;
provided, however, that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. Pursuant to regulations and/or published positions of the
Securities and Exchange Commission, the Portfolio may be required to segregate
cash or high quality money market instruments in connection with its
commodities transactions in an amount generally equal to the value of the
underlying commodity.
Initially, when purchasing or selling futures contracts the Portfolio will
be required to deposit with its custodian in the broker's name an amount of
cash or cash equivalents up to approximately 10% of the contract amount. This
amount is known as "initial margin" and is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Portfolio upon
termination of the futures position, assuming all contractual obligations have
been satisfied. Subsequent payments, known as "variation margin," to and from
the broker will be made daily as the price of the index or securities
underlying the futures contract fluctuates, making the long and short positions
in the futures contract more or less valuable, a process known as
"marking-to-market." At any time prior to the expiration of a futures contract,
the Portfolio may elect to close the position by taking an opposite position,
at the then prevailing price, which will operate to terminate the Portfolio's
existing position in the contract.
The Portfolio may purchase and sell currency futures contracts and options
thereon. By selling foreign currency futures, the Portfolio can establish the
number of U.S. Dollars it will receive in the delivery month for a certain
amount of a foreign currency. In this way, if the Portfolio anticipates a
decline of a foreign currency against the U.S. Dollar, the Portfolio can
attempt to fix the U.S. Dollar value of some or all of the securities held in
its portfolio that are denominated in that currency. By purchasing foreign
currency futures, the Portfolio can establish the number of U.S. Dollars it
will be required to pay for a specified amount of a foreign currency in the
delivery month.
The Portfolio also may invest in interest rate futures contracts and
options on interest rate futures contracts to hedge against adverse movements
in interest rates.
Although the Portfolio intends to purchase or sell futures contracts only
if there is an active market for such contracts, no assurance can be given that
a liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit or trading may be suspended for specified
periods during the trading day. Futures contract prices could move to the limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and potentially subjecting
the Portfolio to substantial losses. If it is not possible, or the Portfolio
determines not, to close a futures position in anticipation of adverse price
movements, the Portfolio will be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may offset partially or
completely losses on the futures contract. However, no assurances can be given
that the price of the securities being hedged will correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
To the extent the Portfolio is engaging in a futures transaction as a
hedging device, because of the risk of an imperfect correlation between
securities held by the Portfolio that are the subject of a hedging transaction
and the futures contract used as a hedging device, it is possible that the
hedge will not be fully effective if, for example, losses on the portfolio
securities exceed gains on the futures contract or losses on the futures
contract exceed gains on the portfolio securities. For futures contracts based
on indexes, the risk of imperfect correlation increases as the composition of
the Portfolio's portfolio varies from the composition of the index. In an
effort to compensate for the imperfect correlation of movements in the price of
the securities being hedged and movements in the price of futures contracts,
the Portfolio may buy or sell futures contracts in a greater or lesser dollar
amount than the dollar amount of the securities being hedged if the historical
volatility of the futures contract has been less or greater than that of the
securities. Such "over hedging" or "under hedging" may adversely affect the
Portfolio's net investment results if market movements are not as anticipated
when the hedge is established.
Successful use of futures by the Portfolio also is subject to the
Adviser's ability to predict correctly movements in the direction of currency
rates or interest rates. Furthermore, if in such circumstance the Portfolio has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified exercise price at any time during the option exercise period.
The writer of the option is required upon exercise to assume an offsetting
futures position (a short position if the option is a call and a long position
if the option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
Call options sold by the Portfolio with respect to futures contracts will
be covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying, or instruments the prices of which are
expected to move relatively consistently with the instruments underlying, the
futures contract. Put options sold by the Portfolio with respect to futures
contracts will be covered in the same manner as put options on specific
securities as described above.
Interest Rate Swaps, Caps, Floors and Collars. The Portfolio may enter
into interest rate swaps and may purchase or sell interest rate caps, floors
and collars. The Portfolio will enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio. The Portfolio also may enter into these transactions to protect
against any increase in the price of securities the Portfolio anticipates
purchasing at a later date. Interest rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to pay or receive
interest (for example, an exchange of floating rate payments for fixed-rate
payments). The exchange commitments can involve payments to be made in the same
currency or in different currencies. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the seller of such interest rate cap.
The purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate, to receive
payments on a notional principal amount from the seller of such interest rate
floor. A collar has aspects of both a cap and a floor.
The Portfolio may enter into these transactions on either an asset-based
or liability-based basis depending on whether it is hedging its assets or its
liabilities, and will usually enter into interest rate swaps on a net basis. In
so doing, the two payment streams are netted out, with the Portfolio receiving
or paying, as the case may be, only the net amount of the two payments. The net
amount of the excess, if any, of the Portfolio's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or high-quality liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Portfolio's custodian. If the
Portfolio enters into an interest rate swap other than on a net basis, the
Portfolio would maintain a segregated account in the full amount accrued on a
daily basis of the Portfolio's obligations with respect to the swap. The
Portfolio will enter into swap, cap or floor transactions with its custodian,
and with other counterparties, but only if: (i) for transactions with
maturities under one year, such other counterparty has outstanding short-term
paper rated at least A-1 by S&P, Prime-1 by Moody's, F-1 by Fitch or Duff-1 by
Duff, or (ii) for transactions with maturities greater than one year, the
counterparty has outstanding debt securities rated at least Aa by Moody's or AA
by S&P, Fitch or Duff. If there is a default by the other party to such a
transaction, the Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. To the extent the Portfolio sells (i.e.,
writes) caps and floors, it will maintain in a segregated account cash or
high-quality liquid debt securities having an aggregate net asset value at
least equal to the full amount accrued on a daily basis, of the Portfolio's
obligations with respect to any caps or floors.
The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. If the Adviser is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Portfolio would diminish compared with what it
would have been if these investment techniques were not used. Moreover, even if
the Adviser is correct in its forecasts, there is a risk that the swap position
may correlate imperfectly with the price of the asset or liability being
hedged. There is no limit on the amount of interest rate swap transactions that
may be entered into by the Portfolio. These transactions do not involve the
delivery of securities or other underlying assets or principal. Accordingly,
the risk of loss with respect to interest rate swaps is limited to the net
amount of interest payments that the Portfolio is contractually obligated to
make. If the other party to an interest rate swap defaults, the Portfolio's
risk of loss consists of the net amount of interest payments that the Portfolio
contractually is entitled to receive. The Portfolio may purchase and sell
(i.e., write) caps and floors without limitation, subject to the segregated
account requirement described above. The swap market has grown substantially in
recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation.
Caps and floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less liquid
than swaps.
Leveraging. The Portfolio may borrow for investment purposes up to 33 1/3%
of the value of its total assets. This borrowing, which is known as leveraging,
generally will be unsecured, except to the extent the Portfolio enters into
reverse repurchase agreements described below. Leveraging will exaggerate the
effect on net asset value of any increase or decrease in the market value of
the Portfolio's investments. Money borrowed for leveraging will be subject to
interest costs that may or may not be recovered by appreciation of the
securities purchased; in certain cases, interest costs may exceed the return
received on the securities purchased.
Among the forms of borrowing in which the Portfolio may engage is the
entry into reverse repurchase agreements with banks, brokers or dealers. These
transactions involve the transfer by the Portfolio of an underlying debt
instrument in return for cash proceeds based on a percentage of the value of
the security. The Portfolio retains the right to receive interest and principal
payments on the security. At an agreed upon future date, the Portfolio
repurchases the security at principal, plus accrued interest.
Portfolio Lending. From time to time, the Portfolio may lend securities
from its portfolio to brokers, dealers and other financial institutions needing
to borrow securities to complete certain transactions. Such loans may not
exceed 33 1/3% of the Portfolio's total assets. In connection with such loans,
the Portfolio will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit issued by third party financial
institutions. Such collateral will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities.
The Portfolio can increase its income through the investment of such
collateral. The Portfolio continues to be entitled to the interest or other
distributions payable on the loaned security and receives interest on the
amount of the loan. Such loans will be terminable at any time upon specified
notice. The Portfolio might experience risk of loss if the institution with
which it has engaged in a portfolio loan transaction breaches its agreement
with the Portfolio.
Short-Selling. Short sales are transactions in which the Portfolio sells a
security it does not own in anticipation of a decline in the market value of
that security. To complete such a transaction, the Portfolio must borrow the
security to make delivery to the buyer. The Portfolio then is obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. Until the security is replaced, the Portfolio is required to
pay to the lender amounts equal to any interest which accrues during the period
of the loan. To borrow the security, the Portfolio also may be required to pay
a premium, which would increase the cost of the security sold. The Portfolio
will incur a loss as a result of the short sale if the price of the security
increases between the date of the short sale and the date on which the
Portfolio replaces the borrowed security. The Portfolio will realize a gain if
the security declines in price between those dates.
Short-selling will be used primarily in conjunction with a long
transaction, but not necessarily in the same instrument or an instrument with a
similar maturity or interest rate, to effect a hedged position to take
advantage of spreads in the market place. The Portfolio may purchase call
options to provide a hedge against an increase in the price of a security sold
short by the Portfolio. See "Call and Put Options on Specific Securities"
above.
The Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short
sales. However, no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 25% of the value of the Portfolio's net assets.
In addition to the short sales discussed above, the Portfolio may make
short sales "against the box," a transaction in which the Portfolio enters into
a short sale of a security which the Portfolio owns. The Portfolio at no time
will have more than 15% of the value of its net assets in deposits on short
sales against the box. It currently is anticipated that the Portfolio will make
short sales against the box for purposes of protecting the value of the
Portfolio's net assets.
When-Issued Securities. The Portfolio may purchase money market securities
on a when-issued or forward commitment basis, which means that delivery and
payment for such securities ordinarily take place within 45 days after the date
of the commitment to purchase. The payment obligation and the interest rate
that will be received on the securities are fixed at the time the buyer enters
into the commitment. The Portfolio will make commitments to purchase such
securities only with the intention of actually acquiring the securities, but
the Portfolio may sell these securities before the settlement date if it is
deemed advisable. The Portfolio will not accrue income in respect of a security
purchased on a when-issued or forward commitment basis prior to its stated
delivery date.
Illiquid Securities. The Portfolio may invest up to 15% of the value of
its net assets in securities as to which a liquid trading market does not
exist. Such securities may include securities that are not readily marketable,
such as certain securities that are subject to legal or contractual
restrictions on resale, repurchase agreements providing for settlement in more
than seven days after notice, and certain asset-backed and mortgage-backed
securities, such as certain collateralized mortgage obligations and stripped
mortgage-backed securities.
<PAGE>
PROSPECTUS
May 1, 1996
LOGO
THE INFINITY MUTUAL FUNDS, INC.
Correspondent Cash Reserves
Money Market Portfolio
Retail Shares
- --------------------------------------------------------------------------------
The Infinity Mutual Funds, Inc. (the "Fund") is an open-end, management
investment company, known as a series fund. By this Prospectus, Retail Shares
of the Fund's Correspondent Cash Reserves Money Market Portfolio (the
"Portfolio") are being offered.
The Portfolio is a diversified, money market mutual fund that seeks to
provide investors with as high a level of current income as is consistent with
the preservation of capital and the maintenance of liquidity. The Portfolio
invests in a diversified portfolio of short-term money market obligations.
The Retail Shares are offered only to clients of certain securities
dealers that have entered into clearing arrangements with Correspondent
Services Corporation [CSC], a wholly-owned subsidiary of PaineWebber
Incorporated ("PaineWebber"). You can invest, reinvest or redeem Retail Shares
at any time without charge or penalty imposed by the Fund.
Another class of the Portfolio's shares -- the Institutional Shares -- are
offered by a separate prospectus to institutional investors and are not offered
hereby. The Retail Shares and the Institutional Shares are identical, except as
to the services offered to each class and the expenses borne by each class
which may affect performance. Investors desiring to obtain information about
the Institutional Shares should ask their sales representative or call
1-800-852-9730.
Mitchell Hutchins Asset Management Inc. (the "Adviser"), a wholly-owned
subsidiary of PaineWebber, is the Portfolio's investment adviser.
Concord Holding Corporation (the "Administrator") serves as the
Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned
subsidiary of the Administrator, serves as distributor of the Portfolio's
shares.
An investment in the Portfolio is neither insured nor guaranteed by the
U.S. Government. There can be no assurance that the Portfolio will be able to
maintain a stable net asset value of $1.00 per share.
------------------------
This Prospectus sets forth concisely information about the Fund and the
Portfolio that an investor should know before investing. It should be read and
retained for future reference.
The Statement of Additional Information, dated May 1, 1996, which may be
revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors.
It has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. For a free copy, write to the Fund at 3435
Stelzer Road, Columbus, Ohio 43219-3035, contact your sales representative or
call 1-800-442-3809.
------------------------
Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other governmental
agency. Portfolio shares involve certain investment risks, including the
possible loss of principal.
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
-----------
Expense Summary................... ............................... 2
Financial Highlights.............................................. 3
Yield Information................................................. 4
Description of the Portfolio...................................... 4
Management of the Portfolio....................................... 12
How to Buy Shares................................................. 15
How to Redeem Shares.............................................. 16
Dividends, Distributions and Taxes................................ 18
General Information............................................... 20
- ------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------
Expense Summary
(as a percentage of average daily net assets)
Retail
Shares
---------
Management Fees.................................................... .10%
12b-1 Fees......................................................... .60%
Other Expenses (net of fee waivers)................................ .23%
Total Operating Expenses (net of fee waivers)................. .93%
Example: 1 Year $ 9
You would pay the following expenses on a $1,000 investment, 3 Years $ 30
assuming (1) 5% annual return and (2) redemption at the 5 Years $ 51
end of each time period: 10 Years $114
- ------------------------------------------------------------------------------
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. Moreover, while the example assumes a 5% annual
return, the Portfolio's actual performance will vary and may result in an
actual return greater or less than 5%.
- ------------------------------------------------------------------------------
The purpose of the foregoing table is to assist you in understanding the
costs and expenses borne by the Portfolio, the payment of which will reduce
investors' annual return. The expenses noted above for the Retail Shares,
without fee waivers, would be: Other Expenses -- .33% and Total Operating
Expenses -- 1.03%. The information in the foregoing table does not reflect any
other fee waivers or expense reimbursement arrangements that were in effect
during the last fiscal year. Certain Securities Firms (as defined below) may
charge their clients direct fees for effecting transactions in Portfolio
shares. See "How to Buy Shares." Long-term investors in Retail Shares could pay
more in 12b-1 fees than theeconomic equivalent of paying a front-end sales
charge. For a further description of the various costs and expenses incurred in
the Portfolio's operation, see "Management of the Portfolio."
- --------------------------------------------------------------------------------
Financial Highlights
Contained below is per share operating performance data for a Retail Share
of common stock outstanding, total investment return, ratios to average net
assets and other supplemental data for each period indicated. The information
in the table has been audited by KPMG Peat Marwick LLP, the Portfolio's
independent auditors, whose report thereon appears in the Statement of
Additional Information. Further financial data and related notes are included
in the Statement of Additional Information, available upon request.
<TABLE>
<CAPTION>
Year Ended December 31, Period Ended
------------------------------------------ December 31,
1995 1994 1993 1992 1991*
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
RETAIL SHARES:
Net Asset Value, Beginning of Period................ $ 0.9975 $ 0.9999 $ 1.0000 $ 1.0000 $ 1.0000
--------- --------- --------- --------- ------------
Income from investment operations
Net investment income............................. 0.0512 0.0340 0.0245 0.0306 0.0310
Net realized gains/(losses) on securities......... 0.0011 (0.0024) (0.0001) -- --
--------- --------- --------- --------- ------------
Net gains from investment operations.............. 0.0523 0.0316 0.0244 0.0306 0.0310
--------- --------- --------- --------- ------------
Dividends from net investment income................ (0.0512) (0.0340) (0.0245) (0.0306) (0.0310)
--------- --------- --------- --------- ------------
Net change in net asset value....................... 0.0011 (0.0024) (0.0001) -- --
--------- --------- --------- --------- ------------
Net Asset Value, End of Period...................... $ 0.9986 $ 0.9975 $ 0.9999 $ 1.0000 $ 1.0000
--------- --------- --------- --------- ------------
--------- --------- --------- --------- ------------
Total return...................................... 5.24% 3.45% 2.48% 3.11% 5.07%+
Ratios/supplemental data:
Net assets, end of period (000's)................. $ 779,011 $ 458,092 $ 331,210 $ 267,895 $ 192,992
Ratio of expenses to average net assets........... 0.85% 0.94% 1.02% 1.12% 0.83%++
Ratio of net interest income to average net
assets.............................................. 5.14% 3.47% 2.44% 3.01% 4.99%++
Ratio of expenses to average net assets**......... 1.03% 1.12% 1.20% 1.35% 1.16%++
Ratio of net interest income to average net
assets**............................................ 4.96% 3.29% 2.26% 2.78% 4.66%++
- ---------------
* For the period May 20, 1991 (commencement of operations) through
December 31, 1991.
** During the period, certain fees and expenses were voluntarily waived and/or
reimbursed. If such voluntary reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
++ Annualized.
</TABLE>
- --------------------------------------------------------------------------------
Yield Information
From time to time, the Portfolio will advertise its yield and effective
yield. Both yield figures are based on historical earnings and are not intended
to indicate future performance. It can be expected that these yields will
fluctuate substantially. The yield of the Portfolio refers to the income
generated by an investment in the Portfolio over a seven-day period (which
period will be stated in the advertisement). This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Portfolio is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment. The Portfolio's
yield and effective yield may reflect absorbed expenses pursuant to any
undertaking that may be in effect.
Yield information is useful in reviewing the Portfolio's performance, but
because yields will fluctuate, under certain conditions such information may
not provide a basis for comparison with domestic bank deposits, other
investments which pay a fixed yield for a stated period of time, or other
investment companies which may use a different method of computing yield.
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., Bank Rate Monitor(TM), N. Palm Beach, Fla. 33408,
IBC/Donoghue's Money Fund Report, Morningstar, Inc., other industry
publications and national financial publications, including Money, Forbes,
Barron's, The Wall Street Journal and The New York Times, or local or regional
publications.
- --------------------------------------------------------------------------------
Description of the Portfolio
Investment Objective
The Portfolio seeks to provide investors with as high a level of current
income as is consistent with the preservation of capital and the maintenance of
liquidity. The Portfolio's investment objective cannot be changed without
approval by the holders of a majority (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of the Portfolio's outstanding voting
shares. There can be no assurance that the Portfolio's investment objective
will be achieved. Securities in which the Portfolio invests may not earn as
high a level of current income as long-term or lower quality securities which
generally have less liquidity, greater market risk and more fluctuation in
market value.
Management Policies
The Portfolio invests in U.S. dollar denominated short-term money market
obligations, including securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities, certificates of deposit, time deposits,
bankers' acceptances and other short-term obligations issued by domestic banks,
foreign branches of domestic banks, foreign subsidiaries of domestic banks, and
domestic and foreign branches of foreign banks, repurchase agreements, and high
quality domestic and foreign commercial paper and other high quality short-term
corporate obligations, such as floating or variable rate U.S. dollar
denominated demand notes and bonds. The Portfolio invests in U.S. dollar
denominated obligations issued or guaranteed by one or more foreign governments
or any of their political subdivisions, agencies or instrumentalities,
including obligations of supranational entities. The Portfolio also may lend
securities from its portfolio and enter into reverse repurchase agreements as
described below. During normal market conditions, at least 25% of the
Portfolio's total assets will be invested in domestic and/or foreign bank
obligations. See "Investment Considerations and Risk Factors" below.
The Portfolio seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Fund uses the amortized cost method of
valuing the Portfolio's securities pursuant to Rule 2a-7 under the 1940 Act,
certain requirements of which are summarized below.
In accordance with Rule 2a-7, the Portfolio is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities determined in accordance with procedures
established by the Board of Directors to present minimal credit risks and which
are rated in one of the two highest rating categories for debt obligations by
at least two nationally recognized statistical rating organizations ("NRSRO")
(or one NRSRO if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Board of Directors. The Board of Directors has delegated to
the Adviser the day-to-day operations of the Portfolio; however, the Board of
Directors retains ultimate responsibility for compliance with Rule 2a-7 under
the 1940 Act. The NRSROs currently rating instruments of the type the Portfolio
may purchase are Moody's Investors Service, Inc., Standard & Poor's Ratings
Group, Duff & Phelps Credit Rating Co., Fitch Investors Service, L.P., IBCA
Limited and IBCA Inc., and Thomson BankWatch, Inc. and their rating criteria
are described in the "Appendix" to the Portfolio's Statement of Additional
Information.
In addition, the Portfolio will not invest more than 5% of its total
assets in the securities (including the securities collateralizing a repurchase
agreement) of, or subject to puts issued by, a single issuer, except that (i)
the Portfolio may invest more than 5% of its total assets in a single issuer
for a period of up to three business days in certain limited circumstances as
set forth under Rule 2a-7, (ii) the Portfolio may invest in obligations issued
or guaranteed by the U.S. Government without any such limitation, and (iii) the
limitation with respect to puts does not apply to unconditional puts if no more
than 10% of the Portfolio's total assets is invested in securities issued or
guaranteed by the issuer of the unconditional put. Investments in rated
securities not rated in the highest category by at least two rating
organizations (or one rating organization if the instrument was rated by only
one such organization), and unrated securities not determined by the Board of
Directors to be comparable to those rated in the highest category, will be
limited to 5% of the Portfolio's total assets, with the investment in any one
such issuer being limited to no more than the greater of 1% of the Portfolio's
total assets or $1,000,000. As to each security, these percentages are measured
at the time the Portfolio purchases the security. For further information
regarding the amortized cost method of valuing securities, see "Determination
of Net Asset Value" in the Portfolio's Statement of Additional Information.
There can be no assurance that the Portfolio will be able to maintain a stable
net asset value of $1.00 per share.
Portfolio Securities
U.S. Government Obligations. The Portfolio may invest in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities. Such
securities include U.S. Treasury securities, such as bills, notes, bonds and
certificates of indebtedness, which differ in their interest rates, maturities
and times of issuance, and issues of U.S. Government agencies and
instrumentalities established under the authority of an act of Congress. Some
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued
by the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Interest may
fluctuate based on generally recognized reference rates or the relationship of
rates. While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Portfolio
will invest in such securities only when it is satisfied that the credit risk
with respect to the issuer is minimal.
Foreign Government Obligations; Securities of Supranational Entities. The
Portfolio may invest in obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Board of Directors to be of
comparable quality to the other obligations in which the Portfolio may invest.
Such securities also include debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of the
Portfolio's assets invested in securities issued by foreign governments will
vary depending on the relative yields of such securities, the economic and
financial markets of the countries in which the investments are made and the
interest rate climate of such countries. See "Investment Considerations and
Risk Factors" below.
Certificates of Deposit, Time Deposits and Bankers' Acceptances. The
Portfolio also will invest in certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations issued by domestic banks, foreign
branches of domestic banks, foreign subsidiaries of domestic banks, and
domestic and foreign branches of foreign banks. See "Investment Considerations
and Risk Factors" below. Certificates of deposit are certificates representing
the obligation of a bank to repay funds deposited with it for a specified
period of time. Time deposits are non-negotiable deposits maintained in a bank
for a specified period of time at a stated interest rate. Time deposits which
may be held by the Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. The Portfolio will not invest more than
10% of the value of its net assets in time deposits maturing in more than seven
days and in other securities that are illiquid. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations bearing fixed,
floating or variable rates of interest.
Repurchase Agreements. Repurchase agreements involve the acquisition by
the Portfolio of an underlying debt instrument, subject to an obligation of the
seller to repurchase, and the Portfolio to resell, the instrument at a fixed
price usually not more than one week after its purchase. Certain costs may be
incurred in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
securities, realization on the securities by the Portfolio may be delayed or
limited.
Commercial Paper and Corporate Obligations. Commercial paper consists of
short-term, unsecured promissory notes issued to finance short-term credit
needs. The commercial paper purchased by the Portfolio will consist only of
direct obligations issued by domestic and foreign entities. The other corporate
obligations in which the Portfolio may invest consist of high quality, U.S.
dollar denominated short-term bonds and notes (including variable amount master
demand notes) issued by domestic and foreign corporations.
Floating and Variable Rate Obligations. The Portfolio also may purchase
floating and variable rate demand notes and bonds, which are obligations
ordinarily having stated maturities in excess of 13 months, but which permit
the holder to demand payment of principal at any time, or at specified
intervals not exceeding 13 months, in each case upon not more than 30 days'
notice. Variable rate demand notes include master demand notes which are
obligations that permit the Portfolio to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the
Portfolio, as lender, and the borrower. The interest rates on these notes
fluctuate from time to time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally
will be traded, and there generally is no established secondary market for
these obligations, although they are redeemable at face value. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, the Portfolio's right to redeem is dependent on the
ability of the borrower to pay principal and interest on demand. These
obligations include highly rated certificates of participation in trusts
secured by accounts receivable, including trade receivables, and other assets.
Such obligations frequently are not rated by credit rating agencies and, if not
so rated, the Portfolio may invest in them only if the Adviser, acting upon
delegated authority from, and subject to ratification by, the Fund's Board of
Directors, determines that at the time of investment the obligations are of
comparable quality to the other obligations in which the Portfolio may invest.
The Adviser, on behalf of the Portfolio, will consider on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate demand
obligations held by the Portfolio. The Portfolio will not invest more than 10%
of the value of its net assets in floating or variable rate demand obligations
as to which it cannot exercise the demand feature on not more than seven days'
notice if the Adviser determines, acting upon delegated authority from, and
procedures established by, the Fund's Board of Directors, that there is no
secondary market available for these obligations, and in other securities that
are illiquid. See "Certain Fundamental Policies" below.
Notes. The Portfolio also may purchase unsecured promissory notes
("Notes") which are not readily marketable and have not been registered under
the Securities Act of 1933, provided such investments are consistent with its
investment objective. The Portfolio will invest no more than 10% of its net
assets in such Notes and in other securities that are illiquid. See "Certain
Fundamental Policies" below.
Participation Interests. The Portfolio may invest in short-term corporate
obligations that are originated, negotiated and structured by a syndicate of
lenders ("Co-Lenders") consisting of commercial banks, thrift institutions,
insurance companies, finance companies or other financial institutions one or
more of which administers the security on behalf of the syndicate (the "Agent
Bank"). Co-Lenders may sell such securities to third parties called
"Participants." The Portfolio may invest in such securities either by
participating as a Co-Lender at origination or by acquiring an interest in the
security from a Co-Lender or a Participant (collectively, "participation
interests"). Co-Lenders and Participants interposed between the Portfolio and
the corporate borrower (the "Borrower"), together with Agent Banks, are
referred to herein as "Intermediate Participants." The Portfolio also may
purchase a participation interest in a portion of the rights of an Intermediate
Participant. The Portfolio will not act as an Agent Bank, guarantor, sole
negotiator or sole structuror with respect to securities that are the subject
of a participation interest.
A participation interest gives the Portfolio an undivided interest in the
security in the proportion that the Portfolio's participation interest bears to
the total principal amount of the security. These instruments may have fixed,
floating or variable rates of interest with remaining maturities of 13 months
or less. If the participation interest is unrated, or has been given a rating
below that which is permissible for purchase by the Portfolio, the
participation interest will be backed by an irrevocable or unconditional letter
of credit or guarantee of a bank or other entity the debt securities of which
are rated high quality, or the payment obligation otherwise will be
collateralized by U.S. Government securities, or, in the case of an unrated
participation interest, the Adviser, acting upon delegated authority from the
Fund's Board of Directors, must have determined that the instrument is of
comparable quality to those instruments in which the Portfolio may invest.
Participation interests with a rating below high quality that are backed by an
irrevocable letter of credit or guarantee as described above will be purchased
only if the Adviser, acting as described above and subject to ratification by
the Fund's Board of Directors, determines after an analysis of, among other
factors, the creditworthiness of the guarantor that such participation interest
is high quality, and if the rating agency did not include the letter of credit
or guarantee in its determination of the instrument's rating. If the rating of
a participation interest is reduced subsequent to its purchase by the
Portfolio, the Adviser will consider, in accordance with procedures established
by the Board of Directors, all circumstances deemed relevant in determining
whether the Portfolio should continue to hold the participation interest. For
certain participation interests, the Portfolio will have the right to demand
payment, on not more than seven days' notice, for all or any part of the
Portfolio's participation interest in the security, plus accrued interest. As
to these instruments, although subject to unconditional demand for payment, the
Portfolio intends to exercise its right to demand payment only upon a default
under the terms of the security, as needed to provide liquidity to meet
redemptions, or to maintain or improve the quality of its investment portfolio.
Not more than 10% of the value of the Portfolio's net assets will be invested
in participation interests that do not have this demand feature, and in other
securities that are illiquid. See "Certain Fundamental Policies" below.
Investment Practices
Portfolio Lending. From time to time, the Portfolio may lend securities
from its portfolio to brokers, dealers and other financial institutions needing
to borrow securities to complete certain transactions. Such loans may not
exceed 33 1/3% of the Portfolio's total assets. In connection with such loans,
the Portfolio will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit issued by third party financial
institutions. Such collateral will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities.
The Portfolio can increase its income through the investment of such
collateral. The Portfolio continues to be entitled to the interest or other
distributions payable on the loaned security and receives interest on the
amount of the loan. Such loans will be terminable at any time upon specified
notice. The Portfolio might experience risk of loss if the institution with
which it has engaged in a portfolio loan transaction breaches its agreement
with the Portfolio.
Reverse Repurchase Agreements. The Portfolio may enter into reverse
repurchase agreements with banks, brokers or dealers. Reverse repurchase
agreements involve the transfer by the Portfolio of an underlying debt
instrument in return for cash proceeds based on a percentage of the value of
the security. The Portfolio retains the right to receive interest and principal
payments on the security. The Portfolio will use the proceeds of reverse
repurchase agreements only to make investments which generally either mature or
have a demand feature to resell to the issuer at a date simultaneous with or
prior to the expiration of the reverse repurchase agreement. At an agreed upon
future date, the Portfolio repurchases the security at principal plus accrued
interest. In certain types of agreements, there is no agreed upon repurchase
date and interest payments are calculated daily, often based on the prevailing
overnight repurchase rate. As a result of these transactions, the Portfolio may
be exposed to greater potential fluctuations in the value of its assets.
Interest costs on the money borrowed may exceed the return received on the
securities purchased. The Fund's Directors have considered the risks to the
Portfolio and its shareholders which may result from the entry into reverse
repurchase agreements and have determined that the entry into such agreements
is consistent with the Portfolio's investment objective and management
policies.
When-Issued Securities. The Portfolio may purchase money market securities
on a when-issued or forward commitment basis, which means that delivery and
payment for such securities ordinarily take place within 45 days after the date
of the commitment to purchase. The payment obligation and the interest rate
that will be received on the securities are fixed at the time the Portfolio
enters into the commitment. The Portfolio will make commitments to purchase
such securities only with the intention of actually acquiring the securities,
but the Portfolio may sell these securities before the settlement date if it is
deemed advisable. The Portfolio will not accrue income in respect of a security
purchased on a forward commitment basis prior to its stated delivery date. No
additional forward commitments will be made if more than 20% of the Portfolio's
net assets would be so committed.
Illiquid Securities. The Portfolio will not invest more than 10% of the
value of its net assets in illiquid securities. The term "illiquid securities"
for this purpose means securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at which the
Portfolio has valued the securities and includes, among other instruments,
certain restricted securities. As to these securities, the Portfolio is subject
to a risk that should the Portfolio desire to sell them when a ready buyer is
not available at a price the Portfolio deems representative of their value, the
value of the Portfolio's net assets could be adversely affected.
Certain Fundamental Policies
The Portfolio (i) may borrow money, but only (a) from banks for temporary
or emergency (not leveraging) purposes, in an amount up to 15% of the value of
the Portfolio's total assets (including the amount borrowed) valued at the
lesser of cost or market, less liabilities (not including the amount borrowed)
at the time the borrowing is made (borrowings repaid within 60 days and not
renewed or extended are presumed to be for temporary purposes) (while such
borrowings exceed 5% of the value of the Portfolio's total assets, the
Portfolio will not make any additional investments), and (b) in connection with
the entry into reverse repurchase agreements. At no time may total borrowings
exceed 33 1/3% of the value of the Portfolio's total assets; (ii) may pledge,
hypothecate, mortgage or otherwise encumber its assets, but only (a) to secure
borrowings for temporary or emergency purposes and (b) in connection with the
entry into reverse repurchase agreements in an amount equal to the aggregate
amount of its reverse repurchase obligations, plus accrued interest in certain
cases; (iii) may invest up to 10% of its net assets in repurchase agreements
providing for settlement in more than seven days after notice and in securities
that are illiquid; (iv) may invest up to 5% of its total assets in the
obligations of any one issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested (subject to the provisions of Rule
2a-7), and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities may be purchased, without regard to any such
limitation; and (v) will invest, except when the Portfolio has adopted a
temporary defensive position, at least 25% of its total assets in securities
issued by banks, including foreign banks and branches, and may invest up to 25%
of its total assets in the securities of issuers in any other industry,
provided that there is no limitation on investments in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. This
paragraph describes fundamental policies that cannot be changed without
approval by the holders of a majority (as defined in the 1940 Act) of the
Portfolio's outstanding voting shares. See "Investment Objective and Management
Policies -- Investment Restrictions" in the Portfolio's Statement of Additional
Information.
Investment Considerations and Risk Factors
General. The Portfolio will attempt to increase yields by trading to take
advantage of short-term market variations. This policy is expected to result in
high portfolio turnover but should not adversely affect the Portfolio since the
Portfolio usually will not pay brokerage commissions on purchases of short-term
debt obligations. The value of the securities held by the Portfolio will vary
inversely to changes in prevailing interest rates. Thus, if interest rates have
increased from the time a security was purchased, such security, if sold, might
be sold at a price less than its cost. Similarly, if interest rates have
declined from the time a security was purchased, such security, if sold, might
be sold at a price greater than its purchase cost. In either instance, if the
security was purchased at face value and held to maturity, no gain or loss will
be realized.
Bank Securities. To the extent the Portfolio's investments are
concentrated in the banking industry, it will have correspondingly greater
exposure to the risk factors which are characteristic of such investments.
Sustained increases in interest rates can adversely affect the availability or
liquidity and cost of capital funds for lending activities, and a deterioration
in general economic conditions could increase the exposure to credit losses. In
addition, the value of and the investment return on the Portfolio's shares will
be affected by economic or regulatory developments in or related to the banking
industry, and competition within the banking industry as well as with other
types of financial institutions. The Portfolio, however, will seek to minimize
its exposure to such risks by investing only in debt securities which are
determined to be of high quality.
Foreign Securities. Since the Portfolio may invest in securities issued by
foreign governments and any of their political subdivisions, agencies or
instrumentalities, and by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, domestic and foreign branches of foreign banks,
and commercial paper issued by foreign issuers, it may be subject to additional
investment risks with respect to those securities that are different in some
respects from those incurred by a fund which invests only in debt obligations
of U.S. domestic issuers. Such risks include future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities, the possible establishment of exchange
controls, the possible seizure or nationalization of foreign deposits, or the
adoption of other foreign governmental restrictions which might adversely
affect the payment of principal and interest on these securities.
Simultaneous Investments. Investment decisions for the Portfolio are made
independently from those of the Fund's other portfolios and other investment
companies or accounts managed by the Adviser. However, if such other entities
desire to invest in, or dispose of, the same securities as the Portfolio,
available investments or opportunities for sales will be allocated equitably to
each of them. In some cases, this procedure may adversely affect the size of
the position obtained for or disposed of by the Portfolio or the price paid or
received by the Portfolio.
Management of the Portfolio
Board of Directors
The business affairs of the Fund are managed under the general supervision
of its Board of Directors. The Portfolio's Statement of Additional Information
contains the name and general business experience of each Director.
Investment Adviser
Mitchell Hutchins Asset Management Inc., located at 1285 Avenue of the
Americas, New York, New York 10019, serves as the Portfolio's investment
adviser. The Adviser is a wholly-owned subsidiary of PaineWebber organized in
May 1977. The Adviser is registered as a broker-dealer under the Securities
Exchange Act of 1934 and as an investment adviser under the Investment Advisers
Act of 1940. As of February 29, 1996, the Adviser served as adviser or
sub-adviser to 32 investment companies with 66 investment portfolios having
aggregate assets in excess of $31 billion.
The Adviser supervises and assists in the overall management of the
Portfolio's affairs under an Investment Advisory Agreement between the Adviser
and the Fund, subject to the overall authority of the Fund's Board of Directors
in accordance with Maryland law.
For the fiscal year ended December 31, 1995, the Portfolio paid the
Adviser a monthly advisory fee at the annual rate of .10 of 1% of the value of
the Portfolio's average daily net assets.
In addition, under the terms of a Special Management Services Agreement
among the Fund, the Adviser and the Administrator, the Portfolio has agreed to
pay the Adviser and the Administrator each a monthly fee at the annual rate of
.05 of 1% of the value of the average daily net assets represented by the
Retail Shares for certain services, other than those provided pursuant to the
Portfolio's Distribution Plan, which will be provided to the holders of the
Retail Shares. These services include developing and monitoring customized
investor programs including individual retirement accounts and other ERISA
options, automatic deposit and withdrawal programs and other programs requested
by Securities Firms (as defined below). For the fiscal year ended December 31,
1995, the Portfolio did not pay the Adviser and the Administrator a fee
pursuant to the Special Management Services Agreement.
Administrator
Concord Holding Corporation, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, serves as the Portfolio's administrator. The Administrator
currently provides administrative or sub-administrative services to other
investment companies with over $60 billion in assets. The Administrator is a
wholly-owned subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator
generally assists in all aspects of the Fund's operations, other than providing
investment advice, subject to the overall authority of the Fund's Board of
Directors in accordance with Maryland law. In connection therewith, the
Administrator provides the Fund with office facilities, personnel, and certain
clerical and bookkeeping services (e.g., preparation of reports to shareholders
and the Securities and Exchange Commission and filing of Federal, state and
local income tax returns) that are not being furnished by The Bank of New York,
the Fund's Custodian.
For the fiscal year ended December 31, 1995, the Portfolio paid the
Administrator a monthly administration fee at the annual rate of .10 of 1% of
the value of the Portfolio's average daily net assets.
As described above, under the terms of the Special Management Services
Agreement, the Portfolio also has agreed to pay the Administrator a monthly fee
at the annual rate of .05 of 1% of the value of the average daily net assets
represented by the Retail Shares.
Distributor
Concord Financial Group, Inc., located at 125 West 55th Street, New York,
New York 10019, serves as the Fund's principal underwriter and distributor of
the Portfolio's shares. The Distributor, a wholly-owned subsidiary of the
Administrator, was organized to distribute shares of mutual funds to
institutional and retail investors. The Distributor distributes the shares of
other investment companies with over $80 billion in assets. The Distributor is
the Fund's sponsor.
The Distributor makes a continuous offering of the Portfolio's shares and
bears the costs and expenses of printing and distributing to prospective
investors copies of any prospectuses, statements of additional information and
annual and interim reports of the Portfolio (after such items have been
prepared and set in type by the Fund) which are used in connection with the
offering of shares, and the costs and expenses of preparing, printing and
distributing any other literature used by the Distributor in connection with
the offering of the Portfolio's shares for sale to the public.
Distribution Plan
Under a distribution plan adopted by the Fund's Board of Directors
pursuant to Rule 12b-1 under the 1940 Act (the "Distribution Plan"), the
Portfolio is authorized to pay Correspondent Services Corporation [CSC] and
correspondent firms a monthly fee at the annual rate of up to .60 of 1% of the
average daily net assets represented by the Retail Shares held in accounts
serviced by Correspondent Services Corporation [CSC] and such firms. Such fees
are paid pursuant to an agreement between the Fund and Correspondent Services
Corporation [CSC]. Such fees are not paid with respect to the Portfolio's
Institutional Shares. Such fees will be paid in respect of certain services
provided by such firms, including answering client inquiries regarding the
Portfolio; assisting clients in changing dividend options, account designations
and addresses; performing subaccounting; establishing and maintaining
shareholder accounts and records; processing purchase and redemption
transactions; investing client cash account balances automatically in Portfolio
shares; providing periodic statements showing a client's account balance and
integrating such statements with those of other transactions and balances in
the client's other accounts serviced by such firm; arranging for bank wires;
and such other services as the clients may request.
Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286, is
the Fund's Custodian (the "Custodian"). BISYS Fund Services Ohio, Inc., an
affiliate of the Administrator, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, is the Fund's Transfer and Dividend Disbursing Agent (the "Transfer
Agent").
Expenses
All expenses incurred in the operation of the Fund are borne by the Fund,
except to the extent specifically assumed by others. The expenses borne by the
Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator, or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory and administration
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, industry association fees, auditing and legal
expenses, costs of maintaining corporate existence, costs of independent
pricing services, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of calculating the net
asset value of the Portfolio's shares, costs of shareholders' reports and
corporate meetings, costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders, and any extraordinary expenses. Expenses attributable to
the Portfolio are charged against the assets of the Portfolio; other expenses
of the Fund are allocated among the Fund's portfolios on the basis determined
by the Board of Directors, including, but not limited to, proportionately in
relation to the net assets of each portfolio.
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How to Buy Shares
General
Retail Shares may be purchased only by clients of certain securities
dealers that have entered into securities clearing arrangements with
Correspondent Services Corporation [CSC] (the "Securities Firms"). Securities
Firms may receive different compensation for selling Retail Shares than for
selling Institutional Shares. If you desire to purchase Retail Shares for your
Keogh Plan, IRA or other retirement plan, you should consult your Securities
Firm. Certificates representing shares of the Portfolio will not be issued. The
Fund reserves the right to reject any purchase order.
The Fund requires no minimum initial or subsequent investment amounts for
the Retail Shares. Certain Securities Firms may impose minimum investment
amounts for purchases of Portfolio shares by their clients, including clients
purchasing shares under Keogh Plans, IRAs or other retirement plans. You should
consult your Securities Firm in this regard.
Shares are sold on a continuous basis at the net asset value per share
next determined after an order in proper form and Federal Funds (monies of
member banks within the Federal Reserve System which are held on deposit at a
Federal Reserve Bank) are received by the Transfer Agent. See "Terms of
Purchase" below.
Payments Through Securities Firms
All orders must be made through your Securities Firm. The Securities Firm
will transmit your payment to the Fund and will supply the Fund with the
required information. It is your Securities Firm's responsibility to transmit
your order properly on a timely basis.
Wire Orders
If you have opened a Portfolio account, you may make subsequent purchases
by wire. Information on remitting funds in this manner may be obtained from
your Securities Firm. You should consult your Securities Firm for information
on any fees that may be charged you directly for wires.
Terms of Purchase
If your purchase order is received by the Transfer Agent by 12:00 noon,
Eastern time, on a business day (which, as used herein, shall include each day
that the New York Stock Exchange and the Fund's Custodian are open for
business), and Federal Funds are received by the Transfer Agent by 4:00 p.m.,
Eastern time, on that day, Retail Shares will be purchased as of 12:00 noon,
Eastern time, on such business day. If your purchase order is received after
12:00 noon, Eastern time, on a given day, or Federal Funds are received after
4:00 p.m., Eastern time, on such day, Retail Shares will be purchased as of
12:00 noon, Eastern time, on the next business day.
The Portfolio's net asset value per share is determined as of 12:00 noon,
Eastern time, on each business day. Net asset value per share is computed by
dividing the value of the Portfolio's net assets (i.e., the value of its assets
less liabilities) by the total number of shares outstanding. See "Determination
of Net Asset Value" in the Portfolio's Statement of Additional Information.
Federal regulations require that you provide a certified Taxpayer
Identification Number upon opening or reopening an account. See "Dividends,
Distributions and Taxes" for further information concerning this requirement.
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How to Redeem Shares
General
You may request redemption of your shares at any time through your
Securities Firm. Redemption requests may be made as described below. When a
request is received in proper form, the Fund will redeem the shares at the next
determined net asset value.
The Fund ordinarily will make payment for all shares redeemed within seven
days after receipt by the Transfer Agent of a redemption request in proper
form, except as provided by the rules of the Securities and Exchange
Commission.
The Fund understands that, if you cease to be a client of a Securities
Firm, or if your Securities Firm's clearing arrangement with Correspondent
Services Corporation [CSC] is discontinued, the Securities Firm will cancel
your Fund account and request the Transfer Agent to remit the proceeds of your
redeemed shares, together with all accrued and unpaid dividends to which you
are entitled. You should consult your Securities Firm in this regard.
The Fund reserves the right to redeem your account at its option upon not
less than 45 days' written notice if your account's net asset value is $500 or
less, for reasons other than market conditions, and remains so during the
notice period. Certain Securities Firms may impose, with respect to their
clients' investments in the Portfolio, a minimum account balance which is
higher than that specified above.
Procedures
Redemption by Check. If you desire to use check redemption, you should
consult your Securities Firm to determine its availability. At your Securities
Firm's request, the Transfer Agent will provide you with redemption checks if
you have a $1,000 minimum account. These checks may be made payable to the
order of any person in an amount not less than $500. The payee of the check may
cash or deposit the check. When a check is presented to the Transfer Agent for
payment, the Transfer Agent will present the check to the Fund as authority to
redeem a sufficient number of full and fractional shares in your account to
cover the amount of the check. You continue earning daily dividends until the
check is cleared. There currently is no charge for the use of checks; however,
the Transfer Agent may impose a charge for stopping payment of a check upon
your request, or if the check cannot be honored due to insufficient funds or
other valid reason. The Fund or the Transfer Agent may modify or terminate the
check redemption privilege at any time upon notice to shareholders.
Repurchase Through Securities Firms. The Fund will repurchase Retail
Shares through Securities Firms. The Fund ordinarily will accept orders to
repurchase shares by wire or telephone from Securities Firms for their
customers at the net asset value next computed after receipt of the order from
the Securities Firm, provided that such request for repurchase is received from
the Securities Firm prior to 12:00 noon, Eastern time, on any business day. It
is your Securities Firm's responsibility to transmit your repurchase order
properly on a timely basis.
These repurchase arrangements are for the convenience of shareholders and
do not involve a charge by the Fund; however, Securities Firms may impose a
charge on the shareholder for transmitting the notice of repurchase to the
Fund. The Fund reserves the right to reject any order for repurchases through a
Securities Firm, but it may not reject other properly submitted requests for
redemption as described herein. The Fund promptly will notify the Securities
Firm of any rejection of a repurchase with respect to Retail Shares. For
shareholders repurchasing through their Securities Firm, payments will be made
by the Transfer Agent to the Securities Firm.
Automatic Withdrawal Plan. If you desire to participate in the Automatic
Withdrawal Plan, you should consult your Securities Firm to determine its
availability and any conditions which may be imposed on its use. The Automatic
Withdrawal Plan permits you to request withdrawal of a specified dollar amount
(minimum of $50) on either a monthly, quarterly, semi-annual or annual basis if
you have a $1,000 minimum account. The automatic withdrawal will be made on the
first or fifteenth day, at your option, of the period selected. Redemption
proceeds will be on deposit in your designated account at an Automated Clearing
House member bank ordinarily within two days following redemption. To
participate in the Automatic Withdrawal Plan, you must supply your Securities
Firm with the necessary information. Your participation in the Automatic
Withdrawal Plan may be ended at any time by you, your Securities Firm, the Fund
or the Transfer Agent.
Automatic Redemption. Correspondent Services Corporation [CSC] carries
securities accounts and performs clearing services for the Securities Firms and
has instituted an automatic redemption procedure applicable to Portfolio
shareholders. This procedure may be used to satisfy amounts due from you as a
result of purchases of securities or other transactions in your securities
account. Under this procedure, unless you notify your Securities Firm to the
contrary, your securities account will be scanned each business day prior to
12:00 noon, Eastern time, and after application of any cash balances in the
account, a sufficient number of Portfolio shares may be redeemed at the 12:00
noon, Eastern time, pricing that day to satisfy any amounts for which you are
obligated to make payment to your Securities Firm. Redemptions will be effected
on the business day preceding the date you are obligated to make such payment,
and your Securities Firm will receive the redemption proceeds on the day
following the redemption date.
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Dividends, Distributions and Taxes
The Portfolio declares dividends from net investment income on each day
the Portfolio is open for business. Dividends usually are paid on or about the
fifteenth day of each month, and are automatically reinvested in additional
Retail Shares at net asset value or, at your option, paid in cash. The
Portfolio's earnings for Saturdays, Sundays and holidays are declared as
dividends on the preceding business day. Shares begin accruing dividends on the
day the purchase order is received in proper form by the Transfer Agent, if
received by 12:00 noon, New York time, on such day, and continue to earn
dividends through the day before a redemption order for such shares is
processed by the Transfer Agent. If you redeem all shares in your account at
any time during the month, all dividends to which you are entitled will be paid
to you along with the proceeds of the redemption. Dividends paid by each class
of Portfolio shares will be calculated at the same time and in the same manner
and will be of the same amount, except that the expenses attributable solely to
a class will be borne exclusively by such class.
Distributions from net realized securities gains, if any, are declared and
paid once a year, but the Portfolio may make distributions on a more frequent
basis to comply with the distribution requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), in all events in a manner consistent with the
provisions of the 1940 Act. Dividends and distributions ordinarily are
reinvested in additional Retail Shares at net asset value. You may elect to
receive dividends and distributions in cash by contacting your Securities Firm.
All expenses are accrued daily and deducted before declaration of dividends to
investors.
If you elect to receive distributions in cash and your distribution checks
(1) are returned to the Fund marked "undeliverable" or (2) remain uncashed for
six months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in Portfolio shares
at the net asset value determined as of the date of payment of the
distribution. In addition, any such undeliverable checks or checks that remain
uncashed for six months will be canceled and will be reinvested in Portfolio
shares at the net asset value determined as of the date of cancellation.
Dividends derived from interest and distributions from any net realized
short-term securities gains generally are taxable to investors as ordinary
income, whether received in cash or reinvested in additional Portfolio shares.
Distributions from net realized long-term securities gains, if any, generally
are taxable as long-term capital gains regardless of how long shareholders have
held their shares and whether such distributions are received in cash or
reinvested in additional Portfolio shares. Dividends and distributions may be
subject to certain state and local taxes. No dividend will qualify for the
dividends-received deduction allowable to certain corporations.
Dividends derived from net investment income and distributions from net
realized short-term securities gains paid by the Portfolio to a foreign
investor generally are subject to U.S. nonresident withholding taxes at the
rate of 30%, unless the foreign investor claims the benefit of a lower rate
specified in a tax treaty. Distributions from net realized long-term securities
gains paid by the Portfolio to a foreign investor generally will not be subject
to U.S. nonresident withholding tax. However, such distributions may be subject
to backup withholding, as described below, unless the foreign investor
certifies his non-U.S. residency status.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends and distributions
from net realized securities gains of the Portfolio paid to a shareholder if
such shareholder fails to certify either that the Taxpayer Identification
Number furnished in connection with opening an account is correct, or that such
shareholder has not received notice from the Internal Revenue Service of being
subject to backup withholding as a result of a failure to properly report
taxable dividend or interest income on a Federal income tax return.
Furthermore, the Internal Revenue Service may notify the Fund to institute
backup withholding if the Internal Revenue Service determines a shareholder's
Taxpayer Identification Number is incorrect or if a shareholder has failed to
properly report taxable dividend and interest income on a Federal income tax
return.
A Taxpayer Identification Number is either the Social Security number or
employer identification number of the record owner of the account. Any tax
withheld as a result of backup withholding does not constitute an additional
tax imposed on the record owner of the account, and may be claimed as a credit
on the record owner's Federal income tax return.
Notice as to the tax status of your dividends and distributions is mailed
to you annually from your Securities Firm. You also will be sent periodic
summaries of your account which will include information as to dividends and
distributions from securities gains, if any, paid during the year.
Management believes that the Portfolio has qualified for the fiscal year
ended December 31, 1995 as a "regulated investment company" under the Code. The
Portfolio intends to continue to so qualify so long as such qualification is in
the best interests of its shareholders. Such qualification relieves the
Portfolio of any liability for Federal income tax to the extent its earnings
are distributed in accordance with applicable provisions of the Code. The Code
subjects regulated investment companies, such as the Portfolio, to a
non-deductible 4% excise tax to the extent that such investment companies do
not distribute a very substantial portion of their taxable investment income
and capital gains, generally determined on a calendar year basis.
You should consult your tax adviser regarding specific questions as to
Federal, state or local taxes.
- --------------------------------------------------------------------------------
General Information
The Fund was incorporated under Maryland law on March 6, 1990, and
commenced operations on August 28, 1990. The Fund is authorized to issue 11
billion shares of Common Stock (with 2 billion allocated to the Portfolio), par
value $.001 per share. The Portfolio's shares are classified into the Retail
Shares (1 billion shares) and Institutional Shares (1 billion shares).
Institutional Shares, which are described in a separate prospectus, are sold to
institutions and may not be purchased by individuals directly. Each share has
one vote and shareholders will vote in the aggregate and not by class except as
otherwise required by law.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Fund to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of Directors or the
appointment of auditors. However, pursuant to the Fund's By-Laws, the holders
of at least 10% of the shares outstanding and entitled to vote may require the
Fund to hold a special meeting of shareholders for purposes of removing a
Director from office or for any other purpose. Shareholders may remove a
Director by the affirmative vote of a majority of the Fund's outstanding voting
shares. In addition, the Board of Directors will call a meeting of shareholders
for the purpose of electing Directors if, at any time, less than a majority of
the Directors then holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios, each of which is treated as a separate entity for certain matters
under the 1940 Act and for other purposes. A shareholder of one portfolio is
not deemed to be a shareholder of any other portfolio. For certain matters Fund
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, Retail Shares of the Correspondent Cash Reserves
Money Market Portfolio are being offered. From time to time, other portfolios
may be established and sold pursuant to other offering documents.
To date, 12 portfolios of shares have been authorized. The other
portfolios are not being offered by this Prospectus. All consideration received
by the Fund for shares of one of the portfolios and all assets in which such
consideration is invested, belong to that portfolio (subject only to the rights
of creditors of the Fund) and will be subject to the liabilities related
thereto. The income and expenses attributable to one portfolio (and as to
classes within a portfolio) are treated separately from those of the other
portfolios (and classes).
The Transfer Agent maintains a record of your ownership. Your Securities
Firm will send you confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
<PAGE>
PROSPECTUS MAY 1, 1996
THE INFINITY MUTUAL FUNDS, INC.
Correspondent Cash Reserves Money Market Portfolio
Institutional Shares
The Infinity Mutual Funds, Inc. (the "Fund") is an open- end,
management investment company, known as a series fund. By this Prospectus,
Institutional Shares of the Fund's Correspondent Cash Reserves Money Market
Portfolio (the "Portfolio") are being offered.
The Portfolio is a diversified, money market mutual fund that seeks
to provide investors with as high a level of current income as is consistent
with the preservation of capital and the maintenance of liquidity. The Portfolio
invests in a diversified portfolio of short-term money market obligations.
The Institutional Shares are offered only to institutional investors.
Institutional Shares may not be purchased by individuals directly, but
institutional investors may purchase shares for accounts maintained by
individuals. Investors can invest, reinvest or redeem Institutional Shares at
any time without charge or penalty.
An investment in the Portfolio is neither insured nor guaranteed by
the U.S. Government. There can be no assurance that the Portfolio will be able
to maintain a stable net asset value of $1.00 per share. (continued on next
page) ------------------
This Prospectus sets forth concisely information about the Fund that
an investor should know before investing. It should be read and retained for
future reference.
The Statement of Additional Information, dated May 1, 1996, which
may be revised from time to time, provides a further discussion of certain areas
in this Prospectus and other matters which may be of interest to some investors.
It has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. For a free copy, write to the Fund at 3435
Stelzer Road, Columbus, Ohio 43219-3035, contact your sales representative or
call 1-800-852-9730.
-----------------------------------
Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other governmental
agency. Portfolio shares involve certain investment risks, including the
possible loss of
principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Another class of the Portfolio's shares -- the Retail Shares -- are
offered by a separate prospectus to individuals and are not offered hereby. The
Institutional Shares and Retail Shares are identical, except as to the services
offered to each class and the expenses borne by each class which may affect
performance. Investors desiring to obtain information about Retail Shares should
ask their sales representative or call 1- 800-852-9730.
Mitchell Hutchins Asset Management Inc. (the "Adviser"), a
wholly-owned subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
Portfolio's investment adviser.
Concord Holding Corporation (the "Administrator") serves as the
Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned
subsidiary of the Administrator, serves as distributor of the Portfolio's
shares.
TABLE OF CONTENTS
Page
Expense Summary.......................................... 3
Financial Highlights..................................... 4
Yield Information........................................ 5
Description of the Portfolio............................. 5
Management of the Portfolio.............................. 15
How to Buy Shares........................................ 18
How to Redeem Shares..................................... 19
Dividends, Distributions and Taxes....................... 20
General Information...................................... 22
<PAGE>
EXPENSE SUMMARY
(as a percentage of average daily net assets)
Institutional
Shares
Management Fees ................................................ .10%
12b-1 Fees...................................................... None
Other Expenses.................................................. .24%
Total Operating Expenses........................................ .34%
EXAMPLE:
Investors would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of
each time period: 1 Year $ 4
3 Years $11
5 Years $19
10 Years $42
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. Moreover, while the example assumes a 5% annual
return, the Portfolio's actual performance will vary and may result in an actual
return greater or less than 5%.
The purpose of the foregoing table is to assist investors in
understanding the costs and expenses borne by the Portfolio, the payment of
which will reduce investors' annual return. Institutions effecting transactions
in Institutional Shares for the accounts of their clients may charge their
clients direct fees in connection with such transactions. See "How to Buy
Shares." For a further description of the various costs and expenses incurred in
the Portfolio's operation, see "Management of the Portfolio."
<PAGE>
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for an
Institutional Share of common stock outstanding, total investment return, ratios
to average net assets and other supplemental data for each period indicated. The
information in the table has been audited by KPMG Peat Marwick LLP, the
Portfolio's independent auditors, whose report thereon appears in the Statement
of Additional Information. Further financial data and related notes are included
in the Statement of Additional Information, available upon request.
<TABLE>
<CAPTION>
Period
Year Ended December 31, Ended
December 31,
1995 1994 1993 1992 1991*
------------ ------------ ------------ ------------- ---------
INSTITUTIONAL SHARES:
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................. $0.9975 $0.9999 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment operations:
Net investment income............................... 0.0563 0.0402 0.0320 0.0391 0.0220
Net realized gains/(losses) on securities........... 0.0011 (0.0024) (0.0001) -- --
------- -------- ------- ---------- -------
Net gains from investment operations................ 0.0574 0.0378 0.0319 0.0391 0.0220
------- ------- ------- ------- -------
Distributions:
Dividends from net investment income................ (0.0563) (0.0402) (0.0320) (0.0391) (0.0220)
------- -------- ------- ------- -------
Net change in net asset value......................... 0.0011 (0.0024) (0.0001) -- --
------- -------- ------- ---------- -------
Net Asset Value, End of Period........................ $0.9986 $0.9975 $0.9999 $1.0000 $1.0000
======= ======= ======= ======= =======
Total return.......................................... 5.78% 4.09% 3.25% 3.98% 4.30%+
Ratios/supplemental data:
Net assets, end of period (000's)................... $39,485 $31,091 $67,230 $64,306 $ 0
Ratio of expenses to average net assets............. 0.34% 0.31% 0.25% 0.27% 0.40%++
Ratio of net interest income
to average net assets............................. 5.66% 3.87% 3.20% 3.73% 5.27%++
Ratio of expenses to average net assets**........... 0.34% 0.31% 0.25% 0.32% 0.50%++
Ratio of net interest income
to average net assets**........................... 5.66% 3.87% 3.20% 3.68% 5.17%++
</TABLE>
* For the period August 2, 1991 (commencement of operations) through December
31, 1991. ** During the period, certain fees and expenses were voluntarily
waived and/or reimbursed. If such voluntary reductions and/or reimbursements had
not occurred, the ratios would have been as indicated. + Total return is not
annualized, as it may not be representative of the total return for the year. ++
Annualized.
<PAGE>
YIELD INFORMATION
From time to time, the Portfolio will advertise its yield and
effective yield. Both yield figures are based on historical earnings and are not
intended to indicate future performance. It can be expected that these yields
will fluctuate substantially. The yield of the Portfolio refers to the income
generated by an investment in the Portfolio over a seven-day period (which
period will be stated in the advertisement). This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Portfolio is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment. The Portfolio's
yield and effective yield may reflect absorbed expenses pursuant to any
undertaking that may be in effect.
Yield information is useful in reviewing the Portfolio's performance,
but because yields will fluctuate, under certain conditions such information may
not provide a basis for comparison with domestic bank deposits, other
investments which pay a fixed yield for a stated period of time, or other
investment companies which may use a different method of computing yield.
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., Bank Rate Monitor(TM), N. Palm Beach, Fla. 33408,
IBC/Donoghue's Money Fund Report, Morningstar, Inc., other industry publications
and national financial publications, including Money, Forbes, Barron's, The Wall
Street Journal and The New York Times, or local or regional publications.
DESCRIPTION OF THE PORTFOLIO
Investment Objection
The Portfolio seeks to provide investors with as high a level of
current income as is consistent with the preservation of capital and the
maintenance of liquidity. The Portfolio's investment objective cannot be changed
without approval by the holders of a majority (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) of the Portfolio's outstanding
voting shares. There can be no assurance that the Portfolio's investment
objective will be achieved. Securities in which the Portfolio invests may not
earn as high a level of current income as long-term or lower quality securities
which generally have less liquidity, greater market risk and more fluctuation in
market value.
Management Policies
The Portfolio invests in U.S. dollar denominated short-term money
market obligations, including securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, certificates of deposit, time
deposits, bankers' acceptances and other short-term obligations issued by
domestic banks, foreign branches of domestic banks, foreign subsidiaries of
domestic banks, and domestic and foreign branches of foreign banks, repurchase
agreements, and high quality domestic and foreign commercial paper and other
high quality short-term corporate obligations, such as floating or variable rate
U.S. dollar denominated demand notes and bonds. The Portfolio invests in U.S.
dollar denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities, including obligations of supranational entities. The
Portfolio also may lend securities from its portfolio and enter into reverse
repurchase agreements as described below. During normal market conditions, at
least 25% of the Portfolio's total assets will be invested in domestic and/or
foreign bank obligations. See "Investment Considerations and Risk Factors"
below.
The Portfolio seeks to maintain a net asset value of $1.00 per share
for purchases and redemptions. To do so, the Fund uses the amortized cost of
method of valuing the Portfolio's securities pursuant to Rule 2a-7 under the
1940 Act, certain requirements of which are summarized below.
In accordance with Rule 2a-7, the Portfolio is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities determined in accordance with procedures
established by the Board of Directors to present minimal credit risks and which
are rated in one of the two highest rating categories for debt obligations by at
least two nationally recognized statistical rating organizations ("NRSRO") (or
one NRSRO if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Board of Directors. The Board of Directors has delegated to
the Adviser the day-to-day operations of the Portfolio; however, the Board of
Directors retains ultimate responsibility for compliance with Rule 2a-7 under
the 1940 Act. The NRSROs currently rating instruments of the type the Portfolio
may purchase are Moody's Investors Service, Inc., Standard & Poor's Rating
Group, Duff & Phelps Credit Rating Co., Fitch Investors Service, L.P., IBCA
Limited and IBCA Inc., and Thomson BankWatch, Inc. and their rating criteria are
described in the "Appendix" to the Portfolio's Statement of Additional
Information.
In addition, the Portfolio will not invest more than 5% of its total
assets in the securities (including the securities collateralizing a repurchase
agreement) of, or subject to puts issued by, a single issuer, except that (i)
the Portfolio may invest more than 5% of its total assets in a single issuer for
a period of up to three business days in certain limited circumstances as set
forth under Rule 2a-7, (ii) the Portfolio may invest in obligations issued or
guaranteed by the U.S. Government without any such limitation, and (iii) the
limitation with respect to puts does not apply to unconditional puts if no more
than 10% of the Portfolio's total assets is invested in securities issued or
guaranteed by the issuer of the unconditional put. Investments in rated
securities not rated in the highest category by at least two rating
organizations (or one rating organization if the instrument was rated by only
one such organization), and unrated securities not determined by the Board of
Directors to be comparable to those rated in the highest category, will be
limited to 5% of the Portfolio's total assets, with the investment in any one
such issuer being limited to no more than the greater of 1% of the Portfolio's
total assets or $1,000,000. As to each security, these percentages are measured
at the time the Portfolio purchases the security. For further information
regarding the amortized cost method of valuing securities, see "Determination of
Net Asset Value" in the Portfolio's Statement of Additional Information. There
can be no assurance that the Portfolio will be able to maintain a stable net
asset value of $1.00 per share.
Portfolio Securities
U.S. Government Obligations. The Portfolio may invest in securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Such securities include U.S. Treasury securities, such as
bills, notes, bonds and certificates of indebtedness, which differ in their
interest rates, maturities and times of issuance, and issues of U.S. Government
agencies and instrumentalities established under the authority of an act of
Congress. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued by
the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Interest may
fluctuate based on generally recognized reference rates or the relationship of
rates. While the U.S. Government provides financial support to such U.S.
Government- sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Portfolio
will invest in such securities only when it is satisfied that the credit risk
with respect to the issuer is minimal.
Foreign Government Obligations; Securities of Supranational Entities.
The Portfolio may invest in obligations issued or guaranteed by one or more
foreign governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Board of Directors to be of
comparable quality to the other obligations in which the Portfolio may invest.
Such securities also include debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of the
Portfolio's assets invested in securities issued by foreign governments will
vary depending on the relative yields of such securities, the economic and
financial markets of the countries in which the investments are made and the
interest rate climate of such countries. See "Investment Considerations and Risk
Factors" below.
Certificates of Deposit, Time Deposits and Bankers' Acceptances. The
Portfolio also will invest in certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations issued by domestic banks, foreign
branches of domestic banks, foreign subsidiaries of domestic banks, and domestic
and foreign branches of foreign banks. See "Risk Factors" below. Certificates of
deposit are certificates representing the obligation of a bank to repay funds
deposited with it for a specified period of time. Time deposits are
non-negotiable deposits maintained in a bank for a specified period of time at a
stated interest rate. Time deposits which may be held by the Portfolio will not
benefit from insurance from the Bank Insurance Fund or the Savings Association
Insurance Fund administered by the Federal Deposit Insurance Corporation. The
Portfolio will not invest more than 10% of the value of its net assets in time
deposits maturing in more than seven days and in other securities that are
illiquid. Bankers' acceptances are credit instruments evidencing the obligation
of a bank to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable rates of
interest.
Repurchase Agreements. Repurchase agreements involve the acquisition
by the Portfolio of an underlying debt instrument, subject to an obligation of
the seller to repurchase, and the Portfolio to resell, the instrument at a fixed
price usually not more than one week after its purchase. Certain costs may be
incurred in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
securities, realization on the securities by the Portfolio may be delayed or
limited.
Commercial Paper and Corporate Obligations. Commercial paper consists
of short-term, unsecured promissory notes issued to finance short-term credit
needs. The commercial paper purchased by the Portfolio will consist only of
direct obligations issued by domestic and foreign entities. The other corporate
obligations in which the Portfolio may invest consist of high quality, U.S.
dollar denominated short-term bonds and notes (including variable amount master
demand notes) issued by domestic and foreign corporations.
Floating and Variable Rate Obligations. The Portfolio also may
purchase floating and variable rate demand notes and bonds, which are
obligations ordinarily having stated maturities in excess of 13 months, but
which permit the holder to demand payment of principal at any time, or at
specified intervals not exceeding 13 months, in each case upon not more than 30
days' notice. Variable rate demand notes include master demand notes which are
obligations that permit the Portfolio to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the
Portfolio, as lender, and the borrower. The interest rates on these notes
fluctuate from time to time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally will
be traded, and there generally is no established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Portfolio's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. These obligations include
highly rated certificates of participation in trusts secured by accounts
receivable, including trade receivables, and other assets. Such obligations
frequently are not rated by credit rating agencies and, if not so rated, the
Portfolio may invest in them only if the Adviser, acting upon delegated
authority from, and subject to ratification by, the Fund's Board of Directors,
determines that at the time of investment the obligations are of comparable
quality to the other obligations in which the Portfolio may invest. The Adviser,
on behalf of the Portfolio, will consider on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate demand
obligations held by the Portfolio. The Portfolio will not invest more than 10%
of the value of its net assets in floating or variable rate demand obligations
as to which it cannot exercise the demand feature on not more than seven days'
notice if the Adviser determines, acting upon delegated authority from, and
procedures established by, the Fund's Board of Directors, that there is no
secondary market available for these obligations, and in other securities that
are illiquid. See "Certain Fundamental Policies" below.
Notes. The Portfolio also may purchase unsecured promissory notes
("Notes") which are not readily marketable and have not been registered under
the Securities Act of 1933, provided such investments are consistent with its
investment objective. The Portfolio will invest no more than 10% of its net
assets in such Notes and in other securities that are illiquid. See "Certain
Fundamental Policies" below.
Participation Interests. The Portfolio may invest in short-term
corporate obligations that are originated, negotiated and structured by a
syndicate of lenders ("Co-Lenders") consisting of commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions one or more of which administers the security on behalf of the
syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third
parties called "Participants." The Portfolio may invest in such securities
either by participating as a Co- Lender at origination or by acquiring an
interest in the security from a Co-Lender or a Participant (collectively,
"participation interests"). Co-Lenders land Participants interposed between the
Portfolio and the corporate borrower (the "Borrower"), together with Agent
Banks, are referred to herein as "intermediate Participants." The Portfolio also
may purchase a participation interest in a portion of the rights of an
Intermediate Participant. The Portfolio will not act as an Agent Bank,
guarantor, sole negotiator or sole structuror with respect to securities that
are the subject of a participation interest.
A participation interest gives the Portfolio an undivided interest in
the security in the proportion that the Portfolio's participation interest bears
to the total principal amount of the security. These instruments may have fixed,
floating or variable rates of interest with remaining maturities of 13 months or
less. If the participation interest is unrated, or has been given a rating below
that which is permissible for purchase by the Portfolio, the participation
interest will be backed by an irrevocable or unconditional letter of credit or
guarantee of a bank or other entity the debt securities of which are rated high
quality, or the payment obligation otherwise will be collateralized by U.S.
Government securities, or, in the case of an unrated participation interest, the
Adviser, acting upon delegated authority from the Fund's Board of Directors,
must have determined that the instrument is of comparable quality to those
instruments in which the Portfolio may invest. Participation interests with a
rating below high quality that are backed by an irrevocable letter of credit or
guarantee as described above will be purchased only if the Adviser, acting as
described above and subject to ratification by the Fund's Board of Directors,
determines after an analysis of, among other factors, the creditworthiness of
the guarantor that such participation interest is high quality, and if the
rating agency did not include the letter of credit or guarantee in its
determination of the instrument's rating. If the rating of a participation
interest is reduced subsequent to its purchase by the Portfolio, the Adviser
will consider, in accordance with procedures established by the Board of
Directors, all circumstances deemed relevant in determining whether the
Portfolio should continue to hold the participation interest. For certain
participation interests, the Portfolio will have the right to demand payment, on
not more than seven days' notice, for all or any part of the Portfolio's
participation interest in the security, plus accrued interest. As to these
instruments, although subject to unconditional demand for payment, the Portfolio
intends to exercise its right to demand payment only upon a default under the
terms of the security, as needed to provide liquidity to meet redemptions, or to
maintain or improve the quality of its investment portfolio. Not more than 10%
of the value of the Portfolio's net assets will be invested in participation
interests that do not have this demand feature, and in other securities that are
illiquid. See "Certain Fundamental Policies" below.
Investment Practices
Portfolio Lending. From time to time, the Portfolio may lend
securities from its portfolio to brokers, dealers and other financial
institutions needing to borrow securities to complete certain transactions. Such
loans may not exceed 33-1/3% of the Portfolio's total assets. In connection with
such loans, the Portfolio will receive collateral consisting of cash, U.S.
Government securities or irrevocable letters of credit issued by third party
financial institutions. Such collateral will be maintained at the Fund's
custodian, at all times in an amount equal to at least 100% of the current
market value of the loaned securities. The Portfolio can increase its income
through the investment of such collateral. The Portfolio continues to be
entitled to the interest or other distributions payable on the loaned security
and receives interest on the amount of the loan. Such loans will be terminable
at any time upon specified notice. The Portfolio might experience risk of loss
if the institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Portfolio.
Reverse Repurchase Agreements. The Portfolio may enter into reverse
repurchase agreements with banks, brokers or dealers. Reverse repurchase
agreements involve the transfer by the Portfolio of an underlying debt
instrument in return for cash proceeds based on a percentage of the value of the
security. The Portfolio retains the right to receive interest and principal
payments on the security. The Portfolio will use the proceeds of reverse
repurchase agreements only to make investments which generally either mature or
have a demand feature to resell to the issuer at a date simultaneous with or
prior to the expiration of the reverse repurchase agreement. At an agreed upon
future date, the Portfolio repurchases the security at principal plus accrued
interest. In certain types of agreements, there is no agreed upon repurchase
date and interest payments are calculated daily, often based on the prevailing
overnight repurchase rate. As a result of these transactions, the Portfolio may
be exposed to greater potential fluctuations in the value of its assets.
Interest costs on the money borrowed may exceed the return received on the
securities purchased. The Fund's Directors have considered the risks to the
Portfolio and its shareholders which may result from the entry into reverse
repurchase agreements and have determined that the entry into such agreements is
consistent with the Portfolio's investment objective and management policies.
When-Issued Securities. The Portfolio may purchase money market
securities on a when-issued or forward commitment basis, which means that
delivery and payment for such securities ordinarily take place within 45 days
after the date of the commitment to purchase. The payment obligation and the
interest rate that will be received on the securities are fixed at the time the
Portfolio enters into the commitment. The Portfolio will make commitments to
purchase such securities only with the intention of actually acquiring the
securities, but the Portfolio may sell these securities before the settlement
date if it is deemed advisable. The Portfolio will not accrue income in respect
of a security purchased on a forward commitment basis prior to its stated
delivery date. No additional forward commitments will be made if more than 20%
of the Portfolio's net assets would be so committed.
Illiquid Securities. The Portfolio will not invest more than 10% of
the value of its net assets in illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Portfolio has valued the securities and includes, among other
instruments, certain restricted securities. As to these securities, the
Portfolio is subject to a risk that should the Portfolio desire to sell them
when a ready buyer is not available at a price the Portfolio deems
representative of their value, the value of the Portfolio's net assets could be
adversely affected.
Certain Fundamental Policies
The Portfolio (i) may borrow money, but only (a) from banks for
temporary or emergency (not leveraging) purposes, in an amount up to 15% of the
value of the Portfolio's total assets (including the amount borrowed) valued at
the lesser of cost or market, less liabilities (not including the amount
borrowed) at the time the borrowing is made (borrowings repaid within 60 days
and not renewed or extended are presumed to be for temporary purposes) (while
such borrowings exceed 5% of the value of the Portfolio's total assets, the
Portfolio will not make any additional investments), and (b) in connection with
the entry into reverse repurchase agreements. At no time may total borrowings
exceed 33-1/3% of the value of the Portfolio's total assets; (ii) may pledge,
hypothecate, mortgage or otherwise encumber its assets, but only (a) to secure
borrowings for temporary or emergency purposes and (b) in connection with the
entry into reverse repurchase agreements in an amount equal to the aggregate
amount of its reverse repurchase obligations, plus accrued interest in certain
cases; (iii) may invest up to 10% of its net assets in repurchase agreements
providing for settlement in more than seven days after notice and in securities
that are illiquid; (iv) may invest up to 5% of its total assets in the
obligations of any one issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested (subject to the provisions of Rule
2a-7), and obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities may be purchased, without regard to any such limitation;
and (v) will invest, except when the Portfolio has adopted a temporary defensive
position, at least 25% of its total assets in securities issued by banks,
including foreign banks and branches, and may invest up to 25% of its total
assets in the securities of issuers in any other industry, provided that there
is no limitation on investments in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. This paragraph describes
fundamental policies that cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
shares. See "Investment Objective and Management Policies--Investment
Restrictions" in the Portfolio's Statement of Additional Information.
Investment Considerations and Risk Factors
General. The Portfolio will attempt to increase yields by trading to
take advantage of short-term market variations. This policy is expected to
result in high portfolio turnover but should not adversely affect the Portfolio
since the Portfolio usually will not pay brokerage commissions on purchases of
short-term debt obligations. The value of the securities held by the Portfolio
will vary inversely to changes in prevailing interest rates. Thus, if interest
rates have increased from the time a security was purchased, such security, if
sold, might be sold at a price less than its cost. Similarly, if interest rates
have declined from the time a security was purchased, such security, if sold,
might be sold at a price greater than its purchase cost. In either instance, if
the security was purchased at face value and held to maturity, no gain or loss
will be realized.
Bank Securities. To the extent the Portfolio's investments are
concentrated in the banking industry, it will have correspondingly greater
exposure to the risk factors which are characteristic of such investments.
Sustained increases in interest rates can adversely affect the availability or
liquidity and cost of capital funds for lending activities, and a deterioration
in general economic conditions could increase the exposure to credit losses. In
addition, the value of and the investment return on the Portfolio's shares will
be affected by economic or regulatory developments in or related to the banking
industry, and competition within the banking industry as well as with other
types of financial institutions. The Portfolio, however, will seek to minimize
its exposure to such risks by investing only in debt securities which are
determined to be of high quality.
Foreign Securities. Since the Portfolio may invest in securities
issued by foreign governments and any of their political subdivisions, agencies
or instrumentalities, and by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, domestic and foreign branches of foreign banks,
and commercial paper issued by foreign issuers, it may be subject to additional
investment risks with respect to those securities that are different in some
respects from those incurred by a fund which invests only in debt obligations of
U.S. domestic issuers. Such risks include future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities, the possible establishment of exchange
controls, the possible seizure or nationalization of foreign deposits, or the
adoption of other foreign governmental restrictions which might adversely affect
the payment of principal and interest on these securities.
Simultaneous Investments. Investment decisions for the Portfolio are
made independently from those of the Fund's other portfolios and other
investment companies or accounts managed by the Adviser. However, if such other
entities desire to invest in, or dispose of, the same securities as the
Portfolio, available investments or opportunities for sales will be allocated
equitably to each of them. In some cases, this procedure may adversely affect
the size of the position obtained for or disposed of by the Portfolio or the
price paid or received by the Portfolio.
MANAGEMENT OF THE PORTFOLIO
Board of Directors
The business affairs of the Fund are managed under the general
supervision of its Board of Directors. The Portfolio's Statement of Additional
Information contains the name and general business experience of each Director.
Investment Adviser
Mitchell Hutchins Asset Management Inc., located at 1285 Avenue of the
Americas, New York, New York 10019, serves as the Portfolio's investment
adviser. The Adviser is a wholly-owned subsidiary of PaineWebber organized in
May 1977. The Adviser is registered as a broker-dealer under the Securities
Exchange Act of 1934 and as an investment adviser under the Investment Advisers
Act of 1940. As of February 29, 1996, the Adviser served as adviser or
sub-adviser to 32 investment companies with 66 investment portfolios having
aggregate assets in excess of $31 billion.
The Adviser supervises and assists in the overall management of the
Portfolio's affairs under an Investment Advisory Agreement between the Adviser
and the Fund, subject to the overall authority of the Fund's Board of Directors
in accordance with Maryland law.
For the fiscal year ended December 31, 1995, the Portfolio paid the
Adviser a monthly advisory fee at the annual rate of .10 of 1% of the value of
the Portfolio's average daily net assets.
Administrator
Concord Holding Corporation, located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as the Portfolio's administrator. The Administrator
currently provides administrative or sub-administrative services to other
investment companies with over $60 billion in assets. The Administrator is a
wholly-owned subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator
generally assists in all aspects of the Fund's operations, other than providing
investment advice, subject to the overall authority of the Fund's Board of
Directors in accordance with Maryland law. In connection therewith, the
Administrator provides the Fund with office facilities, personnel, and certain
clerical and bookkeeping services (e.g., preparation of reports to shareholders
and the Securities and Exchange Commission and filing of Federal, state and
local income tax returns) that are not being furnished by The Bank of New York,
the Fund's Custodian.
For the fiscal year ended December 31, 1995, the Portfolio paid the
Administrator a monthly fee at the annual rate of .10 of 1% of the value of the
Portfolio's average daily net assets.
Distributor
Concord Financial Group, Inc., located at 125 West 55th Street, New
York, New York 10019, serves as the Fund's principal underwriter and distributor
of the Portfolio's shares. The Distributor, a wholly-owned subsidiary of the
Administrator, was organized to distribute shares of mutual funds to
institutional and retail investors. The Distributor distributes the shares of
other investment companies with over $80 billion in assets. The Distributor is
the Fund's sponsor.
The Distributor makes a continuous offering of the Portfolio's shares
and bears the costs and expenses of printing and distributing to prospective
investors copies of any prospectuses, statements of additional information and
annual and interim reports of the Portfolio (after such items have been prepared
and set in type by the Fund) which are used in connection with the offering of
shares, and the costs and expenses of preparing, printing and distributing any
other literature used by the Distributor in connection with the offering of the
Portfolio's shares for sale to the public.
Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286,
is the Fund's Custodian (the "Custodian"). BISYS Fund Services Ohio, Inc., an
affiliate of the Administrator, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, is the Fund's Transfer and Dividend Disbursing Agent (the "Transfer
Agent").
Expenses
All expenses incurred in the operation of the Fund are borne by the
Fund, except to the extent specifically assumed by others. The expenses borne by
the Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or Administrator, or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory and administration
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, industry association fees, auditing and legal
expenses, costs of maintaining corporate existence, costs of independent pricing
services, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of calculating the net
asset value of the Portfolio's shares, costs of shareholders' reports and
corporate meetings, costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders, and any extraordinary expenses. Expenses attributable to
the Portfolio are charged against the assets of the Portfolio; other expenses of
the Fund are allocated among the Fund's portfolios on the basis determined by
the Board of Directors, including, but not limited to, proportionately in
relation to the net assets of each portfolio.
HOW TO BUY SHARES
Institutional Shares may be purchased only by institutional investors.
Institutional Shares may not be purchased by individuals directly, but
institutional investors may purchase shares for accounts maintained by
individuals. Securities dealers may receive different compensation for selling
Institutional Shares than for selling Retail Shares. The Fund does not impose
any sales load in connection with the purchase of Institutional Shares.
Certificates representing shares of the Portfolio will not be issued. The Fund
reserves the right to reject any purchase order.
The minimum initial investment for Institutional Shares is $250,000
and there is no minimum subsequent investment. Certain securities dealers and
other institutional investors may impose higher minimum investment amounts for
purchases of Portfolio shares by their clients.
Institutional Shares are sold at the net asset value per share next
determined after receipt of a purchase order by the Transfer Agent. Purchase
orders for Institutional Shares are accepted by the Fund on any business day
(which, as used herein, shall include each day that the New York Stock Exchange
and the Fund's Custodian are open for business) and must be transmitted to the
Transfer Agent by telephoning 1-800-852-9730 or through compatible terminal
access.
Shares are sold on a continuous basis at the net asset value per share
next determined after an order in proper form and Federal Funds (monies of
member banks within the Federal Reserve System which are held on deposit at a
Federal Reserve Bank) are received by the Transfer Agent.
If an investor's purchase order is received by the Transfer Agent by
12:00 noon, Eastern time, on a business day, and Federal Funds are received by
the Transfer Agent by 4:00 p.m., Eastern time, on that day, Institutional Shares
will be purchased as of 12:00 noon, Eastern time, on such business day. If the
investor's purchase order is received after 12:00 noon, Eastern time, on a given
day, or Federal Funds are received after 4:00 p.m., Eastern time, on such day,
Institutional Shares will be purchased as of 12:00 noon, Eastern time, on the
next business day.
The Portfolio's net asset value per share is determined as of
12:00 noon, Eastern time, on each business day. Net asset value per share is
computed by dividing the value of the Portfolio's net assets (i.e., the value of
its assets less liabilities) by the total number of shares outstanding. See
"Determination of Net Asset Value" in the Portfolio's Statement of Additional
Information.
Federal regulations require that investors provide a certified
Taxpayer Identification Number upon opening or reopening an account. See
"Dividends, Distributions and Taxes" for further information concerning this
requirement.
HOW TO REDEEM SHARES
Investors may request redemption of their shares at any time.
Redemption requests must be transmitted to the Transfer Agent by telephoning
1-800-852-9730 or through compatible terminal access. When a request is received
in proper form, the Fund will redeem the shares at the next determined net asset
value.
The Fund imposes no charges when shares are redeemed directly through
the Transfer Agent. Institutions may charge their clients a fee for effecting
redemptions of Institutional Shares. The value of the shares redeemed may be
more or less than their original cost, depending upon the Portfolio's
then-current net asset value.
Payment for redeemed shares for which a redemption order is received
by the Transfer Agent prior to 12:00 noon, Eastern time, on a business day
ordinarily is made by wire in Federal Funds on the same business day. Payment
for redeemed shares for which a redemption order is received after 12:00 noon,
Eastern time, on a business day ordinarily is made by wire in Federal Funds on
the next business day following redemption. To allow the Adviser to most
effectively manage the Portfolio, investors are urged to initiate redemptions of
shares as early in the day as possible and to notify the Transfer Agent at least
one day in advance of redemptions in excess of $5 million. The Fund reserves the
right to wire redemption proceeds up to seven days after receiving the
redemption request if an earlier payment could adversely affect the Fund. In
making a redemption request, the name of the registered shareholder and the
account number must be supplied.
The Fund reserves the right to redeem an account at its option upon
not less than 45 days' written notice if the net asset value of the investor's
account is $500 or less and remains so during the notice period. Institutions
may impose, with respect to their client's investments in the Portfolio, a
minimum account balance which is higher than that specified above.
If an investor chooses to transmit instructions by telephone, the
investor authorizes the Transfer Agent to act on telephone instructions from any
person representing himself or herself to be a representative of the investor,
and reasonably believed by the Transfer Agent to be genuine. The Fund will
require the Transfer Agent to employ reasonable procedures, such as requiring a
form of identification, to confirm that instructions are genuine and, if it does
not follow such procedures, the Fund or the Transfer Agent may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Fund nor the
Transfer Agent will be liable for following telephone instructions reasonably
believed to be genuine.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Portfolio declares dividends from net investment income on each
day that the Portfolio is open for business. Dividends usually are paid on or
about the fifteenth day of each month, and are automatically reinvested in
additional Institutional Shares at net asset value or, at the investor's option,
paid in cash. The Portfolio's earnings for Saturdays, Sundays and holidays are
declared as dividends on the preceding business day. Shares begin accruing
dividends on the day the purchase order is received in proper form by the
Transfer Agent, if received by 12:00 noon, New York time, on such day, and
continue to earn dividends through the day before a redemption order for such
shares is processed by the Transfer Agent. If an investor redeems all shares in
its account at any time during the month, all dividends to which such investor
is entitled will be paid to the investor along with the proceeds of the
redemption. Dividends paid by each class of Portfolio shares will be calculated
at the same time and in the same manner and will be of the same amount, except
that expenses attributable solely to a class will be borne exclusively by such
class.
Distributions from net realized securities gains, if any, are declared
and paid once a year, but the Portfolio may make distributions on a more
frequent basis to comply with the distribution requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), in all events in a manner
consistent with the provisions of the 1940 Act. Dividends and distributions paid
to holders of Institutional Shares ordinarily are invested in additional
Institutional Shares at net asset value. Investors may elect to receive
dividends and distributions in cash by contacting the Transfer Agent. All
expenses are accrued daily and deducted before declaration of dividends to
investors.
If you elect to receive distributions in cash and your distribution
checks (1) are returned to the Fund marked "undeliverable" or (2) remain
uncashed for six months, your cash election will be changed automatically and
your future dividend and capital gains distributions will be reinvested in
Portfolio shares at the net asset value determined as of the date of payment of
the distribution. In addition, any such undeliverable checks or checks that
remain uncashed for six months will be canceled and will be reinvested in
Portfolio shares at the net asset value determined as of the date of
cancellation.
Dividends derived from interest and distributions from any net
realized short-term securities gains generally are taxable to investors as
ordinary income, whether received in cash or reinvested in additional Portfolio
shares. Distributions from net realized long-term securities gains, if any,
generally are taxable as long-term capital gains, regardless of how long
shareholders have held their Portfolio shares and whether such distributions are
received in cash or reinvested in additional Portfolio shares. Dividends and
distributions may be subject to certain state and local taxes. No dividend will
qualify for the dividends-received deduction allowable to certain corporations.
Dividends derived from net investment income and distributions from
net realized short-term securities gains paid by the Portfolio to a foreign
investor generally are subject to U.S. nonresident withholding taxes at the rate
of 30%, unless the foreign investor claims the benefit of a lower rate specified
in a tax treaty. Distributions from net realized long-term securities gains paid
by the Portfolio to a foreign investor generally will not be subject to U.S.
nonresident withholding tax. However, such distributions may be subject to
backup withholding, as described below, unless the investor certifies his
non-U.S. residency status.
Notice as to the tax status of an investor's dividends and
distributions is mailed to such investor annually from the Transfer Agent. Each
investor also will be sent periodic summaries of its account which will include
information as to dividends and distributions from securities gains, if any,
paid during the year.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends and distributions
from net realized securities gains paid to a shareholder if such shareholder
fails to certify either that the Taxpayer Identification Number furnished in
connection with opening an account is correct or that such shareholder has not
received notice from the Internal Revenue Service of being subject to backup
withholding as a result of a failure to properly report taxable dividend or
interest income on a Federal income tax return. Furthermore, the Internal
Revenue Service may notify the Fund to institute backup withholding if the
Internal Revenue Service determines a shareholder's Taxpayer Identification
Number is incorrect or if a shareholder has failed to properly report taxable
dividend and interest income on a Federal income tax return.
A Taxpayer Identification Number is either the Social Security number
or employer identification number of the record owner of the account. Any tax
withheld as a result of backup withholding does not constitute an additional tax
imposed on the record owner of the account, and may be claimed as a credit on
the record owner's Federal income tax return.
Management believes that the Portfolio has qualified for the fiscal
year ended December 31, 1995 as a "regulated investment company" under the Code.
The Portfolio intends to continue to so qualify so long as such qualification is
in the best interests of its shareholders. Such qualification relieves the
Portfolio of any liability for Federal income tax to the extent its earnings are
distributed in accordance with applicable provisions of the Code. The Code
subjects regulated investment companies, such as the Portfolio, to a
non-deductible 4% excise tax to the extent that such investment companies do not
distribute a very substantial portion of their taxable investment income and
capital gains, generally determined on a calendar year basis.
Each investor should consult its tax adviser regarding specific
questions as to Federal, state or local taxes.
GENERAL INFORMATION
The Fund was incorporated under Maryland law on March 6, 1990, and
commenced operations on August 28, 1990. The Fund is authorized to issue 11
billion shares of Common Stock (with 2 billion allocated to the Portfolio), par
value $.001 per share. The Portfolio's shares are classified into the
Institutional Shares (1 billion shares) and Retail Shares (1 billion shares).
Retail Shares, which are described in a separate prospectus, are sold to
individuals and bear fees and expenses with respect to the Fund's Special
Management Services Agreement and Distribution Plan. Each shares has one vote
and shareholders will vote in the aggregate and not by class except as otherwise
required by law.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Fund to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of Directors or the
appointment of auditors. However, pursuant to the Fund's By-Laws, the holders of
at least 10% of the shares outstanding and entitled to vote may require the Fund
to hold a special meeting of shareholders for purposes of removing a Director
from office or for any other purpose. Shareholders may remove a Director by the
affirmative vote of a majority of the Fund's outstanding voting shares. In
addition, the Board of Directors will call a meeting of shareholders for the
purpose of electing Directors if, at any time, less than a majority of the
Directors then holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into
separate portfolios, each of which is treated as a separate entity for certain
matters under the 1940 Act and for other purposes. A shareholder of one
portfolio is not deemed to be a shareholder of any other portfolio. For certain
matters Fund shareholders vote together as a group; as to others they vote
separately by portfolio. By this Prospectus, Institutional Shares of the
Portfolio are being offered. From time to time, other portfolios may be
established and sold pursuant to other offering documents.
To date, 12 portfolios of shares have been authorized. The other
portfolios are not being offered by this Prospectus. All consideration received
by the Fund for shares of one of the portfolios and all assets in which such
consideration is invested, belong to that portfolio (subject only to the rights
of creditors of the Fund) and will be subject to the liabilities related
thereto. The income and expenses attributable to one portfolio (and as to
classes within a portfolio) are treated separately from those of the other
portfolios (and classes).
The Transfer Agent maintains a record of shareholder ownership and
sends investors confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
<PAGE>
<PAGE>
PROSPECTUS
MAY 1, 1996
THE INFINITY MUTUAL FUNDS, INC.
ValueStar Funds
PRIME MONEY MARKET PORTFOLIO
U.S. TREASURY MONEY MARKET PORTFOLIO
Investor Shares
- ------------------------------------------------------------------------------
The Infinity Mutual Funds, Inc. (the "Fund") is an open-end, management
investment company, known as a series fund. By this Prospectus, the Fund is
offering Investor Shares of two diversified money market portfolios (the
"Portfolios"), that seek to provide investors with as high a level of current
income as is consistent with the preservation of capital and the maintenance of
liquidity.
. The PRIME MONEY MARKET PORTFOLIO will invest in short-term money market
instruments consisting of securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, bank obligations, repurchase
agreements, commercial paper and other corporate obligations.
. The U.S. TREASURY MONEY MARKET PORTFOLIO will invest only in U.S. Treasury
securities and in other securities guaranteed as to principal and interest by
the U.S. Government, and repurchase agreements in respect thereof.
An investment in a Portfolio is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that each Portfolio will be able to
maintain a stable net asset value of $1.00 per share.
Each Portfolio's investment adviser is First American National Bank (the
"Adviser").
BISYS Fund Services Limited Partnership (the "Administrator") serves as
each Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), an affiliate of the
Administrator, serves as distributor of each Portfolio's shares.
Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, the Adviser or any other bank, and are not federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other governmental agency. Portfolio shares involve certain risks, including
the possible loss of principal.
------------------
This Prospectus sets forth concisely information about the Fund and the
Portfolios that an investor should know before investing. It should be read and
retained for future reference.
The Statement of Additional Information, dated May 1, 1996, which may be
revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors.
It has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. For a free copy, write to the Fund at 3435
Stelzer Road, Columbus, Ohio 43219-3035, or call 1-800-852-0045.
- ------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
--------
Annual Operating Expenses......................................... 3
Financial Highlights.............................................. 4
Yield Information................................................. 6
Description of the Portfolios..................................... 6
Management of the Portfolios...................................... 10
How to Buy Shares................................................. 13
How to Redeem Shares.............................................. 15
Shareholder Privileges............................................ 18
Dividends, Distributions and Taxes................................ 19
General Information............................................... 21
Appendix.......................................................... A-1
Distributed by: Investment Adviser:
Concord Financial Group, Inc. First American National Bank
125 West 55th Street 315 Deaderick Street
New York, New York 10019 Nashville, Tennessee 37237
For information about opening an account and other Fund services call: (800)
824-3741
To execute purchases, redemptions and exchanges and for information about the
status
of your account call: (800) 852-0045
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES*
(as a percentage of average daily net assets)
Prime U.S. Treasury
Portfolio Portfolio
------------------------ ------------------------
Trust Investor Trust Investor
Shares Shares Shares Shares
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Management Fees....................................................... .25% .25% .25% .25%
Other Expenses (after expense reimbursement).......................... .40% .40% .25% .25%
Total Portfolio Operating Expenses (after expense reimbursement)**.... .65% .65% .50% .50%
Example:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
1 Year...................................................... $ 7 $ 7 $ 5 $ 5
3 Years..................................................... $ 21 $ 21 $ 16 $ 16
5 Years..................................................... $ 36 $ 36 $ 28 $ 28
10 Years.................................................... $ 81 $ 81 $ 63 $ 63
</TABLE>
- --------------------------------------------------------------------------------
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. Moreover, while the example assumes a 5% annual
return, each Portfolio's actual performance will vary and may result in an
actual return greater or less than 5%.
- --------------------------------------------------------------------------------
The purpose of the foregoing table is to assist investors in understanding
the costs and expenses borne by a Portfolio, the payment of which will reduce
investors' annual return. The expenses noted above, without reimbursements,
would have been: Other Expenses, .65% and Total Portfolio Operating Expenses,
.90% for the Prime Portfolio; and Other Expenses, .50% and Total Portfolio
Operating Expenses, .75% for the U.S. Treasury Portfolio. For a further
description of the various costs and expenses incurred in a Portfolio's
operation, as well as expense reimbursement or waiver arrangements, see
"Management of the Portfolios."
- ---------------
* Only Investor Shares are offered by this Prospectus. Trust Shares are
offered pursuant to a separate prospectus; if an investor is eligible
and desires to purchase Trust Shares, the investor must obtain and
should review a copy of the current prospectus for Trust Shares. As of
the date of this Prospectus, Trust shares have not been offered.
** Certain Service Organizations (as defined below) and other institutions also
may charge their clients direct fees for effecting transactions in Portfolio
shares and the Adviser, its affiliates and certain other institutions may
charge customary account and account transaction fees, which are not Fund
related, with respect to accounts through which or for which Portfolio shares
are purchased or redeemed; such fees are not reflected in the foregoing
table.
<PAGE>
FINANCIAL HIGHLIGHTS
Contained below for each Portfolio is per share operating performance data
for an Investor Share of common stock outstanding, total investment return,
ratios to average net assets and other supplemental data for each period
indicated. The information in the tables has been audited by KPMG Peat Marwick
LLP, the Portfolios' independent auditors, whose report thereon appears in the
Statement of Additional Information. Further financial data and related notes
are included in the Statement of Additional Information, available upon
request.
<TABLE>
<CAPTION>
VALUESTAR PRIME MONEY MARKET PORTFOLIO
Year Ended Period Ended
December 31, December 31,
1995 1994*
------------- -------------
<S> <C> <C>
Net Asset Value, Beginning of Period..................................... $ 1.0000 $ 1.0000
------------- -------------
Income from investment operations:
Net investment income.................................................. 0.0538 0.0309
------------- -------------
Net gains from investment operations................................... 0.0538 0.0309
------------- -------------
Less dividends and distributions:
Dividends from net investment income................................... (0.0538) (0.0309)
------------- -------------
Net Asset Value, End of Period........................................... $ 1.0000 $ 1.0000
------------- -------------
------------- -------------
Total Return............................................................. 5.51% 3.13%+
Ratios/Supplemental Data:
Net assets, end of period (000's)...................................... $ 63,919 $ 82,351
Ratio of expenses to average net assets................................ 0.65% 0.63%++
Ratio of net investment income to average net assets................... 5.37% 4.06%++
Ratio of expenses to average net assets**.............................. 0.90% 0.93%++
Ratio of net investment income to average net assets**................. 5.12% 3.76%++
- ---------------
* For the period March 29, 1994 (commencement of operations) through December
31, 1994.
** During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
++ Annualized.
</TABLE>
<TABLE>
<CAPTION>
VALUESTAR U.S. TREASURY MONEY MARKET PORTFOLIO
Year Ended Period Ended
December 31, December 31,
1995 1994*
------------- -------------
<S> <C> <C>
Net Asset Value, Beginning of Period..................................... $ 1.0000 $ 1.0000
------------- -------------
Income from investment operations:
Net investment income.................................................. 0.0528 0.0297
------------- -------------
Net gains from investment operations................................... 0.0528 0.0297
------------- -------------
Less dividends and distributions:
Dividends from net investment income................................... (0.0528) (0.0297)
------------- -------------
Net Asset Value, End of Period........................................... $ 1.0000 $ 1.0000
------------- -------------
------------- -------------
Total Return............................................................. 5.41% 3.01%+
Ratios/Supplemental Data:
Net assets, end of period (000's)...................................... $ 168,430 $ 139,715
Ratio of expenses to average net assets................................ 0.50% 0.54%++
Ratio of net investment income to average net assets................... 5.28% 4.02%++
Ratio of expenses to average net assets**.............................. 0.75% 0.83%++
Ratio of net investment income to average net assets**................. 5.03% 3.73%++
- ---------------
* For the period March 29, 1994 (commencement of operations) through December
31, 1994.
** During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
++ Annualized.
</TABLE>
YIELD INFORMATION
From time to time, each Portfolio will advertise its yield and effective yield.
Both yield figures are based on historical earnings and are not intended to
indicate future performance. It can be expected that these yields will fluctuate
substantially. The yield of the Portfolio refers to the income generated by an
investment in such Portfolio over a seven-day period (which period will be
stated in the advertisement). This income is then annualized. That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The effective yield is calculated similarly but, when annualized,
the income earned by an investment in the Portfolio is assumed to be reinvested.
The effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment. Each Portfolio's yield and
effective yield may reflect absorbed expenses pursuant to any undertaking that
may be in effect.
Yield information is useful in reviewing the Portfolio's performance, but
because yields will fluctuate, under certain conditions such information may not
provide a basis for comparison with domestic bank deposits, other investments
which pay a fixed yield for a stated period of time, or other investment
companies which may use a different method of computing yield.
Comparative performance information may be used from time to time in advertising
or marketing each Portfolio's shares, including data from Lipper Analytical
Services, Inc., Morningstar, Inc., Bank Rate MonitorTM, N. Palm Beach, Fla.
33408, IBC/Donoghue's Money Fund Report and other industry publications.
The fees paid pursuant to the Shareholder Services Plan will be borne by the
holders of the Investor Shares and not the Trust Shares. As a result, at any
given time, the yield of the Investor Class should be expected to be lower than
that of the Trust Class. Yield information for each class will be calculated
separately.
DESCRIPTION OF THE PORTFOLIOS
Investment Objectives
Each Portfolio seeks to provide investors with as high a level of current
income as is consistent with the preservation of capital and the maintenance of
liquidity. Each Portfolio's investment objective cannot be changed without
approval by the holders of a majority (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of such Portfolio's outstanding voting
shares. There can be no assurance that each Portfolio's investment objective
will be achieved. Securities in which each Portfolio will invest may not earn
as high a level of current income as long-term or lower quality securities
which generally have less liquidity, greater market risk and more fluctuation
in market value.
Management Policies
Each Portfolio seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, each Portfolio uses the amortized cost
method of valuing its securities pursuant to Rule 2a-7 under the 1940 Act,
certain requirements of which are summarized below.
In accordance with Rule 2a-7, each Portfolio will maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 13 months or less and invest only in U.S. dollar
denominated securities determined in accordance with procedures established by
the Fund's Board of Directors to present minimal credit risks and, with respect
to the Prime Portfolio, which are rated in one of the two highest rating
categories for debt obligations by at least two nationally recognized
statistical rating organizations ("NRSRO") (or one NRSRO if the instrument was
rated by only one such organization) or, if unrated, are of comparable quality
as determined in accordance with procedures established by the Fund's Board of
Directors. The NRSROs currently rating instruments of the type the Prime
Portfolio may purchase are Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Rat-ings Group ("S&P"), Duff & Phelps Credit Rating Co.
("Duff"), Fitch Investors Service, L.P. ("Fitch"), IBCA Limited and IBCA Inc.
and Thomson BankWatch, Inc. and their rating criteria are described in the
"Appendix" to the Statement of Additional Information. For further information
regarding the amortized cost method of valuing securities, see "Determination
of Net Asset Value" in the Statement of Additional Information. There can be no
assurance that the Portfolios will be able to maintain a stable net asset value
of $1.00 per share.
Prime Portfolio--The Prime Portfolio will invest in U.S. dollar denominated
short-term money market obligations, including securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities, certificates of
deposit, time deposits and bankers' acceptances issued by domestic banks,
foreign branches of domestic banks, foreign subsidiaries of domestic banks, and
domestic and foreign branches of foreign banks, loan participation agreements,
guaranteed investment contracts, municipal obligations, repurchase agreements,
and high quality domestic and foreign commercial paper and other high quality
short-term corporate obligations, such as floating or variable rate U.S. dollar
denominated demand notes and bonds. The Prime Portfolio will invest in U.S.
dollar denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities, including obligations of supranational entities. The Prime
Portfolio will not invest more than 35% of the value of its total assets in
foreign securities. See "Appendix--Portfolio Securities." The Prime Portfolio
also may lend securities from its portfolio, enter into reverse repurchase
agreements and purchase restricted securities pursuant to Rule 144A under the
Securities Act of 1933, as amended. See "Appendix--Investment Practices."
During normal market conditions, at least 25% of the Prime Portfolio's total
assets will be invested in domestic and/or foreign bank obligations. See "Risk
Factors Related to the Prime Portfolio" below.
The Prime Portfolio will not invest more than 5% of its total assets in the
securities (including the securities collateralizing a repurchase agreement)
of, or subject to puts issued by, a single issuer, except that (i) the Prime
Portfolio may invest more than 5% of its total assets in a single issuer for a
period of up to three business days in certain limited circumstances, (ii) the
Prime Portfolio may invest in obligations issued or guaranteed by the U.S.
Government without any such limitation, and (iii) the limitation with respect
to puts does not apply to unconditional puts if no more than 10% of the
Portfolio's total assets is invested in securities issued or guaranteed by the
issuer of the unconditional put. Investments in rated securities not rated in
the highest category by at least two rating organizations (or one rating
organization if the instrument was rated by only one such organization), and
unrated securities not determined by the Fund's Board of Directors to be
comparable to those rated in the highest category, will be limited to 5% of the
Prime Portfolio's total assets, with the investment in any one such issuer
being limited to no more than the greater of 1% of the Prime Portfolio's total
assets or $1,000,000. As to each security, these percentages are measured at
the time the Prime Portfolio purchases the security.
U.S. Treasury Portfolio--The U.S. Treasury Portfolio will invest, as a
fundamental policy, at least 65% of the value of its total assets in U.S.
Treasury securities and repurchase agreements in respect thereof. The remainder
of its assets may be invested in other securities guaranteed as to principal
and interest by the U.S. Government and repurchase agreements in respect
thereof. See "Appendix--Portfolio Securities." The U.S. Treasury Portfolio also
may lend its portfolio securities, enter into reverse repurchase agreements and
purchase restricted securities pursuant to Rule 144A under the Securities Act
of 1933, as amended. See "Appendix--Investment Practices."
Instruments which are issued or guaranteed as to principal and interest by the
U.S. Government constitute direct obligations of the United States of America.
The U.S. Treasury Portfolio will not invest in securities issued or guaranteed
by U.S. Government agencies, instrumentalities or government-sponsored
enterprises that are not backed by the full faith and credit of the United
States. Dividends and distributions paid by the U.S. Treasury Portfolio that
are attributable to interest from direct obligations of the United States
currently are not subject to personal income tax in most states. However,
dividends and distributions attributable to interest from repurchase agreements
may be subject to state tax.
Certain Fundamental Policies--Each Portfolio may (i) borrow money in an amount
up to 33 1/3% of the value of its total assets and (ii) invest up to 25% of the
value of its total assets in the securities of issuers in a single industry,
provided there is no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. In
addition, the Prime Portfolio (i) may invest up to 5% of its total assets in
the obligations of any one issuer, except that up to 25% of the value of the
Prime Portfolio's total assets may be invested (subject to the provisions of
Rule 2a-7), and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities may be purchased, without regard to any such
limitation and (ii) will invest, except when the Prime Portfolio has adopted a
temporary defensive position, at least 25% of its total assets in securities
issued by banks, including foreign banks and branches. This paragraph describes
fundamental policies that cannot be changed as to a Portfolio without approval
by the holders of a majority (as defined in the 1940 Act) of such Portfolio's
outstanding voting shares. See "Investment Objectives and Management
Policies--Investment Restrictions" in the Statement of Additional Information.
Risk Factors Relating to the Prime Portfolio-- To the extent the Prime
Portfolio's investments are concentrated in the banking industry, it will have
correspondingly greater exposure to the risk factors which are characteristic
of such investments. Sustained increases in interest rates can adversely affect
the availability or liquidity and cost of capital funds for a bank's lending
activities, and a deterioration in general economic conditions could increase
the exposure to credit losses. In addition, the value of and the investment
return on the Prime Portfolio's shares will be affected by economic or
regulatory developments in or related to the banking industry, and competition
within the banking industry as well as with other types of financial
institutions. The Prime Portfolio, however, will seek to minimize its exposure
to such risks by investing only in debt securities which are determined to be
of high quality.
Since the Prime Portfolio may invest in securities issued by foreign
governments and any of their political subdivisions, agencies or
instrumentalities, and by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, domestic and foreign branches of foreign banks,
and commercial paper issued by foreign issuers, it may be subject to additional
investment risks with respect to those securities that are different in some
respects from those incurred by a fund which invests only in debt obligations
of U.S. domestic issuers. Such risks include future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities, the possible establishment of exchange
controls, the possible seizure or nationalization of foreign deposits, or the
adoption of other foreign governmental restrictions with might adversely affect
the payment of principal and interest on these securities.
Other Investment Considerations--Each Portfolio will attempt to increase yields
by trading to take advantage of short-term market variations. This policy is
expected to result in high portfolio turnover but should not adversely affect
the Portfolios since each Portfolio usually will not pay brokerage commissions
on purchases of short-term debt obligations. The value of the securities held
by a Portfolio will vary inversely to changes in prevailing interest rates.
Thus, if interest rates have increased from the time a security was purchased,
such security, if sold, might be sold at a price less than its cost. Similarly,
if interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its purchase cost. In
either instance, if the security is held to maturity, no gain or loss will be
realized. The value of U.S. Treasury securities also will be affected by the
supply and demand, as well as the perceived supply and demand, for such
securities.
Federal income tax law requires the holder of a zero coupon security or of
certain pay-in-kind bonds to accrue income with respect to these securities
prior to the receipt of cash payments. To maintain its qualification as a
regulated investment company and avoid liability for Federal income taxes, each
Portfolio that invests in such securities may be required to distribute such
income accrued with respect to these securities and may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
cash to satisfy these distribution requirements.
Investment decisions for each Portfolio are made independently from those of
the Fund's other portfolios and other investment companies or accounts managed
by the Adviser or Sub-Adviser. However, if such other entities desire to invest
in, or dispose of, the same securities as a Portfolio, available investments or
opportunities for sales will be allocated equitably to each of them. In some
cases, this procedure may adversely affect the size of the position obtained
for or disposed of by the Portfolio or the price paid or received by the
Portfolio.
MANAGEMENT OF THE PORTFOLIOS
Board of Directors
The business affairs of the Fund are managed under the general supervision of
its Board of Directors. The Statement of Additional Information contains the
name and general business experience of each Director.
Investment Adviser
First American National Bank, located at First American Center, 315 Deaderick
Street, Nashville, Tennessee 37237, serves as each Portfolio's investment
adviser. The Adviser is a wholly-owned subsidiary of First American
Corporation, a registered bank holding company having assets as of December 31,
1995 of $9.7 billion. First American National Bank provides personal trust,
estate, employee benefit trust, corporate trust and custody services to over
3,000 individual and business clients and investment advisory services. The
Adviser and its affiliates, as of December 31, 1995, had approximately $4.4
billion under trust and approximately $2.5 billion under management.
The Adviser and its affiliates deal, trade and invest for their own accounts and
for the accounts of clients which they manage in the types of securities in
which the Portfolios may invest and may have deposit, loan and commercial
banking relationships with the issuers of securities purchased by the Prime
Portfolio. The Adviser has informed the Fund that in making its investment
decisions it does not obtain or use material inside information in its or its
affiliates' possession.
The Adviser supervises and assists in the management of each Portfolio's
affairs under an Investment Advisory Agreement between the Adviser and the
Fund, subject to the overall authority of the Fund's Board of Directors in
accordance with Maryland law. All activities of the Adviser are conducted by
persons who are also officers of one or more of the Adviser's affiliates.
The Adviser has engaged Barnett Banks Trust Company, N.A. (the "Sub-Adviser"),
located at 9000 Southside Boulevard, Building 100, Jacksonville, Florida 32256,
to provide the day-to-day management of the Prime Portfolio's investments.
Under the terms of the Investment Advisory Agreement, the Fund has agreed to
pay the Adviser a monthly fee at the annual rate of .25 of 1% of the value of
each Portfolio's average daily net assets less, in the case of the Prime
Portfolio, any amount payable by the Fund to the Sub-Adviser. Pursuant to the
Sub-Investment Advisory Agreement among the Fund, the Advisory and the
Sub-Adviser, the Fund has agreed to pay the Sub-Adviser a monthly fee at the
annual rate of .15 of 1% of the value of the Prime Portfolio's average daily
net assets. For the fiscal year ended December 31, 1995, the Fund paid the
Adviser a monthly fee at the annual rate of .10 of 1% of the value of the Prime
Portfolio's and .25 of 1% of the value of the U.S. Treasury Portfolio's average
daily net assets. For such year, the Fund paid the Sub-Adviser at the annual
rate of .15 of 1% of the value of the Prime Portfolio's average daily net
assets.
From time to time, the Adviser and/or the Sub-Adviser may waive receipt of
their respective fees and/or voluntarily assume certain expenses of a
Portfolio, which would have the effect of lowering the overall expense ratio of
that Portfolio and increasing yield to its investors. The Portfolio will not
pay the Adviser and/or the Sub-Adviser at a later time for any amounts that may
be waived, nor will the Portfolio reimburse the Adviser and/or the Sub-Adviser
for any amounts that may be assumed.
Administrator
BISYS Fund Services Limited Partnership, located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, serves as each Portfolio's administrator. The
Administrator currently provides administrative services or sub-administrative
services to other investment companies with over $60 billion in assets. The
Administrator is a wholly-owned subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator generally
assists in all aspects of the Fund's operations, other than providing
investment advice, subject to the overall authority of the Fund's Board of
Directors in accordance with Maryland law. In connection therewith, the
Administrator provides the Fund with office facilities, personnel, and certain
clerical and bookkeeping services (e.g., preparation of reports to shareholders
and the Securities and Exchange Commission and filing of Federal, state and
local income tax returns) that are not being furnished by The Bank of New York,
the Fund's Custodian.
For the fiscal year ended December 31, 1995, the Fund paid Concord Holding
Corporation, an affiliate of the Administrator and the Portfolios' predecessor
administrator, a monthly administration fee at the annual rate of .10 of 1% of
the value of each Portfolio's average daily net assets.
Distributor
Concord Financial Group, Inc., located at 125 West 55th Street, New York, New
York 10019, serves as the Fund's principal underwriter and distributor of each
Portfolio's shares. The Distributor, an affiliate of the Administrator, was
organized to distribute shares of mutual funds to institutional and retail
investors. The Distributor distributes the shares of other investment companies
with over $80 billion in assets. The Distributor is the Fund's sponsor.
The Distributor makes a continuous offering of each Portfolio's shares and
bears the costs and expenses of printing and distributing to prospective
investors copies of any prospectuses, statements of additional information and
annual and interim reports of each Portfolio (after such items have been
prepared and set in type by the Fund) which are used in connection with the
offering of shares, and the costs and expenses of preparing, printing and
distributing any other literature used by the Distributor in connection with
the offering of such Portfolio's shares for sale to the public.
Shareholder Services Plan
Under a shareholder services plan adopted by the Fund's Board of Directors (the
"Plan"), the Fund pays the Distributor for the provision of certain services to
the holders of Investor Shares at an annual rate of .25 of 1% of the value of
each Portfolio's average daily net assets represented by Investor Shares. The
services provided may include personal services relating to shareholder
accounts, such as answering shareholder inquiries regarding a Portfolio and
providing reports and other information, and services related to the
maintenance of such shareholder accounts. The fee payable for such services is
intended to be a "service fee" as defined in Article III, Section 26 of the
NASD Rules of Fair Practice. Under the Plan, the Distributor may make payments
to certain financial institutions, securities dealers and other industry
professionals that have entered into agreements with the Distributor ("Service
Organizations") in respect of these services. The Distributor determines the
amounts to be paid to Service Organizations. Service Organizations receive such
fees in respect of the average daily value of Investor Shares owned by their
clients. From time to time, the Distributor may defer or waive receipt of fees
under the Plan while retaining the ability to be paid by the Fund under the
Plan thereafter. The fees payable to the Distributor under the Plan are payable
without regard to actual expenses incurred.
The Fund understands that Service Organizations may charge fees to their
clients who are the beneficial owners of Investor Shares in connection with
their client accounts. These fees would be in addition to any amounts which may
be received by a Service Organization under its agreement with the Distributor.
Each Service Organization is required to disclose to its clients any
compensation payable to it by the Fund pursuant to the Plan and any other
compensation payable by such clients in connection with the investment of their
assets in Portfolio shares. Clients of Service Organizations should read this
Prospectus in light of the terms governing their accounts with such Service
Organizations.
Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286, is the
Fund's Custodian. BISYS Fund Services Ohio, Inc., an affiliate of the
Administrator, located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, is the
Fund's Transfer and Dividend Disbursing Agent (the "Transfer Agent").
Expenses
All expenses incurred in the operation of the Fund are borne by the Fund,
except to the extent specifically assumed by others. The expenses borne by the
Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser, Sub-Adviser or Administrator, or any of their affiliates, Securities
and Exchange Commission fees, state Blue Sky qualification fees, advisory and
administration fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, industry association fees, auditing
and legal expenses, costs of maintaining corporate existence, costs of
independent pricing services, costs of calculating the net asset value of each
Portfolio's shares, costs of shareholders' reports and corporate meetings,
costs of preparing and printing certain prospectuses and statements of
additional information, and any extraordinary expenses. Expenses attributable
to a particular Portfolio are charged against the assets of that Portfolio;
other expenses of the Fund are allocated among the Portfolios on the basis
determined by the Board of Directors, including, but not limited to,
proportionately in relation to the net assets of each Portfolio.
HOW TO BUY SHARES
General
Investor Shares may be purchased through a number of institutions, including
the Adviser and its affiliates such as AmeriStar Capital Markets Inc., Service
Organizations, and directly from the Distributor. When purchasing Portfolio
shares, you must specify the Portfolio being purchased and that the purchase is
for Investor Shares. The Adviser, its affiliates and Service Organizations may
receive different levels of compensation for selling different classes of
Portfolio shares. Stock certificates will not be issued.
The minimum initial investment for each Portfolio is $1,000, and subsequent
investments must be at least $100. For full-time or part-time employees of the
Adviser or any of its affiliates, the minimum initial investment for each
Portfolio is $500, and subsequent investments must be at least $50. The
Adviser, its affiliates and Service Organizations may impose initial or
subsequent investment minimums which are higher or lower than those specified
above and may impose different minimums for different types of accounts or
purchase arrangements. In addition, purchases made in connection with certain
shareholder privileges may have different minimum investment requirements. See
"Shareholder Privileges."
Shares are sold on a continuous basis at the net asset value per share next
determined after an order in proper form and Federal Funds (monies of member
banks within the Federal Reserve System which are held on deposit at a Federal
Reserve Bank) are received by the Transfer Agent. See "Terms of Purchase"
below. If you do not remit Federal Funds, your payment must be converted into
Federal Funds. This usually occurs within one business day of receipt of a bank
wire or within two business days of receipt of a check drawn on a member bank
of the Federal Reserve System. Checks drawn on banks which are not members of
the Federal Reserve System may take considerably longer to convert into Federal
Funds. Prior to receipt of Federal Funds, your money will not be invested.
The Fund reserves the right to reject any purchase order for Investor Shares in
whole or in part, including purchases made with foreign checks and third party
checks not originally made payable to the order of the investor.
Procedures
You may purchase Portfolio shares by check or wire, or through TeleTrade or a
sweep program as described below. Investors purchasing shares through the
Adviser, its affiliates or Service Organizations should contact such entity
directly for appropriate instructions, as well as for information about
conditions pertaining to the account and any related fees.
Written Orders. For written orders, you may send your initial or subsequent
purchase order, together with the Fund's Account Application (which may be
obtained by calling 1-800-852-0045) for initial orders, and your check or money
order payable to: The ValueStar Funds (Portfolio Name), to The ValueStar Funds,
c/o BISYS Fund Services, Inc., Department L-1686, Columbus, Ohio 43260-1686.
For subsequent investments, your Fund account number should appear on the check
or money order. All payments should be made in U.S. dollars and, to avoid fees
and delays, should be drawn only on U.S. banks. A charge will be imposed if a
check used for investment in your account does not clear.
Wire Orders. For wire orders, you must call the Transfer Agent at
1-800-852-0045. If a subsequent payment is being made, your Fund account number
should be included. Information on remitting funds in this manner, including
any related fees, may be obtained from your bank.
Subsequent investments also may be made by electronic transfer of funds from an
account maintained in a bank or other domestic financial institution that is an
Automated Clearing House member. For information on purchasing shares through
the Automatic Clearing House, you must call the Transfer Agent at
1-800-852-0045.
Automatically Through "Sweep" Programs. Certain investor accounts with the
Adviser, its affiliates and certain Service Organizations may be eligible for
an automatic investment privilege, commonly called a "sweep," under which
amounts in excess of a certain minimum held in these accounts will be invested
automatically in shares of a Portfolio at predetermined intervals at the next
determined net asset value. Investors desiring to use this privilege should
consult such entity at which the investor maintains his account to determine if
it is available and whether any conditions are imposed on its use. It is the
responsibility of the financial institution holding the investor's funds to
transmit such investor's order on a timely basis. The "sweep" program may be
modified or terminated at any time by the Fund.
TeleTrade. You may purchase Portfolio shares (minimum purchase $500, maximum
$50,000 per transaction) without charge by telephone for an existing Fund
account if you have checked the appropriate box and supplied the necessary
information on the Fund's Account Application. The proceeds will be transferred
between the bank account designated on the Account Application and your Fund
account. Only a bank account maintained in a domestic financial institution
which is an Automated Clearing House member may be so designated. TeleTrade
purchases are effected at the net asset value next determined after receipt of
an order in proper form by the Transfer Agent. See "Terms of Purchase" below.
TeleTrade may not be available to certain clients of the Adviser, its
affiliates and certain Service Organizations. The Fund may modify or terminate
TeleTrade at any time or charge a service fee upon notice to shareholders. No
such fee currently is contemplated. If you have selected TeleTrade, you may
request such a purchase of Portfolio shares by telephoning the Transfer Agent
at 1-800- 852-0045.
Terms of Purchase
If your purchase order is received by the Transfer Agent by 2:00 p.m., Eastern
time, on a business day (which, as used herein, shall include each day the New
York Stock Exchange and the Fund's Custodian are open for business), shares
will be purchased as of 2:00 p.m., Eastern time, on such business day if
payment is received in, or is converted into, Federal Funds by 4:00 p.m.,
Eastern time, by the Transfer Agent on that day. If your purchase order is
received after 2:00 p.m., Eastern time, or if payment in Federal Funds is not
received by 4:00 p.m., Eastern time, shares will be purchased as of 2:00 p.m.,
Eastern time, on the business day on which Federal Funds are available. The New
York Stock Exchange or the Fund's Custodian currently is closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving and Christmas. If you effect transactions in shares
of a Portfolio through the Adviser, its affiliates or a Service Organization,
it is such entity's responsibility to transmit orders so that they will be
received by the Transfer Agent in time to receive the next determined net asset
value as described above.
Each Portfolio's net asset value per share is determined as of 2:00 p.m.,
Eastern time, on each business day. Net asset value per Investor Share is
computed by dividing the value of the Portfolio's net assets attributable to
Investor Shares (i.e., the value of its assets less liabilities) by the total
number of Investor Shares of such Portfolio outstanding. See "Determination of
Net Asset Value" in the Statement of Additional Information.
Federal regulations require that an investor provide a certified TIN upon
opening or reopening an account. See "Dividends, Distributions and Taxes" and
the Fund's Account Application for further information concerning this
requirement. Failure to furnish a certified TIN to the Fund could subject the
investor to a $50 penalty imposed by the Internal Revenue Service ("IRS").
HOW TO REDEEM SHARES
General
An investor who has purchased shares through an account with the Adviser, its
affiliates or a Service Organization must redeem shares by following
instructions pertaining to such account. If such investors also are the
shareholders of record of those accounts on the books of the Transfer Agent,
they may redeem shares as described below under "Procedures." Such investors
wishing to use the other redemption methods described below must arrange with
the Adviser, its affiliates or the Service Organization for delivery of the
required notice(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 ten business days. The Fund will delay requests to redeem shares by wire
for a period of up to ten business days after receipt by the Transfer Agent of
the purchase check or TeleTrade order against which such redemption is
requested. This procedure does not apply to shares purchased by wire payment.
Prior to the time the redemption is effective, dividends on such shares will
accrue and be payable, and you will be entitled to exercise all other rights of
beneficial ownership.
The Fund imposes no charges when shares are redeemed. The Adviser, its
affiliates and Service Organizations may charge their clients a nominal fee for
effecting redemptions of Portfolio shares. The value of Portfolio shares
redeemed may be more or less than their original cost, depending upon the
Portfolio's then-current net asset value.
The Fund reserves the right to redeem your account at its option upon not less
than 45 days' written notice if your account's net asset value is $500 or less,
for reasons other than market conditions, and remains so during the notice
period.
Procedures
Written Orders. Written requests for redemption, indicating the name of the
Portfolio and that Investor Shares are being redeemed, with signature
appropriately guaranteed, if required, and otherwise in accordance with the
requirements listed below, should be mailed to The ValueStar Funds, c/o BISYS
Fund Services, Inc., Department L-1686, Columbus, Ohio 43260-1686.
Redemption by Check. If you desire to use check redemption, you should consult
the Adviser, its affiliates or your Service Organization to determine its
availability. At such entity's request, the Transfer Agent will provide you
with redemption checks. These checks can be made payable to the order of any
person in an amount not less than $500. The payee of the check may cash or
deposit the check. When a check is presented to the Transfer Agent for payment,
the Transfer Agent will present the check to the Fund as authority to redeem a
sufficient number of full and fractional shares in your account to cover the
amount of the check. This enables you to continue earning daily dividends until
the check is cleared. There currently is no charge for the use of checks;
however, the Transfer Agent may impose a charge for stopping payment of a check
upon your request, or if the check cannot be honored due to insufficient funds
or other valid reason. Shares for which stock certificates have been issued may
not be redeemed by check. The Fund or the Transfer Agent may modify or
terminate the check redemption privilege at any time upon notice to
shareholders.
Wire Redemption Privilege. After appropriate prior authorization, you may
request by telephone or in writing that redemption proceeds be transmitted by
the Transfer Agent via Federal Funds wire transfer to your bank account.
Redemption requests must be in an amount of at least $1,000. The Fund reserves
the right to refuse any request for a wire transfer and may limit the amount
involved or the number of telephone redemption requests. This Privilege may be
modified or terminated at any time by the Transfer Agent or the Fund.
Automatically Through "Sweep" Programs. See Page 14.
TeleTrade. You may redeem Portfolio shares (minimum $500, maximum $50,000 per
transaction) without charge by telephone if you have checked the appropriate
box and supplied the necessary information on the Fund's Account Application.
The proceeds will be transferred between your Fund account and the bank account
designated on the Account Application.
Only a bank account maintained in a domestic financial institution which is an
Automated Clearing House member may be so designated. Redemption proceeds will
be on deposit in your account at an Automated Clearing House member bank
ordinarily two days after receipt of the redemption request.
The Fund may modify or terminate TeleTrade at any time or charge a service fee
upon notice to shareholders. No such fee currently is contemplated. If you have
selected TeleTrade, you may request such a redemption of Portfolio shares by
telephoning the Transfer Agent at 1-800-852-0045.
Redemption Requirements
Written redemption instructions, indicating the name of the Portfolio and that
Investor Shares are being redeemed, and duly endorsed share certificates, if
previously issued, must be received by the Transfer Agent in proper form and
signed exactly as the shares are registered. Except as noted below, all
signatures must be guaranteed. The Transfer Agent has adopted standards and
procedures pursuant to which signature-guarantees in proper form generally will
be accepted from domestic banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations, as well as from participants in the New York Stock
Exchange Medallion Signature Program, the Securities Transfer Agents Medallion
Program ("STAMP") and the Stock Exchanges Medallion Program.
Signature-guarantees may not be provided by notaries public. The
signature-guarantee requirement will be waived if the following conditions
apply: (1) the redemption check is payable to the shareholder(s) of record; and
(2) the redemption check is mailed to the shareholder(s) at the address of
record or the proceeds are either mailed or wired to a financial institution
account previously designated. Redemption requests by corporate and fiduciary
shareholders must be accompanied by appropriate documentation establishing the
authority of the person seeking to act on behalf of the account. You may
obtain, from the Fund or the Transfer Agent, forms of resolutions and other
documentation which have been prepared in advance to assist compliance with the
Fund's procedures.
You may redeem or exchange Portfolio shares by telephone if you have checked
the appropriate box on the Fund's Account Application. By selecting a telephone
redemption or exchange privilege, an investor authorizes the Transfer Agent to
act on telephone instructions from any person representing himself or herself
to be the investor, or a representative of the investor's Service Organization,
and reasonably believed by the Transfer Agent to be genuine. The Fund will
require the Transfer Agent to employ reasonable procedures, such as requiring a
form of personal identification, to confirm that instructions are genuine and,
if it does not follow such procedures, the Fund or the Transfer Agent may be
liable for any losses due to unauthorized or fraudulent instructions. Neither
the Fund nor the Transfer Agent will be liable for following telephone
instructions reasonably believed to be genuine.
During times of drastic economic or market conditions, investors may experience
difficulty in contacting the Transfer Agent by telephone to request a
redemption or exchange of Portfolio shares. In such cases, investors should
consider using the other redemption procedures described herein. Use of these
other redemption procedures may result in the investor's redemption request
being processed at a later time than it would have been if telephone redemption
had been used.
SHAREHOLDER PRIVILEGES
The services and privileges described under this heading may not be available
to certain clients of the Adviser, its affiliates and certain Service
Organizations and the Adviser, its affiliates and some Service Organizations
may impose certain conditions on their clients which are different from those
described in this Prospectus. Such investors should consult the Adviser, its
affiliates or their Service Organization in this regard.
Exchange Privilege
The Exchange Privilege enables you to purchase, in exchange for shares of a
Portfolio, shares of the other Portfolio offered by this Prospectus, or shares
of ValueStar Capital Growth Portfolio, ValueStar Investment Grade Bond
Portfolio, ValueStar Short-Intermediate Duration Bond Portfolio or ValueStar
Tennessee Tax Exempt Bond Portfolio, to the extent such shares are offered for
sale in your state of residence. If you desire to use this Privilege, you
should consult the Adviser, its affiliate where you maintain your account, your
Service Organization or the Distributor to determine if it is available and
whether any conditions are imposed on its use.
To use the Exchange Privilege, you or your Service Organization acting on your
behalf must give exchange instructions to the Transfer Agent in writing or by
telephone, or in accordance with the instructions pertaining to your account at
the Adviser or its affiliates. If you previously established the Telephone
Exchange Privilege, you may telephone exchange instructions by calling
1-800-852-0045. See "How to Redeem Shares--Redemption Requirements." Before any
exchange into a Portfolio offered by another prospectus, you must obtain and
should review a copy of the current prospectus of the Portfolio into which the
exchange is being made. Prospectuses may be obtained from the Adviser, its
affiliates, certain Service Organizations or the Distributor. The shares being
exchanged must have a current value of at least $500; furthermore, when
establishing a new account by exchange, the shares being exchanged must have a
value of at least the minimum initial investment required for the Portfolio
into which the exchange is being made.
Shares will be exchanged at the next determined net asset value; however, a
sales load may be charged with respect to exchanges into a Portfolio sold with
a sales load. If you are exchanging into a Portfolio that charges a sales load,
you may qualify for share prices which do not include the sales load or which
reflect a reduced sales load, if the shares of the Portfolio from which you are
exchanging were: (a) purchased with a sales load, (b) acquired by a previous
exchange from shares purchased with a sales load, or (c) acquired through
reinvestment of dividends or distributions paid with respect to the foregoing
categories of shares. No fees currently are charged shareholders directly in
connection with exchanges although the Fund reserves the right, upon not less
than 60 days' written notice, to charge shareholders a nominal fee in
accordance with rules promulgated by the Securities and Exchange Commission.
The Fund reserves the right to reject any exchange request in whole or in part.
The Exchange Privilege may be modified or terminated at any time upon notice to
shareholders.
The exchange of shares of one Portfolio for shares of another is treated
for Federal income tax purposes as a sale of the shares given in exchange by
the shareholder and, therefore, an exchanging shareholder may realize a taxable
gain or loss.
Automatic Investment Plan
The Automatic Investment Plan permits you to purchase Portfolio shares (minimum
initial investment of $1,000 and minimum subsequent investments of $100 per
transaction) at regular intervals selected by you. Provided your bank or other
financial institution allows automatic withdrawals, Portfolio shares may be
purchased by transferring funds from the bank account designated by you. At your
option, the account designated will be debited in the specified amount, and
Portfolio shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only an account maintained at a
domestic financial institution which is an Automated Clearing House member may
be so designated. This service enables you to make regularly scheduled
investments and may provide you with a convenient way to invest for long-term
financial goals. You should be aware, however, that periodic investment plans do
not guarantee a profit and will not protect an investor against loss in a
declining market. To establish an Automatic Investment Plan account, you must
check the appropriate box and supply the necessary information on the Account
Application. You may obtain the necessary applications from the Distributor. You
may cancel your participation in the Automatic Investment Plan or change the
amount of purchase at any time by mailing written notification to The ValueStar
Funds, c/o BISYS Fund Services, Inc., Department L-1686, Columbus, Ohio
43260-1686, and such notification will be effective three business days
following receipt. The Fund may modify or terminate the Automatic Investment
Plan at any time or charge a service fee. No such fee currently is contemplated.
Automatic Withdrawal Plan
The Automatic Withdrawal Plan permits you to request withdrawal of a specified
dollar amount (minimum of $50) on either a monthly, quarterly, semi-annual or
annual basis if you have a $5,000 minimum account. The automatic withdrawal
will be made on the first or fifteenth day, at your option, of the period
selected. To participate in the Automatic Withdrawal Plan, you must check the
appropriate box and supply the necessary information on the Account
Application. The Automatic Withdrawal Plan may be ended at any time by the
investor, the Fund or the Transfer Agent.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Portfolio declares dividends from net investment income on each day that
the Portfolio is open for business. Dividends usually are paid on the last
calendar day of each month, and are automatically reinvested in additional
Portfolio shares at net asset value or, at your option, paid in cash. Each
Portfolio's earnings for Saturdays, Sundays and holidays are declared as
dividends on the preceding business day. Shares begin accruing dividends on the
day the purchase order is received in proper form by the Transfer Agent, and
continue to earn dividends through the day before a redemption order for such
shares is processed by the Transfer Agent. Dividends paid by each class of
shares of a Portfolio will be calculated at the same time and in the same
manner and will be of the same amount regardless of class, except that the
expenses attributable solely to a class will be borne exclusively by such
class. If you redeem all shares in your account at any time during the month,
all dividends to which you are entitled will be paid to you along with the
proceeds of the redemption.
If you elect to receive distributions in cash and your distribution checks (1)
are returned to the Fund marked as "undeliverable" or (2) remain uncashed for
six months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in Portfolio shares
at the net asset value determined as of the date of payment of the
distribution. In addition, any such undeliverable checks or checks that remain
uncashed for six months will be canceled and will be reinvested in Portfolio
shares at the net asset value determined as of the date of cancellation.
Distributions from net realized securities gains, if any, are declared and paid
once a year, but each Portfolio may make distributions on a more frequent basis
to comply with the distribution requirements of the Internal Revenue Code of
1986, as amended (the "Code"), in all events in a manner consistent with the
provisions of the 1940 Act. You may choose whether to receive distributions in
cash or to reinvest in additional Investor Shares at net asset value. All
expenses are accrued daily and deducted before declaration of dividends to
investors.
Dividends derived from interest and distributions from any net realized
short-term securities gains are generally taxable to investors as ordinary
income, whether received in cash or reinvested in additional Portfolio shares.
Distributions from net realized long-term securities gains, if any, generally
are taxable as long-term capital gains regardless of how long shareholders have
held their shares and whether such distributions are received in cash or
reinvested in additional Portfolio shares. Dividends and distributions may be
subject to certain state and local taxes. No dividend will qualify for the
dividends-received deduction allowable to certain corporations.
Dividends paid by a Portfolio derived from net investment income and
distributions from net realized short-term securities gains paid by such
Portfolio to a foreign investor generally are subject to U.S. nonresident
withholding taxes at the rate of 30%, unless the investor claims the benefit of
a lower rate specified in a tax treaty. Distributions from net realized
long-term securities gains paid by a Portfolio to a foreign investor generally
will not be subject to U.S. nonresident withholding tax. However, such
distributions may be subject to backup withholding, as described below, unless
the foreign investor certifies his non-U.S. residency status.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends and distributions
from net realized securities gains paid to a shareholder if such shareholder
fails to certify either that the TIN furnished in connection with opening an
account is correct, or that such shareholder has not received notice from the
IRS of being subject to backup withholding as a result of a failure to properly
report taxable dividend or interest income on a Federal income tax return.
Furthermore, the IRS may notify the Fund to institute backup withholding if the
IRS determines a shareholder's TIN is incorrect or if a shareholder has failed
to properly report taxable dividend and interest income on a Federal income tax
return.
A TIN is either the Social Security number or employer identification number of
the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner
of the account, and may be claimed as a credit on the record owner's Federal
income tax return.
Notice as to the tax status of your dividends and distributions will be mailed
to you annually. You also will receive periodic summaries of your account which
will include information as to income dividends and distributions from
securities gains, if any, paid during the year.
Dividends and distributions attributable to interest from direct obligations of
the United States and paid by a Portfolio to individuals currently are not
subject to tax in most states. Dividends and distributions attributable to
interest from other securities in which the Portfolios may invest may be
subject to state tax. The Fund will provide shareholders with a statement which
sets forth the percentage of dividends and distributions paid by the U.S.
Treasury Portfolio that is attributable to interest income from direct
obligations of the United States.
Management of the Fund believes that each Portfolio qualified for the fiscal
year ended December 31, 1995 as a "regulated investment company" under the
Code. Each Portfolio intends to continue to so qualify if such qualification is
in the best interests of its shareholders. Such qualification relieves the
Portfolio of any liability for Federal income tax to the extent its earnings
are distributed in accordance with applicable provisions of the Code. In
addition, each Portfolio is subject to a non-deductible 4% excise tax, measured
with respect to certain undistributed amounts of taxable investment income and
capital gains.
You should consult your tax adviser regarding specific questions as to Federal,
state or local taxes.
GENERAL INFORMATION
The Fund was incorporated under Maryland law on March 6, 1990, and commenced
operations on August 28, 1990.
The Fund is authorized to issue eleven billion shares of Common Stock (with 750
million shares allocated to each Portfolio), par value $.001 per share. Each
Portfolio's shares are classified into Investor Shares (375 million) and Trust
Shares (375 million). Trust Shares, which are described in a separate
prospectus, are sold only to clients of the Adviser for their qualified trust,
custody and/or agency accounts and to clients of the Adviser's affiliated and
correspondent banks and other affiliated and non-affiliated institutions for
their similar accounts maintained at such affiliates or institutions. Each
share has one vote and shareholders will vote in the aggregate and not by class
except as otherwise required by law. Only holders of the Investor Shares,
however, will be entitled to vote on matters submitted to shareholders
pertaining to the Shareholder Services Plan.
Unless otherwise required by the 1940 Act, ordinarily it will not be necessary
for the Fund to hold annual meetings of shareholders. As a result, shareholders
may not consider each year the election of Directors or the appointment of
auditors. However, pursuant to the Fund's By-Laws, the holders of at least 10%
of the shares outstanding and entitled to vote may require the Fund to hold a
special meeting of shareholders for purposes of removing a Director from office
or for any other purpose. Shareholders may remove a Director by the affirmative
vote of a majority of the Fund's outstanding voting shares. In addition, the
Board of Directors will call a meeting of shareholders for the purpose of
electing Directors if, at any time, less than a majority of the Directors then
holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios, each of which is treated as a separate entity for certain matters
under the 1940 Act, and for other purposes. A shareholder of one portfolio is
not deemed to be a shareholder of any other portfolio. For certain matters Fund
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, Investor Shares of two of the Fund's ValueStar
Portfolios are being offered--Prime Money Market Portfolio and U.S. Treasury
Money Market Portfolio, each of which is a diversified money market fund. From
time to time, other portfolios may be established and sold pursuant to other
offering documents.
To date, 12 portfolios have been authorized. The other portfolios are not being
offered by this Prospectus. All consideration received by the Fund for shares
of one of the portfolios, and all assets in which such consideration is
invested, belong to that portfolio (subject only to the rights of creditors of
the Fund) and will be subject to the liabilities related thereto. The income
and expenses attributable to one portfolio (and as to classes within a
portfolio) are treated separately from those of the other portfolios (and
classes).
The Transfer Agent maintains a record of each investor's ownership and sends
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
<PAGE>
APPENDIX
Portfolio Securities
To the extent set forth in this Prospectus, each Portfolio may invest in the
securities described below.
U.S. Treasury Securities--Each Portfolio may invest in U.S. Treasury securities
which include Treasury Bills, Treasury Notes and Treasury Bonds that differ in
their interest rates, maturities and times of issuance. Treasury Bills have
initial maturities of one year or less; Treasury Notes have initial maturities
of one to ten years; and Treasury Bonds generally have initial maturities of
greater than ten years.
U.S. Government Securities--In addition to U.S. Treasury securities, the Prime
Portfolio and, to a limited extent, the U.S. Treasury Portfolio may invest in
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. Interest
may fluctuate based on generally recognized reference rates or the relationship
of rates. While the U.S. Government provides financial support to such U.S.
Government sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. Each Portfolio
will invest in such securities only when it is satisfied that the credit risk
with respect to the issuer is minimal.
Zero Coupon and Stripped Securities--Each Portfolio may invest in zero coupon
U.S. Treasury securities, which are Treasury Notes and Bonds that have been
stripped of their unmatured interest coupons, the coupons themselves and
receipts or certificates representing interests in such stripped debt
obligations and coupons. A zero coupon security pays no interest to its holder
during its life and is sold at a discount to its face value at maturity. The
amount of the discount fluctuates with the market price of the security. The
market prices of zero coupon securities generally are more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to a greater degree to changes in interest rates than non-zero coupon
securities having similar maturities and credit qualities.
Repurchase Agreements--Each Portfolio may enter into repurchase agreements,
which involve the acquisition by a Portfolio of an underlying debt instrument,
subject to an obligation of the seller to repurchase, and such Portfolio to
resell, the instrument at a fixed price usually not more than one week after
its purchase. Certain costs may be incurred by a Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited.
Foreign Government Obligations; Securities of Supranational Entities--The Prime
Portfolio may invest in obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Sub-Adviser to be of comparable
quality to the other obligations in which the Prime Portfolio may invest. Such
securities also include debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of the
Prime Portfolio's assets invested in securities issued by foreign governments
will vary depending on the relative yields of such securities, the economic and
financial markets of the countries in which the investments are made and the
interest rate climate of such countries. See "Description of the
Portfolios--Risk Factors Relating to the Prime Portfolio."
Bank Obligations--The Prime Portfolio will invest in bank obligations (other
than those issued by the Adviser or its affiliates), including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations
of domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. See "Description
of the Portfolios--Risk Factors Relating to the Prime Portfolio." Certificates
of deposit are negotiable certificates evidencing the obligation of a bank to
repay funds deposited with it for a specified period of time. Time deposits are
non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Time deposits which may be held by
the Prime Portfolio will not benefit from insurance from the Bank Insurance
Fund or the Savings Association Insurance Fund administered by the Federal
Deposit Insurance Corporation. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the face amount of the instrument upon maturity. The other short-term
obligations may include uninsured, direct obligations, bearing fixed, floating
or variable interest rates.
Commercial Paper and other Short-Term Corporate Obligations--The Prime
Portfolio may invest in commercial paper, which consists of short-term,
unsecured promissory notes issued to finance short-term credit needs. The
commercial paper purchased by the Prime Portfolio will consist only of direct
obligations issued by domestic and foreign entities. The other corporate
obligations in which the Prime Portfolio may invest consist of high quality,
U.S. dollar denominated short-term bonds and notes (including variable amount
master demand notes) issued by domestic and foreign corporations.
Floating and Variable Rate Obligations-- The Prime Portfolio also may purchase
floating and variable rate demand notes and bonds, which are obligations
ordinarily having stated maturities in excess of 13 months, but which permit
the holder to demand payment of principal at any time, or at specified
intervals not exceeding 13 months, in each case upon not more than 30 days'
notice. Variable rate demand notes include master demand notes which are
obligations that permit the Prime Portfolio to invest fluctuating amounts,
which may change daily without penalty, pursuant to direct arrangements between
the Prime Portfolio, as lender, and the borrower. The interest rates on these
notes fluctuate from time to time. The issuer of such obligations normally has
a corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally
will be traded, and there generally is no established secondary market for
these obligations, although they are redeemable at face value. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, the Prime Portfolio's right to redeem is dependent on the
ability of the borrower to pay principal and interest on demand. Such
obligations frequently are not rated by credit rating agencies and, if not so
rated, the Prime Portfolio may invest in them only if the Sub-Adviser, acting
upon delegated authority from the Fund's Board of Directors, determines that at
the time of investment the obligations are of comparable quality to the other
obligations in which the Prime Portfolio may invest. The Sub-Adviser, on behalf
of the Prime Portfolio, will consider on an ongoing basis the creditworthiness
of the issuers of the floating and variable rate demand obligations held by the
Portfolio. The Prime Portfolio will not invest more than 10% of the value of
its net assets in floating or variable rate demand obligations as to which it
cannot exercise the demand feature on not more than seven days' notice if the
Sub-Adviser determines, acting upon delegated authority from, and procedures
established by, the Fund's Board of Directors, that there is no secondary
market available for these obligations, and in other securities that are
illiquid.
Notes--The Prime Portfolio also may purchase unsecured promissory notes
("Notes") which are not readily marketable and have not been registered under
the Securities Act of 1933, provided such investments are consistent with its
investment objective. The Portfolio will invest no more than 10% of its net
assets in such Notes and in other securities that are illiquid.
Participation Interests and Trust Receipts-- The Prime Portfolio may purchase
from financial institutions and trusts created by such institutions
participation interests and trust receipts in securities in which it may invest
and may enter into loan participation agreements. See "Investment Objectives
and Management Policies--Portfolio Securities" in the Statement of Additional
Information. A participation interest or receipt gives the Prime Portfolio an
undivided interest in the security in the proportion that the Prime Portfolio's
participation interest or receipt bears to the total principal amount of the
security. These instruments may have fixed, floating or variable rates of
interest with remaining maturities of 13 months or less. If the instrument is
unrated, or has been given a rating below that which is permissible for
purchase by the Prime Portfolio, the instrument will be backed by an
irrevocable letter of credit or guarantee of a bank or other entity the debt
securities of which are rated high quality, or the payment obligation otherwise
will be collateralized by U.S. Government securities, or, in the case of
unrated instruments, the Sub-Adviser, acting upon delegated authority from the
Fund's Board of Directors, must have determined that the instrument is of
comparable quality to those instruments in which the Prime Portfolio may
invest. Participation interests or trust receipts with a rating below high
quality that are backed by an irrevocable letter of credit or guarantee as
described above will be purchased only if the Sub-Adviser, acting as described
above, determines after an analysis of, among other factors, the
creditworthiness of the guarantor that such instrument is high quality, and if
the rating agency did not include the letter of credit or guarantee in its
determination of the instrument's rating. If the rating of a participation
interest or trust receipt is reduced subsequent to its purchase by the Prime
Portfolio, the Sub-Adviser will consider, in accordance with procedures
established by the Board of Directors, all circumstances deemed relevant in
determining whether the Prime Portfolio should continue to hold the instrument.
The guarantor of a participation interest or trust receipt will be treated as a
separate issuer. For certain participation interests and trust receipts, the
Prime Portfolio will have the unconditional right to demand payment, on not
more than seven days' notice, for all or any part of the Prime Portfolio's
interest in the security, plus accrued interest. As to these instruments, the
Prime Portfolio intends to exercise its right to demand payment only upon a
default under the terms of the security, as needed to provide liquidity to meet
redemptions, or to maintain or improve the quality of its investment portfolio.
Not more than 10% of the value of the Prime Portfolio's net assets will be
invested in participation interests and trust receipts that do not have this
demand feature, and in other securities that are illiquid.
Guaranteed Investment Contracts--The Prime Portfolio may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Pursuant to such a contract, the Prime Portfolio
would make cash contributions to a deposit fund of the insurance company's
general account. The insurance company would then credit to the Prime Portfolio
on a monthly basis interest which is based on an index (in most cases the
Salomon Brothers CD Index), but is guaranteed not to be less than a certain
minimum rate. The Portfolio will not invest more than 10% of the value of its
net assets in GICs and in other illiquid securities. The Prime Portfolio
currently does not expect to invest more than 5% of its net assets in GICs.
Municipal Obligations--The Prime Portfolio may make limited investments (up to
5% of its net assets) in municipal obligations when their yield on a pre-tax
basis is comparable to that of taxable money market instruments. Municipal
obligations are debt obligations issued by states, territories and possessions
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, or multistate agencies or
authorities. While in general, municipal obligations are tax exempt securities
having relatively low yields as compared to taxable, non-municipal obligations
of similar quality, certain issues of municipal obligations, both taxable and
non-taxable, offer yields comparable and in some cases greater than the yields
available on other permissible investments. Municipal obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities. Municipal obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from the general
taxing power. Industrial development bonds, in most cases, are revenue bonds
and generally do not carry the pledge of the credit of the issuing
municipality, but generally are guaranteed by the corporate entity on whose
behalf they are issued.
Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Municipal obligations include
municipal lease/purchase agreements which are similar to installment purchase
contracts for property or equipment issued by municipalities. Municipal
obligations bear fixed, floating or variable rates of interest. Municipal
obligations may be in the form of custodial receipts that give the Prime
Portfolio the right to receive specific future interest or principal payments
on securities held in trust or a special custody account. Certain municipal
obligations are subject to redemption at a date earlier than their stated
maturity pursuant to call options, which may be separated from the related
municipal obligation and purchased and sold separately. Dividends received by
shareholders of the Prime Portfolio which are attributable to interest income
received by it from municipal obligations generally will be subject to Federal
income tax. The Prime Portfolio currently intends to invest no more than 5% of
its net assets in municipal obligations. However, this percentage may be varied
from time to time without shareholder approval.
Investment Practices
Lending Portfolio Securities--From time to time, each Portfolio may lend
securities from its investment portfolio to brokers, dealers and other
financial institutions needing to borrow securities to complete certain
transactions. Such loans may not exceed 33 1/3% of the value of the relevant
Portfolio's total assets. In connection with such loans, each Portfolio will
receive collateral consisting of cash or U.S. Government securities which will
be maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. Each Portfolio can increase its income
through the investment of such collateral. Each Portfolio continues to be
entitled to payments in amounts equal to the interest and other distributions
payable on the loaned security and receives interest on the amount of the loan.
Such loans will be terminable at any time upon specified notice. A Portfolio
might experience risk of loss if the institution with which it has engaged in a
portfolio loan transaction breaches its agreement with such Portfolio.
Reverse Repurchase Agreements--Each Portfolio may enter into reverse repurchase
agreements with banks, brokers or dealers. Reverse repurchase agreements
involve the transfer by the Portfolio of an underlying debt instrument in
return for cash proceeds based on a percentage of the value of the security.
Each Portfolio retains the right to receive interest and principal payments on
the security. The Portfolio will use the proceeds of reverse repurchase
agreements only to make investments which generally either mature or have a
demand feature to resell to the issuer at a date simultaneous with or prior to
the expiration of the reverse repurchase agreement. At an agreed upon future
date, the Portfolio repurchases the security at principal plus accrued
interest. In certain types of agreements, there is no agreed upon repurchase
date and interest payments are calculated daily, often based on the prevailing
overnight repurchase rate. As a result of these transactions, each Portfolio
may be exposed to greater potential fluctuations in the value of its assets and
its net asset value per share. Interest costs on the money borrowed may exceed
the return received on the securities purchased. The Fund's Directors have
considered the risks to each Portfolio and its shareholders which may result
from the entry into reverse repurchase agreements and have determined that the
entry into such agreements is consistent with each Portfolio's investment
objective and management policies.
When-Issued Securities--Each Portfolio may purchase money market securities on
a when-issued or forward commitment basis, which means that delivery and
payment for such securities ordinarily take place within 45 days after the date
of the commitment to purchase. The payment obligation and the interest rate
that will be received on the securities are fixed at the time the buyer enters
into the commitment. A Portfolio will make commitments to purchase such
securities only with the intention of actually acquiring the securities, but
such Portfolio may sell these securities before the settlement date if it is
deemed advisable. A Portfolio will not accrue income in respect of a security
purchased on a forward commitment basis prior to its stated delivery date.
Illiquid Securities--Each Portfolio may invest up to 10% of the value of its
net assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with its investment objective. Such
securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, participation interests and trust receipts that are not subject to the
demand feature described above, floating and variable rate demand obligations
as to which the Portfolio cannot exercise the related demand feature described
above on not more than seven days' notice and as to which there is no secondary
market and repurchase agreements providing for settlement in more than seven
days after notice. As to these securities, the Portfolio is subject to a risk
that should the Portfolio desire to sell them when a ready buyer is not
available at a price the Portfolio deems representative of their value, the
value of the Portfolio's net assets could be adversely affected.
Borrowing Money--As a fundamental policy, each Portfolio is permitted to borrow
money in an amount up to 33 1/3% of the value of its total assets. However,
each Portfolio currently intends to borrow money only (a) for temporary or
emergency (not leveraging) purposes or (b) in connection with the entry into
reverse repurchase agreements, in an amount up to 33 1/3% of the value of its
total assets (including the amount borrowed) valued at the lesser of cost or
market, less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of a Portfolio's total assets,
such Portfolio will not make any investments.
<PAGE>
PROSPECTUS MAY 1, 1996
THE INFINITY MUTUAL FUNDS, INC.
ValueStar Funds
CAPITAL GROWTH PORTFOLIO
SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
INVESTMENT GRADE BOND PORTFOLIO
TENNESSEE TAX EXEMPT BOND PORTFOLIO
Investor Shares
- --------------------------------------------------------------------------------
The Infinity Mutual Funds, Inc. (the "Fund") is an open-end, management
investment company, known as a series fund. By this Prospectus, the Fund is
offering Investor Shares of four of its ValueStar Funds (the "Portfolios"), each
with a different investment objective:
. The CAPITAL GROWTH PORTFOLIO seeks to provide investors with capital growth.
This Portfolio will invest primarily in the equity securities of domestic
issuers.
. The SHORT-INTERMEDIATE DURATION BOND PORTFOLIO seeks to provide investors
with current income without assuming undue risk. This Portfolio will invest
primarily in investment grade, U.S. dollar denominated fixed-income
securities of domestic and foreign issuers. Under normal market conditions,
the Short-Intermediate Duration Bond Portfolio will invest in a portfolio of
securities that has a duration of under four years.
. The INVESTMENT GRADE BOND PORTFOLIO seeks to provide investors with current
income without assuming undue risk. This Portfolio will invest primarily in
investment grade, U.S. dollar denominated fixed-income securities of domestic
and foreign issuers. Under normal market conditions, the Investment Grade
Bond Portfolio will invest in a portfolio of securities, except when
maintaining a temporary defensive position, that has a duration of 50% to
150% of that of the Merrill Lynch Corporate Government Master Index.
. The TENNESSEE TAX EXEMPT BOND PORTFOLIO seeks to provide investors with
current income exempt from Federal and Tennessee income taxes without
assuming undue risk. This Portfolio will invest primarily in investment grade
Tennessee Municipal Obligations without regard to maturity.
Each Portfolio's investment adviser is First American National Bank (the
"Adviser").
BISYS Fund Services Limited Partnership (the "Administrator") serves as each
Portfolio's administrator.
Concord Financial Group, Inc. (the "Distributor"), an affiliate of the
Administrator, serves as distributor of each Portfolio's shares.
Portfolio shares are not deposits or obligations of, or endorsed or
guaranteed by, the Adviser or any other bank, and are not federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other governmental agency. Portfolio shares involve certain risks, including the
possible loss of principal. Each Portfolio's share price and investment return
fluctuate and are not guaranteed.
------------------
This Prospectus sets forth concisely information about the Fund and the
Portfolios that an investor should know before investing. It should be read and
retained for future reference.
The Statement of Additional Information, dated May 1, 1996, which may be
revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, write to the Fund at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, or call 1-800-852-0045.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
--------
Fee Table.............................................................. 3
Financial Highlights................................................... 5
Description of the Portfolios.......................................... 7
Management of the Portfolios........................................... 14
How to Buy Shares...................................................... 17
How to Redeem Shares................................................... 20
Shareholder Privileges................................................. 22
Dividends, Distributions and Taxes..................................... 25
Performance Information................................................ 27
General Information.................................................... 29
Appendix............................................................... A-1
Distributed by: Investment Adviser:
Concord Financial Group, Inc. First American National Bank
125 West 55th Street 315 Deaderick Street
New York, New York 10019 Nashville, Tennessee 37237
For information about opening an account and other Fund services call: (800)
824-3741
To execute purchases, redemptions and exchanges and for information about the
status of your account call: (800) 852-0045
<TABLE>
<CAPTION>
FEE TABLE*
Short- Intermediate
Capital Investment
Growth Duration Grade
Portfolio Bond Portfolio Bond Portfolio
------------------------ ------------------------ ------------------------
Trust Investor Trust Investor Trust Investor
Shares Shares Shares Shares Shares Shares
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses Maximum
Sales Load Imposed on Purchases (as a
percentage of offering price)............. None 3.0% None 3.0% None 3.0%
Annual Operating Expenses (as a percentage
of average daily net assets)
Management Fees............................. .65% .65% .50% .50% .50% .50%
12b-1 Fees (after expense reimbursement).... None .00% None .00% None .00%
Other Expenses.............................. .52% .52% .37% .37% .51% .51%
Total Portfolio Operating Expenses (after
expense reimbursement)**.................... 1.17% 1.17% .87% .87% 1.01% 1.01%
</TABLE>
<TABLE>
<CAPTION>
Tennessee
Tax Exempt
Bond Portfolio
------------------------
Trust Investor
Shares Shares
----------- -----------
<S> <C> <C>
Shareholder Transaction Expenses Maximum
Sales Load Imposed on Purchases (as a
percentage of offering price)............. None 3.0%
Annual Operating Expenses (as a percentage
of average daily net assets)
Management Fees............................. .50% .50%
12b-1 Fees (after expense reimbursement).... None .00%
Other Expenses.............................. .37% .37%
Total Portfolio Operating Expenses (after
expense reimbursement)**.................... .87% .87%
Example:
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return and (2)
redemption at the end of each time
period:
<S> <C> <C> <C> <C> <C> <C>
1 Year................................. $ 12 $ 42 $ 9 $ 39 $ 10 $ 40
3 Years................................ $ 37 $ 66 $ 28 $ 57 $ 32 $ 61
5 Years................................ $ 64 $ 92 $ 48 $ 77 $ 56 $ 84
10 Years............................... $ 142 $ 108 $ 107 $ 134 $ 124 $ 150
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................................. $ 9 $ 39
3 Years................................ $ 28 $ 57
5 Years................................ $ 48 $ 77
10 Years............................... $ 107 $ 134
</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.
- --------------------------------------------------------------------------------
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. Moreover, while the example assumes a 5% annual
return, each Portfolio's actual performance will vary and may result in an
actual return greater or less than 5%.
- --------------------------------------------------------------------------------
The purpose of the foregoing table is to assist investors in understanding
the costs and expenses borne by the Portfolios and investors, the payment of
which will reduce investors' annual return. Other Expenses for the Capital
Growth Portfolio and Investment Grade Bond Portfolio are based on estimated
amounts for the current fiscal year. The expenses noted above, without
reimbursements, would have been: 12b-1 Fees, .25% for each Portfolio and Total
Portfolio Operating Expenses, 1.12% for each of the Short-Intermediate Duration
Bond Portfolio and Tennessee Tax Exempt Bond Portfolio and 1.42% for the Capital
Growth Portfolio and 1.26% for the Investment Grade Bond Portfolio. Long-term
investors in Investor Shares could pay more in 12b-1 fees than the economic
equivalent of paying a front-end sales charge. For a further description of the
various costs and expenses incurred in a Portfolio's operation, as well as
expense reimbursement or waiver arrangements, see "Management of the
Portfolios."
<PAGE>
FINANCIAL HIGHLIGHTS
Contained below for the Short-Intermediate Duration Bond Portfolio and
Tennessee Tax Exempt Bond Portfolio is per share operating performance data for
an Investor Share of common stock outstanding, total investment return, ratios
to average net assets and other supplemental data for each period indicated. The
information in the tables has been audited by KPMG Peat Marwick LLP, the
Portfolios' independent auditors, whose report thereon appears in the Statement
of Additional Information. Further financial data and related notes are included
in the Statement of Additional Information, available upon request. No financial
information is available for the Capital Growth Portfolio or Investment Grade
Bond Portfolio, which had not commenced operations as of the date of the
financial statements.
<TABLE>
<CAPTION>
VALUESTAR SHORT-INTERMEDIATE DURATION BOND PORTFOLIO
Year Ended Period Ended
December 31, December 31,
1995 1994*
------------- -------------
<S> <C> <C>
Net Asset Value, Beginning of Period....................................... $ 9.66 $ 10.00
------------- -------------
Income from investment operations:
Net investment income.................................................... 0.59 0.38
Net realized and unrealized gains (losses) on securities transactions.... 0.47 (0.34)
------------- -------------
Net gains from investment operations..................................... 1.06 0.04
------------- -------------
Less dividends and distributions:
Dividends from net investment income..................................... (0.59) (0.38)
------------- -------------
Net change in net asset value.............................................. 0.47 (0.34)
------------- -------------
Net Asset Value, End of Period............................................. $ 10.13 $ 9.66
------------- -------------
------------- -------------
Total Return (excluding sales charge)...................................... 11.20% 0.42%+
Ratios/Supplemental Data:
Net assets, end of period (000's)........................................ $ 103,382 $ 93,189
Ratio of expenses to average net assets.................................. 0.87% 0.83%++
Ratio of net investment income to average net assets..................... 5.89% 5.27%++
Ratio of expenses to average net assets**................................ 1.12% 1.28%++
Ratio of net investment income to average net assets**................... 5.64% 4.82%++
Portfolio Turnover....................................................... 28% 6%
</TABLE>
- ---------------
* For the period March 28, 1994 (commencement of operations) through December
31, 1994.
** During the period certain fees were voluntarily waived. If such voluntary fee
waivers had not occurred, the ratios would have been as indicated.
+ Total return is not annualized as it may not be representative of the total
return for the year.
++ Annualized.
<TABLE>
<CAPTION>
VALUESTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
Year Ended Period Ended
December 31, December 31,
1995 1994*
------------- -------------
<S> <C> <C>
Net Asset Value, Beginning of Period.................................... $ 9.40 $ 10.00
------------- -------------
Income from investment operations:
Net investment income................................................. 0.45 0.34
Net realized and unrealized gains (losses) on securities
transactions............................................................ 0.79 (0.60)
------------- -------------
Net gains (losses) from investment operations......................... 1.24 (0.26)
------------- -------------
Less dividends and distributions:
Dividends from net investment income.................................. (0.45) (0.34)
------------- -------------
Net change in net asset value........................................... 0.79 (0.60)
------------- -------------
Net Asset Value, End of Period.......................................... $ 10.19 $ 9.40
------------- -------------
------------- -------------
Total Return (excluding sales charge)................................... 13.40% (2.63)%+
Ratios/Supplemental Data:
Net assets, end of period (000's)..................................... $ 94,143 $ 86,127
Ratio of expenses to average net assets............................... 0.87% 0.82%++
Ratio of net investment income to average net assets.................. 4.52% 4.61%++
Ratio of expenses to average net assets**............................. 1.12% 1.18%++
Ratio of net investment income to average net assets**................ 4.27% 4.25%++
Portfolio Turnover.................................................... 188% 41%
</TABLE>
- ---------------
* For the period March 28, 1994 (commencement of operations) through December
31, 1994.
** During the period certain fees were voluntarily waived. If such voluntary fee
waivers had not occurred, the ratios would have been as indicated.
+ Total return is not annualized as it may not be representative of the total
return for the year.
++ 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
Investment Objectives
Each Portfolio's investment objective is set forth on the cover page of this
Prospectus. The differences in objectives and policies among the Portfolios
determine the types of securities in which each Portfolio invests and can be
expected to affect the degree of risk to which each Portfolio is subject and
each Portfolio's yield or return. Each Portfolio's investment objective cannot
be changed without approval by the holders of a majority (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of such Portfolio's
outstanding voting shares. There can be no assurance that each Portfolio's
investment objective will be achieved.
Management Policies
Capital Growth Portfolio--The Capital Growth Portfolio will invest primarily in
the equity securities of domestic issuers. The Capital Growth Portfolio, under
normal circumstances, will invest primarily in securities of companies with
relatively large capitalizations (generally greater than $500 million) that the
Adviser believes offer opportunities for capital appreciation and growth of
earnings. The equity securities in which the Portfolio may invest consist of
common stocks, preferred stocks and convertible securities, including those in
the form of American Depositary Receipts and Standard & Poor's Depositary
Receipts, as well as warrants to purchase such securities. The Portfolio also
may invest in debt securities of domestic and foreign issuers when the Adviser
believes that such securities offer opportunities on capital growth. The
Portfolio may invest up to 10% of the value of its total assets in foreign
securities which are not publicly traded in the United States. See
"Appendix--Portfolio Securities." At least 65% of the value of the Capital
Growth Portfolio's total assets invested in debt securities must consist of debt
securities which are rated no lower than Baa by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P"), Fitch Investors
Service, L.P. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff") or, if
unrated, deemed to be of comparable quality by the Adviser. The remainder of
such assets may be invested in debt securities which are rated no lower than Ba
by Moody's and BB by S&P, Fitch and Duff or, if unrated, deemed to be of
comparable quality by the Adviser. Debt securities rated Ba by Moody's and BB by
S&P, Fitch and Duff are considered speculative grade debt and the payment of
principal and interest may be affected at any time by adverse economic changes.
See "Investment Considerations and risk Factors--Lower Rated Securities" below,
and "Appendix" in the Statement of Additional Information.
The Capital Growth Portfolio may invest, in anticipation of otherwise investing
cash positions, in money market instruments of the type described under
"Appendix--Portfolio Securities--Money Market Instruments." Under normal market
conditions, the Portfolio does not expect to have a substantial portion of its
assets invested in money market instruments. However, when the Adviser
determines that adverse market conditions exist, the Portfolio may adopt a
temporary defensive posture and invest entirely in money market instruments.
The Capital Growth Portfolio also may engage in various investment techniques
such as options and future transactions and lending portfolio securities, each
of which involves risk. For a discussion of these investment techniques and
their related risks, see "Investment Considerations and Risk Factors" below, and
"Appendix--Investment Techniques." The 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 Portfolio invests.
Short-Intermediate Duration Bond Portfolio--The Short-Intermediate Duration Bond
Portfolio invests at least 65% of the value of its total assets (except when
maintaining a temporary defensive position) in bonds, debentures and other debt
instruments. The Portfolio invests in a broad range of investment grade, U.S.
dollar denominated fixed-income securities of domestic and foreign issuers.
These debt securities include bonds, debentures, notes, money market instruments
(including foreign bank obligations, such as time deposits, certificates of
deposit and bankers' acceptances, commercial paper and other short-term
corporate debt obligations and repurchase agreements), mortgage-related
securities (including interest-only and principal-only stripped mortgage-backed
securities), asset-backed securities, municipal obligations and convertible debt
obligations. The issuers may include foreign corporations, partnerships, trusts
or similar entities, and governments or their political subdivisions, agencies
or instrumentalities. Under normal market conditions, the Short-Intermediate
Duration Bond Portfolio will invest in a portfolio of securities that has a
duration of under four years.
The maturity of any single instrument held by the Short-Intermediate Duration
Bond Portfolio is not limited. The duration of the Portfolio, however, under
normal circumstances, will not exceed four years. The Adviser will seek to
maintain a duration ranging between one year and four years depending upon
market conditions. Under normal circumstances, the dollar-weighted average life
of the Portfolio's investment securities will be longer than one year and less
than five years. As a measure of a fixed-income security's cash flow, duration
is an alternative to the concept of "term to maturity" in assessing the price
volatility associated with changes in interest rates. Generally, the longer the
duration, the more volatility an investor should expect. For example, the market
price of a bond with a duration of two years would be expected to decline 2% if
interest rates rose 1%. Conversely, the market price of the same bond would be
expected to increase 2% if interest rates fell 1%. The market price of a bond
with a duration of four years would be expected to increase or decline twice as
much as the market price of a bond with a two-year duration. Duration is a way
of measuring a security's maturity in terms of the average time required to
receive the present value of all interest and principal payments as opposed to
its term to maturity. The maturity of a security measures only the time until
final payment is due; it does not take account of the pattern of a security's
cash flows over time, which would include how cash flow is affected by
prepayments and by changes in interest rates. Incorporating a security's yield,
coupon interest payments, final maturity and option features into one measure,
duration is computed by determining the weighted average maturity of a bond's
cash flows, where the present values of the cash flows serve as weights. In
computing the duration of the Short-Intermediate Duration Bond Portfolio, the
Adviser will estimate the duration of obligations that are subject to prepayment
or redemption by the issuer, taking into account the influence of interest rates
on prepayments and coupon flows. This method of computing duration is known as
option-adjusted duration.
The securities in which the Short-Intermediate Duration Bond Portfolio will
invest will consist only of those which, at the time of purchase, are rated no
lower than Baa by Moody's or BBB by S&P, Fitch or Duff, or, if unrated, deemed
to be of comparable quality by the Adviser. Obligations rated BBB by S&P and
Fitch and Baa by Moody's are considered investment grade obligations; those
rated BBB by S&P and Fitch are regarded as having an adequate capacity to pay
principal and interest, while those rated Baa by Moody's are considered medium
grade obligations which lack outstanding investment characteristics and have
speculative characteristics. See "Investment Considerations and Risk
Factors--Fixed-Income Securities" below, and "Appendix" in the Statement of
Additional Information.
When management believes it advisable for temporary defensive purposes, the
Portfolio may invest in the U.S. dollar denominated money market instruments of
the type described under "Appendix--Portfolio Securities--Money Market
Instruments."
The Short-Intermediate Duration Bond Portfolio also may lend securities from its
portfolio as described under "Appendix--Investment Techniques--Lending Portfolio
Securities." The Short-Intermediate Duration Bond Portfolio also may invest, to
a limited extent, in securities issued by other investment companies which
principally invest in securities of the type in which the Portfolio invests.
Investment Grade Bond Portfolio--The Investment Grade bond Portfolio's
management policies are identical to those of the Short-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 comprise 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
5.653 years.
Tennessee Tax Exempt Bond Portfolio--The Tennessee Tax Exempt Bond Portfolio
will invest, as a fundamental policy, at least 80% of the value of its net
assets (except when maintaining a temporary defensive position) in Municipal
Obligations. Under normal circumstances, at least 65% of the value of the
Portfolio's total assets will be invested in bonds, debentures, and other debt
securities of the State of Tennessee, its political subdivisions, authorities
and corporations, the interest from which is, in the opinion of bond counsel to
the issuer, exempt from Federal and Tennessee personal income taxes
(collectively, "Tennessee Municipal Obligations"). The remainder of the
Portfolio's assets may be invested in securities that are not Tennessee
Municipal Obligations and therefore may be subject to Tennessee income tax. See
"Investment Considerations and Risk Factors--Investing in Tennessee Municipal
Obligations" below, and "Dividends, Distributions and Taxes." The Portfolio
intends to invest in such securities when their return to investors, taking into
account applicable Tennessee income taxes, would be greater than comparably
rated Tennessee Municipal Obligations. In addition, to the extent acceptable
Tennessee Municipal Obligations are at any time unavailable for investment by
the Portfolio, the Portfolio will invest temporarily in other debt securities
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from Federal income tax ("Municipal Obligations"). See "Investment
Considerations and Risk Factors--Investing in Municipal Obligations" below, and
"Appendix--Portfolio Securities--Municipal Obligations."
The average dollar-weighted credit rating of the Municipal Obligations held by
the Tennessee Tax Exempt Bond Portfolio will be at least A- by Moody's, S&P or
Fitch. To further limit risk, each Municipal Obligation in which the Portfolio
may invest must be rated, in the case of bonds, at least Baa by Moody's or at
least BBB by S&P or Fitch. The Portfolio may invest in short-term Municipal
Obligations which are rated in the two highest rating categories by Moody's, S&P
or Fitch. Municipal Obligations rated Baa by Moody's or BBB by S&P or Fitch are
considered investment grade obligations which lack outstanding investment
characteristics and may have speculative characteristics as well. The average
dollar-weighted portfolio credit rating will be measured on the basis of the
dollar value of the Municipal Obligations purchased and their credit rating
without reference to rating subcategories. The Tennessee Tax Exempt Bond
Portfolio will not invest in Municipal Obligations that are unrated and no more
than 5% of its total assets will consist of Municipal Obligations which, after
purchase by the Portfolio, have become unrated. See "Investment Considerations
and Risk Factors--Fixed-Income Securities" below, and "Appendix" in the
Statement of Additional Information.
The Portfolio may invest no more than 10% of the value of its total assets in
industrial development bonds which, although issued by industrial development
authorities, may be backed only by the assets and revenues of the
non-governmental users. Interest on Municipal Obligations (including certain
industrial development bonds) which are specified private activity bonds, as
defined in the Internal Revenue code of 1986, as amended (the "Code"), issued
after August 7, 1986, while exempt from Federal income tax, is a preference item
for the purpose of the alternative minimum tax. Where a regulated investment
company receives such interest, a proportionate share of any exempt-interest
dividend paid by the investment company may be treated as such a preference item
to shareholders. The Tennessee Tax Exempt Bond Portfolio will invest no more
than 10% of the value of its net assets in Municipal Obligations the interest
from which gives rise to a preference item for the purpose of the alternative
minimum tax. The Tennessee Tax Exempt Bond Portfolio will invest in the
aggregate, except for temporary defensive purposes, no more than 20% of the
value of its net assets in securities subject to Federal income tax.
The Tennessee Tax Exempt Bond Portfolio may purchase tender option bonds and
similar securities. A tender option bond is a Municipal Obligation (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate, that has been coupled with the agreement of a
third party which grants the security holder the option, at periodic intervals,
to tender the Municipal Obligation to the third party and receive the face value
thereof. See "Appendix--Portfolio Securities--Tender Option Bonds."
From time to time, on a temporary basis other than for temporary defensive
purposes (but not to exceed 20% of the value of the Portfolio's net assets) or
for temporary defensive purposes, the Portfolio may invest in taxable money
market instruments having, at the time of purchase, a quality rating in the two
highest grades of Moody's, S&P or Fitch or, if unrated, deemed to be of
comparable quality by the Adviser. Dividends paid by the Portfolio that are
attributable to income earned by it from these securities will be taxable to
investors. See "Dividends, Distributions and Taxes." Except for temporary
defensive purposes, at no time will more than 20% of the value of the
Portfolio's net assets be invested in taxable money market instruments and
Municipal Obligations the interest from which gives rise to a preference for the
purpose of the alternative minimum tax. When the Portfolio has adopted a
temporary defensive position, including when acceptable Tennessee Municipal
Obligations are unavailable for investment by the Portfolio, in excess of 35% of
the Portfolio's total assets may be invested in securities that are not exempt
from Tennessee State income tax. Under normal market conditions, the Fund
anticipates that not more than 5% of the value of the Portfolio's total assets
will be invested in any one category of these securities. Money market
instruments are more fully described under the "Appendix--Portfolio
Securities--Money Market Instruments."
The Tennessee Tax Exempt Bond Portfolio also may engage in various investment
techniques such as options and futures transactions and lending portfolio
securities, each of which involves risk and may give rise to taxable income. For
a discussion of these investment techniques and their related risks, see
"Investment Considerations and Risk Factors" below, and "Appendix--Investment
Techniques." The Tennessee Tax Exempt Bond Portfolio also may invest, to a
limited extent, in securities issued by other investment companies which
principally invest in securities of the type in which the Tennessee Tax Exempt
Bond Portfolio invests.
Investment Considerations and Risk Factors
General--Since each Portfolio will pursue different types of investments, the
risks of investing will vary depending on the Portfolio selected for investment.
Before selecting a Portfolio in which to invest, the investor should assess the
risks associated with the types of investments made by the Portfolio. The net
asset value per share of each Portfolio is not fixed and should be expected to
fluctuate. Investors should consider each Portfolio as a supplement to an
overall investment program and should invest only if they are willing to
undertake the risks involved.
Investment Techniques--Each Portfolio may engage in various investment
techniques the use of which involves risk. Investors in the Tennessee Tax Exempt
Bond Portfolio should be aware that the use of these techniques may give rise to
taxable income. See "Appendix--Investment Techniques." Using these techniques
may produce higher than normal portfolio turnover for a Portfolio and may affect
the degree to which its net asset value fluctuates.
Portfolio turnover may vary from year to year, as well as within a year. Under
normal market conditions, the portfolio turnover rate of each Portfolio
generally will not exceed 100%. Higher portfolio turnover rates are likely to
result in comparatively greater brokerage commissions or transaction costs.
A Portfolio's ability to engage in certain short-term transactions may be
limited by the requirement that, to qualify as a regulated investment company,
it must earn less than 30% of its gross income from the disposition of
securities held for less than three months. This 30% test limits the extent to
which a Portfolio may sell securities held for less than three months, effect
short sales of securities held for less than three months, write options
expiring in less than three months and invest in certain futures contracts,
among other strategies. However, portfolio turnover will not otherwise be a
limiting factor in making investment decisions.
Equity Securities--(Capital Growth Portfolio) Equity securities fluctuate in
value, often based on factors unrelated to the value of the issuer of the
securities, and such fluctuations can be pronounced. Changes in the value of the
investment securities of the Capital Growth Portfolio will result in changes in
the value of such Portfolio's shares and thus its total return to investors.
Fixed-Income Securities--(All Portfolios) Even though interest-bearing
securities are investments which promise a stable stream of income, the prices
of such securities are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating of
a security purchased by a Portfolio has been adversely changed, such Portfolio
will consider all circumstances deemed relevant in determining whether to
continue to hold the security. With respect to the Short-Intermediate Duration
Bond Portfolio and Investment Grade Bond Portfolio, not more than 10% of the
value of either Portfolio's total assets may consist of securities which have
been downgraded below investment grade by Moody's, S&P and Fitch. Certain
securities purchased by a Portfolio, such as those rated Baa by Moody's and BBB
by S&P, Fitch and Duff, may be subject to such risk with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated fixed-income securities. See "Appendix--Portfolio Securities--Ratings"
below, and "Appendix" in the Statement of Additional Information.
No assurance can be given as to the liquidity of the market for certain
mortgage-backed securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities, which may be purchased by the Capital
Growth Portfolio, Short-Intermediate Duration Bond Portfolio and Investment
Grade Bond Portfolio. Determination as to the liquidity of interest-only and
principal-only fixed mortgage-backed securities issued by the U.S. Government or
its agencies and instrumentalities will be made in accordance with guidelines
established by the Fund's Board of Directors. In accordance with such
guidelines, the Adviser will monitor investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information. The Fund intends to treat other
stripped mortgage-backed securities as illiquid securities. See
"Appendix--Portfolio Securities--Illiquid Securities."
Federal income tax law requires the holder of a zero coupon security or of
certain pay-in-kind bonds to accrue income with respect to these securities
prior to the receipt of cash payments. A Portfolio investing in such securities
may be required to distribute such income accrued with respect to these
securities and may have to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution
requirements.
Investing in Municipal Obligations--(Tennessee Tax Exempt Bond Portfolio) The
Tennessee Tax Exempt Bond Portfolio may invest more than 25% of the value of its
total assets in Municipal Obligations which are related in such a way that an
economic, business or political development or change affecting one such
security also would affect the other securities; for example, securities the
interest upon which is paid from revenues of similar types of projects. As a
result, the Portfolio may be subject to greater risk as compared to a fund that
does not follow this practice.
Certain provisions in the Code relating to the issuance of Municipal Obligations
may reduce the volume of Municipal Obligations qualifying for Federal tax
exemption. One effect of these provisions could be to increase the cost of the
Municipal Obligations available for purchase by the Tennessee Tax Exempt Bond
Portfolio and thus reduce its available yield. Investors should consult their
tax advisers concerning the effect of these provisions on an investment in the
Tennessee Tax Exempt Bond Portfolio. Proposals that may restrict or eliminate
the income tax exemption for interest on Municipal Obligations may be introduced
in the future. If any such proposal were enacted that would reduce the
availability of Municipal Obligations for investment by the Tennessee Tax Exempt
Bond Portfolio so as to adversely affect its shareholders, the Fund would
reevaluate such Portfolio's investment objective and policies and submit
possible changes in the Portfolio's structure to shareholders for their
consideration. If legislation were enacted that would treat a type of Municipal
Obligation as taxable, the Tennessee Tax Exempt Bond Portfolio would treat such
security as a permissible taxable investment within the applicable limits set
forth herein.
Investing in Tennessee Municipal Obligations-- (Tennessee Tax Exempt Bond
Portfolio) Investors in the Tennessee Tax Exempt Bond Portfolio should consider
carefully the special risks inherent in the Portfolio's investment in Tennessee
Municipal Obligations. These risks result from the financial condition of the
State of Tennessee. Tennessee has historically had a sound financial position.
The State, however, encountered budgetary problems during the 1995 fiscal year
requiring supplemental appropriations and the use of one-time reserves to close
an estimated $250 million deficit caused by cost overruns in several major
programs. Due principally to inaccurate funding assumptions with respect to the
TennCare program, the State's program to replace Medicaid, the State completed
its fiscal year ended June 30, 1995 with an estimated budget deficit of $125
million. Investors in the Tennessee Tax Exempt Bond Portfolio should obtain and
review a copy of the Portfolios' Statement of Additional Information which sets
forth other considerations.
Investing in Foreign Securities--(Capital Growth Portfolio, Short-Intermediate
Duration Bond Portfolio and Investment Grade Bond Portfolio) Foreign securities
markets generally are not as developed or efficient as those in the United
States. Securities of some foreign issuers are less liquid and more volatile
than securities of comparable U.S. issuers. Similarly, volume and liquidity in
most foreign securities markets are less than in the United States and, at
times, volatility of price can be greater than in the United States.
Because evidences of ownership of such securities usually are held outside the
United States, a Portfolio's investment in foreign securities will be subject to
additional risks which include possible adverse political and economic
developments, seizure or nationalization of foreign deposits and adoption of
governmental restrictions that might adversely affect the payment of principal,
interest and dividends on the foreign securities or restrict the payment of
principal, interest and dividends to investors located outside the country of
the issuers, whether from currency blockage or otherwise.
Since foreign securities may be purchased by the Capital Growth Portfolio with
and be payable in currencies of foreign countries, the value of these assets as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
currency rates and exchange control regulations. Some currency exchange costs
may be incurred when the Capital Growth Portfolio changes investments from one
country to another.
Use of Derivatives--Each Portfolio may invest in derivatives ("Derivatives").
These are financial instruments which derive their performance, at least in
part, from the performance of an underlying asset, index or interest rate. The
Derivatives a Portfolio may use include, with respect to the Capital Growth
Portfolio and Ten- nessee 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 desire to invest in, or dispose of, the same securities as
the Portfolio, available investments or opportunities for sales will be
allocated equitably to each of them. In some cases, this procedure may adversely
affect the size of the position obtained for or disposed of by a Portfolio or
the price paid or received by a Portfolio.
MANAGEMENT OF THE PORTFOLIOS
Board of Directors
The business affairs of the Fund are managed under the general supervision of
its Board of Directors. The Statement of Additional Information contains the
name and general business experience of each Director.
Investment Adviser
First American National Bank, located at First American Center, 315 Deaderick
Street, Nashville, Tennessee 37237, serves as each Portfolio's investment
adviser. The Adviser is a wholly-owned subsidiary of First American Corporation,
a registered bank holding company having assets as of December 31, 1995 of $9.7
billion. First American National Bank provides personal trust, estate, employee
benefit trust, corporate trust and custody services to over 3,000 individual and
business clients and investment advisory services. The Adviser, as of December
31, 1995 had approximately $4.4 billion under trust and approximately $2.5
billion under management.
The Adviser and its affiliates deal, trade and invest for their own accounts and
for the accounts of clients which they manage in the types of securities in
which the Portfolios may invest and may have deposit, loan and commercial
banking relationships with the issuers of securities purchased by a Portfolio.
The Adviser has informed the Fund that in making its investment decisions it
does not obtain or use material inside information in its or its affiliates'
possession.
The Adviser supervises and assists in the overall management of each Portfolio's
affairs under an Investment Advisory Agreement between the Adviser and the Fund,
subject to the overall authority of the Fund's Board of Directors in accordance
with Maryland law. The primary portfolio manager for each Portfolio is as
follows: for the Capital Growth Portfolio, Charles E. Winger, Jr., who has been
a Trust Officer of the Adviser since 1988; for the Short-Intermediate Duration
Bond Portfolio and Investment Grade Bond Portfolio, Donald F. Turk, who has been
a Trust Officer of the Adviser since 1980; and for the Tennessee Tax Exempt Bond
Portfolio, Sharon S. Brown, who has been a Trust Officer of the Adviser since
1988. The Adviser also provides research services for the Portfolios through a
professional staff of portfolio managers and securities analysts. All activities
of the Adviser are conducted by persons who are also officers of one or more of
the Adviser's affiliates.
Under the terms of the Investment Advisory Agreement, the Fund has agreed to pay
the Adviser a monthly fee at the annual rate of .65 of 1% of the value of the
Capital Growth Portfo- lio's average daily net assets and .50 of 1% of the value
of each other Portfolio's average daily net assets. For the fiscal year ended
December 31, 1995, the Fund paid the Adviser a monthly fee at the annual rate of
.50 of 1% of the value of Short-Intermediate Duration Bond Portfolio's and the
Tennessee Tax Exempt Bond Portfolio's average daily net assets.
From time to time, the Adviser may waive receipt of its fees and/or voluntarily
assume certain expenses of a Portfolio, which would have the effect of lowering
the overall expense ratio of that Portfolio and increasing yield to its
investors. The Portfolio will not pay the Adviser at a later time for any
amounts it may waive, nor will the Portfolio reimburse the Adviser for any
amounts it may assume.
Administrator
BISYS Fund Services Limited Partnership, located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as each Portfolio's administrator. The Administrator
currently provides administrative services or sub-administrative services to
other investment companies with over $60 billion in assets. The Administrator is
a wholly-owned subsidiary of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, the Administrator generally
assists in all aspects of the Fund's operations, other than providing investment
advice, subject to the overall authority of the Fund's Board of Directors in
accordance with Maryland law. In connection therewith, the Administrator
provides the Fund with office facilities, personnel, and certain clerical and
bookkeeping services (e.g., preparation of reports to shareholders and the
Securities and Exchange Commission and filing of Federal, state and local income
tax returns) that are not being furnished by The Bank of New York, the Fund's
Custodian.
Under the terms of the Administration Agreement, the Fund has agreed to pay the
Administrator a monthly fee at the annual rate of .15 of 1% of the value of each
Portfolio's average daily net assets. For the fiscal year ended December 31,
1995, the Fund paid Concord Holding Corporation, an affiliate of the
Administrator and the Portfolios' predecessor administrator, at the annual rate
of .15 of 1% of the value of Short-Intermediate Duration Bond Portfolio's and
the Tennessee Tax Exempt Bond Portfolio's average daily net assets.
Distributor
Concord Financial Group, Inc., located at 125 West 55th Street, New York, New
York 10019, serves as the Fund's principal underwriter and distributor of the
Portfolio's shares. The Distributor, an affiliate of the Administrator, was
organized to distribute shares of mutual funds to institutional and retail
investors. The Distributor distributes the shares of other investment companies
with over $80 billion in assets. The Distributor is the Fund's sponsor.
The Distributor makes a continuous offering of each Portfolio's shares and bears
the costs and expenses of printing and distributing to prospective investors
copies of any prospectuses, statements of additional information and annual and
interim reports of each Portfolio (after such items have been prepared and set
in type by the Fund) which are used in connection with the offering of shares,
and the costs and expenses of preparing, printing and distributing any other
literature used by the Distributor in connection with the offering of such
Portfolio's shares for sale to the public.
Distribution Plan
Under a plan adopted by the Fund's Board of Directors pursuant to Rule 12b-1
under the 1940 Act (the "Distribution Plan"), each Portfolio pays the
Distributor for advertising, marketing and distributing Investor Shares at an
annual rate of .25 of 1% of the value of the average daily net assets of such
class of shares. Under the Distribution Plan, the Distributor may make payments
to certain financial institutions, securities dealers and other industry
professionals that have entered into agreements with the Distributor ("Service
Organizations") in respect of these services. The Distributor determines the
amounts to be paid to Service Organizations. Service Organizations receive such
fees in respect of the average daily value of Investor Shares owned by their
clients. From time to time, the Distributor may defer or waive receipt of fees
under the Distribution Plan while retaining the ability to be paid by the Fund
under the Distribution Plan thereafter. The fees payable to the Distributor
under the Distribution Plan for advertising, marketing and distributing Investor
Shares are payable without regard to actual expenses incurred.
The Fund understands that Service Organizations may charge fees to their clients
who are the beneficial owners of Investor Shares in connection with their client
accounts. These fees would be in addition to any amounts which may be received
by a Service Organization under its agreement with the Distributor.
Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286, is the
Fund's Custodian. BISYS Fund Services Ohio, Inc., an affiliate of the
Administrator, located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, is the
Fund's Transfer and Dividend Disbursing Agent (the "Transfer Agent").
Expenses
All expenses incurred in the operation of the Fund are borne by the Fund, except
to the extent specifically assumed by others. The expenses borne by the Fund
include: organizational costs, taxes, interest, brokerage fees and commissions,
if any, fees of Directors who are not officers, directors, employees or holders
of 5% or more of the outstanding voting securities of the Adviser or
Administrator, or any of their affiliates, Securities and Exchange Commission
fees, state Blue Sky qualification fees, advisory and administration fees,
charges of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, industry association fees, auditing and legal expenses,
costs of maintaining corporate existence, costs of independent pricing services,
costs of calculating the net asset value of each Portfolio's shares, costs of
shareholders' reports and corporate meetings, costs of preparing and printing
certain prospectuses and statements of additional information, and any
extraordinary expenses. Expenses attributable to a particular Portfolio are
charged against the assets of that Portfolio; other expenses of the Fund are
allocated among the Portfolios on the basis determined by the Board of
Directors, including, but not limited to, proportionately in relation to the net
assets of each Portfolio.
HOW TO BUY SHARES
General
Investor Shares may be purchased through a number of institutions, including the
Adviser and its affiliates such as AmeriStar Capital Markets Inc., Service
Organizations, and directly from the Distributor. When purchasing Portfolio
shares, you must specify the Portfolio being purchased and that the purchase is
for Investor Shares. The Adviser, its affiliates and Service Organizations may
receive different levels of compensation for selling different classes of
Portfolio shares. Stock certificates will not be issued. It is not recommended
that the Tennessee Tax Exempt Bond Portfolio be used as a vehicle for Keogh, IRA
and other qualified plans, because such plans are otherwise entitled to tax
deferred benefits.
The 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.
The Fund reserves the right to reject any purchase order for Investor Shares in
whole or in part, including purchases made with foreign checks and third party
checks not originally made payable to the order of the investor.
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
Ser-vices, Inc., Department L-1686, Columbus, Ohio 43260-1686. For subsequent
investments, your Fund account number should appear on the check or money order.
All payments should be made in U.S. dollars and, to avoid fees and delays,
should be drawn only on U.S. banks. A charge will be imposed if a check used for
investment in your account does not clear.
For wire orders, you must call the Transfer Agent at 1-800-852-0045. If a
subsequent payment is being made, your Fund account number should be included.
Information on remitting funds in this manner, including any related fees, may
be obtained from your bank.
Subsequent investments also may be made by electronic transfer of funds from an
account maintained in a bank or other domestic financial institution that is an
Automated Clearing House member. For information on purchasing shares through
the Automated Clearing House, you must call the Transfer Agent at
1-800-852-0045.
Portfolio shares are sold on a continuous basis. Net asset value per share is
determined as of the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m., Eastern time), on each day the New York Stock
Exchange is open for business. The New York Stock Exchange currently is closed
on the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Net asset
value per Investor Share is computed by dividing the value of the Portfolio's
net assets attributable to such shares (i.e., the value of its assets less
liabilities) by the total number of Investor Shares of such Portfolio
outstanding. The Portfolio's investments are valued each business day generally
by using available market quotations or at fair value which may be determined by
one or more pricing services approved by the Board of Directors. Each pricing
service's procedures are reviewed under the general supervision of the Board of
Directors. For further information regarding the methods employed in valuing the
Portfolios' investments, see "Determination of Net Asset Value" in the Statement
of Additional Information.
If an order is received by the Transfer Agent by the close of trading on the
floor of the New York Stock Exchange on a business day, Portfolio shares will be
purchased at the public offering price determined as of such time on that day.
Otherwise, Portfolio shares will be purchased at the public offering price
determined as of the close of trading on the floor of the New York Stock
Exchange on the next business day, except where Investor Shares are purchased
through a dealer as provided below.
Orders for the purchase of Investor Shares received by dealers by the close of
trading on the floor of the New York Stock Exchange on any business day and
transmitted to the Transfer Agent by the close of its business day (normally
5:15 p.m., Eastern time) will be based on the public offering price per share
determined as of the close of trading on the floor of the New York Stock
Exchange on that day. Otherwise, the orders will be based on the next determined
public offering price. It is the dealer's responsibility to transmit orders so
that they will be received by the Transfer Agent before the close of its
business day.
Federal regulations require that an investor provide a certified Tax
Identification Number ("TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes" and the Fund's Account Application for
further information concerning this requirement. Failure to furnish a certified
TIN to the Fund could subject the investor to a $50 penalty imposed by the
Internal Revenue Service ("IRS").
TeleTrade--You may purchase Portfolio shares (minimum purchase $500, maximum
$50,000 per transaction) by telephone for an existing Fund account if you have
checked the appropriate box and supplied the necessary information on the Fund's
Account Application. The proceeds will be transferred between the bank account
designated on the Account Application and your Fund account. Only a bank account
maintained in a domestic financial institution which is an Automated Clearing
House member may be so designated. TeleTrade purchases are effected at the net
asset value (plus the applicable sales load) next determined after receipt of an
order in proper form by the Transfer Agent. See "General" above. TeleTrade may
not be available to certain clients of the Adviser, its affiliates and certain
Service Organizations. The Fund may modify or terminate TeleTrade at any time or
charge a service fee upon notice to shareholders. No such fee currently is
contemplated. If you have selected TeleTrade, you may request such a purchase of
Portfolio shares by telephoning the Transfer Agent at 1-800-852-0045.
Purchase Price
The public offering price of Investor Shares is the net asset value per share of
that class, plus a sales load as shown below:
Total Sales Load
-----------------------------------------------
Dealers'
Amount of Offering Net Asset Reallowance as a %
Transaction Price Value of Offering Price
- ------------------ ----------- ----------- ---------------------
Less than
$100,000.......... 3.00% 3.09% 2.50%
$100,000 to less
than
$250,000......... 2.50% 2.56% 2.20%
$250,000 to less
than
$500,000......... 2.00% 2.04% 1.75%
$500,000 to less
than
$750,000......... 1.50% 1.52% 1.30%
$750,000 to less
than
$1,000,000....... 1.00% 1.01% 0.90%
$1,000,000 and
above............. 0.25% 0.25% 0.25%
The dealer reallowance may be changed from time to time but will remain the same
for all dealers. From time to time, the Distributor may make or allow additional
payments or promotional incentives in the form of cash or other compensation to
dealers that sell Portfolio shares. In some instances, these incentives may be
offered only to certain dealers who have sold or may sell significant amounts of
Portfolio shares.
Management understands that the Adviser, its affiliates and some Service
Organizations may impose certain conditions on their clients which are different
from those described in this Prospectus, and, to the extent permitted by
applicable regulatory authority, may charge their clients a direct fee for
effecting transactions in Portfolio shares. You should consult the Adviser, its
affiliates or your Service Organization in this regard.
No Sales Load--Portfolio shares will be offered at net asset value without a
sales load to registered representatives of NASD member firms which have entered
into an agreement with the Distributor pertaining to the sale of Portfolio
shares, full-time employees of the Adviser, the Administrator or the
Distributor, their spouses and minor children, and accounts opened by a bank,
trust company or thrift institution which is acting as a fiduciary and has
entered into an agreement with the Distributor pertaining to the sale of
Portfolio shares, provided that they have furnished the Distributor appropriate
notification of such status at the time of the investment and with such
information as it may request from time to time in order to verify eligibility
for this privilege. This privilege also applies to the Fund's Directors,
fee-based financial planners and registered investment advisers not affiliated
with or clearing purchases through full service broker/dealers, investment
advisers regulated by Federal or state governmental authority when such
investment advisers purchase shares for their own accounts or for accounts for
which they are authorized to make investment decisions (i.e., discretionary
accounts), asset allocation programs offered by the Adviser for its clients, and
corporate/business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh
plans) sponsored by the Adviser, the Distributor or their affiliates or
subsidiaries or pursuant to a payroll deduction system which makes direct
investments in a Portfolio by means of electronic data transmission in a form
acceptable to the Fund. The sales load is not charged on shares acquired through
the reinvestment of dividends or distributions or pursuant to the Directed
Distribution Plan or Reinstatement Privilege, described below.
Right of Accumulation--Reduced sales loads apply to any purchase of shares by
you and any related "purchaser" as defined in the Statement of Additional
Information, where the aggregate investment in Investor Shares among any of the
Portfolios offered with a sales load, including such purchase, is $100,000 or
more. If, for example, you previously purchased and still hold Investor Shares
of the Short-Intermediate Duration Bond Portfolio, with an aggregate current
market value of $90,000 and subsequently purchase Investor Shares of the
Short-Intermediate Duration Bond Portfolio having a current value of $20,000,
the sales load applicable to the subsequent purchase would be reduced to 2.50%
of the offering price (2.56% of the net asset value). All present holdings of
Investor Shares may be combined to determine the current offering price of the
aggregate investment in ascertaining the sales load applicable to each
subsequent purchase. To qualify for reduced sales loads, at the time of a
purchase an investor or his Service Organization must notify the Transfer Agent.
The reduced sales load is subject to confirmation of an investor's holdings
through a check of appropriate records.
HOW TO REDEEM SHARES
General
An investor who has purchased shares through an account with the Adviser, its
affiliates or a Service Organization must redeem shares by following
instructions pertaining to such account. If such investor also is the
shareholder of record of the account on the books of the Transfer Agent, the
investor may redeem shares as described below under "Procedures." Such investors
wishing to use the other redemption methods described below must arrange with
the Adviser, its affiliates or the Service Organization for delivery of the
required notice(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 ten business days. The Fund will not transmit redemption proceeds pursuant
to a request to redeem shares by wire for a period of up to ten business days
after receipt by the Transfer Agent of the purchase check or TeleTrade order
against which such redemption is requested. This procedure does not apply to
shares purchased by wire payment.
The Fund imposes no charges when shares are redeemed. The Adviser, its
affiliates and Service Organizations may charge their clients a nominal fee for
effecting redemptions of Portfolio shares. The value of Portfolio shares
redeemed may be more or less than their original cost, depending upon the
Portfolio's then-current net asset value.
The Fund reserves the right to redeem your account at its option upon not less
than 45 days' written notice if your account's net asset value is $500 or less,
for reasons other than market conditions, and remains so during the notice
period.
Procedures
Written Orders--Written requests for redemption, indicating the name of the
Portfolio and that Investor Shares are being redeemed, with signature
appropriately guaranteed, if required, and otherwise in accordance with the
requirements listed below, should be mailed to The ValueStar Funds, c/o BISYS
Fund Services, Inc., Department L-1686, Columbus, Ohio 43260-1686.
Wire Redemption Privilege--After appropriate prior authorization, you may
request by telephone or in writing that redemption proceeds be transmitted by
the Transfer Agent via Federal Funds wire transfer to your bank account.
Redemption requests must be in an amount of at least $1,000. The Fund reserves
the right to refuse any request for a wire transfer and may limit the amount
involved or the number of telephone redemption requests. This Privilege may be
modified or terminated at any time by the Transfer Agent or the Fund.
TeleTrade--You may redeem Portfolio shares (minimum $500, maximum $50,000 per
transaction) without charge by telephone if you have checked the appropriate box
and supplied the necessary information on the Fund's Account Application. The
proceeds will be transferred between your Fund account and the bank account
designated on the Account Application. Only a bank account maintained in a
domestic financial institution which is an Automated Clearing House member may
be so designated. Redemption proceeds will be on deposit in your account at an
Automated Clearing House member bank ordinarily two days after receipt of the
redemption request. The Fund may modify or terminate TeleTrade at any time or
charge a service fee upon notice to shareholders. No such fee currently is
contemplated. If you have selected TeleTrade, you may request such a redemption
of Portfolio shares by telephoning the Transfer Agent at 1-800-852-0045.
Redemption Requirements
Written redemption instructions, indicating the name of the Portfolio and that
Investor Shares are being redeemed, must be received by the Transfer Agent in
proper form and signed exactly as the shares are registered. Except as noted
below, all signatures must be guaranteed. The Transfer Agent has adopted
standards and procedures pursuant to which signature-guarantees in proper form
generally will be accepted from domestic banks, brokers, dealers, credit unions,
national securities exchanges, registered securities associations, clearing
agencies and savings associations, as well as from participants in the New York
Stock Exchange Medallion Signature Program, the Securities Transfer Agents
Medallion Program ("STAMP") and the Stock Exchanges Medallion Program.
Signature-guarantees may not be provided by notaries public. The signature
guarantee requirement will be waived if the following conditions apply: (1) the
redemption check is payable to the shareholder(s) of record; and (2) the
redemption check is mailed to the shareholder(s) at the address of record or the
proceeds are either mailed or wired to a financial institution account
previously designated. Redemption requests by corporate and fiduciary
shareholders must be accompanied by appropriate documentation establishing the
authority of the person seeking to act on behalf of the account. You may obtain
from the Fund or the Transfer Agent forms of resolutions and other documentation
which have been prepared in advance to assist compliance with the Fund's
procedures.
You may redeem or exchange Portfolio shares by telephone if you have checked the
appropriate box on the Fund's Account Application. By selecting a telephone
redemption or exchange privilege, an investor authorizes the Transfer Agent to
act on telephone instructions from any person representing himself or herself to
be the investor, or a representative of the investor's Service Organization, and
reasonably believed by the Transfer Agent to be genuine. The Fund will require
the Transfer Agent to employ reasonable procedures, such as requiring a form of
personal identification, to confirm that instructions are genuine and, if it
does not follow such procedures, the Fund or the Transfer Agent may be liable
for any losses due to unauthorized or fraudulent instructions. Neither the Fund
nor the Transfer Agent will be liable for following telephone instructions
reasonably believed to be genuine.
During times of drastic economic or market conditions, investors may experience
difficulty in contacting the Transfer Agent by telephone to request a redemption
or exchange of Portfolio shares. In such cases, investors should consider using
the other redemption procedures described herein. Use of these other redemption
procedures may result in the investor's redemption request being processed at a
later time than it would have been if telephone redemption had been used. During
the delay, the Portfolio's net asset value may fluctuate.
SHAREHOLDER PRIVILEGES
The services and privileges described under this heading may not be available to
certain clients of the Adviser, its affiliates and certain Service Organizations
and the Adviser, its affiliates and some Service Organizations may impose
certain conditions on their clients which are different from those described in
this Prospectus. Such investors should consult the Adviser, its affiliates or
their Service Organization in this regard.
Exchange Privilege
The Exchange Privilege enables you to purchase, in exchange for shares of a
Portfolio, shares of one of the other Portfolios offered by this Prospectus,
ValueStar Prime Money Market Portfolio or ValueStar U.S. Treasury Money Market
Portfolio, to the extent such shares are offered for sale in your state of
residence. If you desire to use this Privilege, you should consult the Adviser,
its affiliate where you maintain your account, your Service Organization or the
Distributor to determine if it is available and whether any conditions are
imposed on its use.
To use the Exchange Privilege, you or your Service Organization acting on your
behalf must give exchange instructions to the Transfer Agent in writing or by
telephone, or in accordance with the instructions pertaining to your account at
the Adviser or its affiliates. If you previously established the Telephone
Exchange Privilege, you may telephone exchange instructions by calling
1-800-852-0045. See "How to Redeem Shares-- Redemption Requirements." Before any
exchange into a Portfolio offered by another prospectus, you must obtain and
should review a copy of the current prospectus of the Portfolio into which the
exchange is being made. Prospectuses may be obtained from the Adviser, its
affiliates, certain Service Organizations or the Distributor. The shares being
exchanged must have a current value of at least $500; furthermore, when
establishing a new account by exchange, the shares being exchanged must have a
value of at least the minimum initial investment required for the Portfolio into
which the exchange is being made.
Shares will be exchanged at the next determined net asset value; however, a
sales load may be charged with respect to exchanges into a Portfolio sold with a
sales load. If you are exchanging into a Portfolio that charges a sales load,
you may qualify for share prices which do not include the sales load or which
reflect a reduced sales load, if the shares you are exchanging were: (a)
purchased with a sales load, (b) acquired by a previous exchange from shares
purchased with a sales load, or (c) acquired through reinvestment of dividends
or distributions paid with respect to the foregoing categories of shares. No
fees currently are charged shareholders directly in connection with exchanges
although the Fund reserves the right, upon not less than 60 days' written
notice, to charge shareholders a nominal fee in accordance with rules
promulgated by the Securities and Exchange Commission. The Fund reserves the
right to reject any exchange request in whole or in part. The Exchange Privilege
may be modified or terminated at any time upon notice to shareholders.
The exchange of shares of one Portfolio for shares of another is treated for
Federal income tax purposes as a sale of the shares given in exchange by the
shareholder and, therefore, an exchanging shareholder may realize a taxable gain
or loss.
Automatic Investment Plan
The Automatic Investment Plan permits you to purchase Portfolio shares (minimum
initial investment of $1,000 and minimum subsequent investments of $100 per
transaction) at regular intervals selected by you. Provided your bank or other
financial institution allows automatic withdrawals, Portfolio shares may be
purchased by transferring funds from the bank account designated by you. At your
option, the account designated will be debited in the specified amount, and
Portfolio shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only an account maintained at a
domestic financial institution which is an Automated Clearing House member may
be so designated. This service enables you to make regularly scheduled
investments and may provide you with a convenient way to invest for long-term
financial goals. You should be aware, however, that periodic investment plans do
not guarantee a profit and will not protect an investor against loss in a
declining market. To establish an Automatic Investment Plan account, you must
check the appropriate box and supply the necessary information on the Account
Application. You may obtain the necessary applications from the Distributor. You
may cancel your participation in the Automatic Investment Plan or change the
amount of purchase at any time by mailing written notification to The ValueStar
Funds, c/o BISYS Fund Services, Inc., Department L-1686, Columbus, Ohio
43260-1686, and such notification will be effective three business days
following receipt. The Fund may modify or terminate the Automatic Investment
Plan at any time or charge a service fee. No such fee currently is contemplated.
Directed Distribution Plan
The Directed Distribution Plan enables you to invest automatically dividends and
capital gain distributions, if any, paid by a Portfolio in Investor Shares of
another Portfolio of which you are a shareholder. Shares of the other Portfolio
will be purchased at the then-current net asset value; however, a sales load may
be charged with respect to investments in shares of a Portfolio sold with a
sales load. You may qualify for share prices which do not include the sales load
or which reflect a reduced sales load. Minimum subsequent investments do not
apply. Investors desiring to participate in the Directed Distribution Plan
should check the appropriate box and supply the necessary information on the
Account Application. The Plan is available only for existing accounts and may
not be used to open new accounts. The Fund may modify or terminate the Directed
Distribution Plan at any time or charge a service fee. No such fee currently is
contemplated.
Automatic Withdrawal Plan
The Automatic Withdrawal Plan permits you to request withdrawal of a specified
dollar amount (minimum of $50) on either a monthly, quarterly, semi-annual or
annual basis if you have a $5,000 minimum account. The automatic withdrawal will
be made on the first or fifteenth day, at your option, of the period selected.
To participate in the Automatic Withdrawal Plan, you must check the appropriate
box and supply the necessary information on the Account Application. The
Automatic Withdrawal Plan may be ended at any time by the investor, the Fund or
the Transfer Agent.
Purchases of additional Investor Shares concurrent with withdrawals generally
are undesirable because a sales load may be imposed whenever purchases of
Investor Shares are made.
Reinstatement Privilege
The Reinstatement Privilege enables investors who have redeemed Investor Shares
to repurchase, within 90 days of such redemption, Investor Shares of a Portfolio
in an amount not to exceed the redemption proceeds received at a purchase price
equal to the then-current net asset value determined after a reinstatement
request and payment are received by the Transfer Agent. This privilege also
enables such investors to reinstate their account for the purpose of exercising
the Exchange Privilege. To use the Reinstatement Privilege, you must submit a
written reinstatement request to the Transfer Agent. The reinstatement request
and payment must be received within 90 days of the trade date of the redemption.
There currently are no restrictions on the number of times an investor may use
this privilege.
Letter of Intent
By signing a Letter of Intent form, available from the Distributor or certain
Service Organizations, you become eligible for the reduced sales load applicable
to the total number of Investor Shares purchased in a 13-month period (beginning
up to 90 days prior to the date of execution of the Letter of Intent) pursuant
to the terms and conditions set forth in the Letter of Intent. A minimum initial
purchase of $5,000 is required. To compute the applicable sales load, the
offering price of shares you hold (on the date of submission of the Letter of
Intent) in any Portfolio that may be used toward "Right of Accumulation"
benefits described above may be used as a credit toward completion of the Letter
of Intent.
The Transfer Agent will hold in escrow 5% of the amount indicated in the Letter
of Intent for payment of a higher sales load if the investor does not purchase
the full amount indicated in the Letter of Intent. The escrow will be released
when the investor fulfills the terms of the Letter of Intent by purchasing the
specified amount. Assuming completion of the total minimum investment specified
under a Letter of Intent, an adjustment will be made to reflect any reduced
sales load applicable to shares purchased during the 90-day period prior to the
submission of the Letter of Intent. In addition, if the investor's purchases
qualify for a further sales load reduction, the sales load will be adjusted to
reflect the investor's total purchase at the end of 13 months. If total
purchases are less than the amount specified, the investor will be requested to
remit an amount equal to the difference between the sales load actually paid and
the sales load applicable to the aggregate purchases actually made. If such
remittance is not received within 20 days, the Transfer Agent, as
attorney-in-fact pursuant to the terms of the Letter of Intent, will redeem an
appropriate number of Investor Shares held in escrow to realize the difference.
Signing a Letter of Intent does not bind the investor to purchase, or the Fund
to sell, the full amount indicated at the sales load in effect at the time of
signing, but the investor must complete the intended purchase to obtain the
reduced sales load. At the time you purchase Investor Shares, you must indicate
your intention to do so under a Letter of Intent.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Capital Growth Portfolio--Declares and pays dividends quarterly 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
monthly. Shares begin accruing income dividends on the day the purchase order is
settled.
Applicable to All Portfolios (except where indicated)--Each Portfolio will make
distributions from net realized securities gains, if any, once a year, but may
make distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the
provisions of the 1940 Act. No Portfolio will make distributions from net
realized securities gains unless capital loss carryovers, if any, have been
utilized or have expired. Dividends are automatically reinvested in additional
Portfolio shares of the same class from which they were paid at net asset value,
unless payment in cash is requested. If all shares in an account are redeemed at
any time, all dividends to which the shareholder is entitled will be paid along
with the proceeds of the redemption. Dividends paid by each class of shares of a
Portfolio will be calculated at the same time and in the same manner and will be
of the same amount, except that the expenses attributable solely to a class will
be borne exclusively by such class.
If you elect to receive distributions in cash and your distribution checks (1)
are returned to the Fund marked "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in Portfolio shares
at the net asset value determined as of the date of payment of the distribution.
In addition, any such undeliverable checks or checks that remain uncashed for
six months will be canceled and will be reinvested in Portfolio shares at the
net asset value determined as of the date of cancellation.
The Fund anticipates that individual shareholders will not be subject to
Tennessee personal income tax on dividends paid by the Tennessee Tax Exempt Bond
Portfolio to the extent such dividends are attributable to interest from
securities of the U.S. Government or any of its agencies or instrumentalities or
from bonds of the State of Tennessee or any county, municipality or political
subdivision thereof, including any agency, board, authority or commission. To
the extent that an investor is obligated to pay state or local taxes outside of
the State of Tennessee, dividends earned by an investment in the Tennessee Tax
Exempt Bond Portfolio may represent taxable income. Dividends and distributions
of the Tennessee Tax Exempt Bond Portfolio derived from taxable investments and
from income or gain derived from securities transactions and from the use of the
investment techniques described under "Appendix--Investment Techniques" will be
subject to Federal and Tennessee income tax. Dividends paid by the Capital
Growth Portfolio, Short-Intermediate Duration Bond Portfolio and Investment
Grade Bond Portfolio derived from interest, together with distributions from any
net realized short-term securities gains and all or a portion of any gains
realized from the sale or other disposition of certain market discount bonds,
generally are taxable to U.S. investors as ordinary income, whether or not
reinvested in additional Portfolio shares. Distributions from net realized
long-term securities gains, if any, generally are taxable to U.S. investors as
long-term capital gains for Federal income tax purposes, regardless of how long
shareholders have held their shares and whether such distributions are received
in cash or reinvested in additional Portfolio shares. The Code provides that the
net capital gains of an individual generally will not be subject to Federal
income tax at a rate in excess of 28%. Dividends and distributions may be
subject to state and local taxes.
Dividends and distributions attributable to interest from direct obligations of
the United States and paid by a Portfolio to individuals currently are not
subject to tax in most states. Dividends and distributions attributable to
interest from other securities in which the Portfolios may invest may be subject
to state tax.
Although all or a substantial portion of the dividends paid by the Tennessee Tax
Exempt Bond Portfolio may be excluded by shareholders of such Portfolio from
their gross income for Federal income tax purposes, the Tennessee Tax Exempt
Bond Portfolio may purchase specified private activity bonds, the interest from
which may be (i) a preference item for purposes of the alternative minimum tax,
(ii) a component of the "adjusted current earnings" preference item for purposes
of the corporate alternative minimum tax as well as a component in computing the
corporate environmental tax or (iii) a factor in determining the extent to which
a shareholder's Social Security benefits are taxable. If the Tennessee Tax
Exempt Bond Portfolio purchases such securities, the portion of dividends
related thereto will not necessarily be tax exempt to an investor who is subject
to the alternative minimum tax and/or tax on Social Security benefits and may
cause an investor to be subject to such taxes.
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized from the sale or other disposition of certain market discount bonds,
paid by a Portfolio to a foreign investor generally are subject to U.S.
nonresident withholding taxes at the rate of 30%, unless the foreign investor
claims the benefits of a lower rate specified in a tax treaty. Distributions
from net realized long-term securities gains paid by a Portfolio to a foreign
investor, as well as the proceeds of any redemptions from a foreign investor's
account, regardless of the extent to which gain or loss may be realized, will
not be subject to U.S. nonresident withholding tax. However, such distributions
may be subject to backup withholding, as described below, unless the foreign
investor certifies his non-U.S. residency status.
The Code provides for the "carryover" of some or all of the sales load imposed
on Investor Shares if an investor exchanges his Investor Shares for shares of
another Portfolio within 91 days of purchase and such other Portfolio reduces or
eliminates its otherwise applicable sales load charge for the purpose of the
exchange. In this case, the amount of the sales load charged the investor for
Investor Shares, up to the amount of the reduction of the sales load charged on
the exchange, is not included in the basis of the investor's Investor Shares for
purposes of computing gain or loss on the exchange, and instead is added to the
basis of the shares received on the exchange.
Notice as to the tax status of your dividends and distributions will be mailed
to you annually. You also will receive periodic summaries of your account which
will include information as to dividends and distributions from securities
gains, if any, paid during the year.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and the proceeds of any redemption,
regardless of the extent to which gain or loss may be realized, paid to a
shareholder if such shareholder fails to certify either that the TIN furnished
in connection with opening an account is correct or that such shareholder has
not received notice from the IRS of being subject to backup withholding as a
result of a failure to properly report taxable dividend or interest income on a
Federal income tax return. Furthermore, the IRS may notify the Fund to institute
backup withholding if the IRS determines a shareholder's TIN is incorrect or if
a shareholder has failed to properly report taxable dividend and interest income
on a Federal income tax return.
A TIN is either the Social Security number or employer identification number of
the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner of
the account, and may be claimed as a credit on the record owner's Federal income
tax return.
Management of the Fund believes that the Short-Intermediate Duration Bond
Portfolio and the Tennessee Tax Exempt Bond Portfolio have qualified for the
fiscal year ended December 31, 1995 as a "regulated investment company" under
the Code. Each Portfolio intends to continue to so qualify if such qualification
is in the best interests of its shareholders. It is expected that each of the
Capital Growth Portfolio and Investment Grade Bond Portfolio will qualify as a
"regulated investment company" under the Code so long as such qualification is
in the best interests of its shareholders. Qualification as a regulated
investment company relieves the Portfolio of any liability for Federal income
tax to the extent its earnings are distributed in accordance with applicable
provisions of the Code. Each Portfolio is subject to a non-deductible 4% excise
tax, measured with respect to certain undistributed amounts of taxable
investment income and capital gains.
You should consult your tax adviser regarding specific questions as to Federal,
state or local taxes.
PERFORMANCE INFORMATION
Capital Growth Portfolio--For purposes of advertising, performance will be
calculated on the bases of average annual total return and/or total return.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the Capital Growth Portfolio was purchased
with an initial payment of $1,000 and that the investment was redeemed at the
end of a stated period of time, after giving effect to the reinvestment of
dividends and distributions during the period. The return is expressed as a
percentage rate which, if applied on a compounded annual basis, would result in
the redeemable value of the investment at the end of the period. Advertisements
of the Portfolio's performance will include the Portfolio's average annual
total return for one, five and ten year periods, or for shorter time periods
depending upon the length of time during which the Portfolio has operated.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a percentage
rate which is calculated by combining the income and principal changes for a
specified period and dividing by the maximum offering price per share at the
beginning of the period. Advertisements may include the percentage rate of total
return or may include the value of a hypothetical investment at the end of the
period which assumes the application of the percentage rate of total return.
Total return also may be calculated by using the net asset value per share at
the beginning of the period instead of the maximum offering price per share at
the beginning of the period.
Short-Intermediate Duration Bond, Investment Grade Bond and Tennessee Tax Exempt
Bond Portfolios--For purposes of advertising, performance will be calculated on
several bases, including current yield, average annual total return and/or total
return. Current yield refers to a Portfolio's annualized net investment income
per share over a 30-day period, expressed as a percentage of the net asset value
per share at the end of the period. For purposes of calculating current yield,
the amount of net investment income per share during that 30-day period,
computed in accordance with regulatory requirements, is compounded by assuming
that it is reinvested at a constant rate over a six-month period. An identical
result is then assumed to have occurred during a second six-month period which,
when added to the result for the first six months, provides an "annualized"
yield for an entire one-year period.
The Tennessee Tax Exempt Bond Portfolio may advertise tax equivalent yield,
which is calculated by determining the pre-tax yield which, after being taxed at
a certain rate, would be equivalent to a stated current yield calculated as
described above.
Average annual total return and total return will be calculated as described
above for the Capital Growth Portfolio.
Applicable to All Portfolios--Performance will vary from time to time and past
results are not necessarily representative of future results. Investors should
remember that performance is a function of portfolio management in selecting the
type and quality of portfolio securities and is affected by operating expenses.
The fees paid pursuant to the Distribution Plan will be borne by the Portfolios'
Investor Shares and not by the Trust Shares. As a result, at any given time, the
performance of the Investor Class should be expected to be lower than that of
the Trust Class. Performance information, such as that described above, may not
provide a basis for comparison with other investments or other investment
companies using a different method of calculating performance.
Comparative performance information may be used from time to time in advertising
or marketing each Portfolio's shares, including data from Lipper Analytical
Services, Inc., Morningstar, Inc., Bond Buyer's 20-Bond Index, Moody's Bond
Survey Bond Index, Lehman Brothers Aggregate Bond Index and components thereof,
Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average, CDA/Wiesenberger Investment Companies Service, Mutual Fund Values;
Mutual Fund Forecaster, Mutual Fund Investing and other industry publications.
Historical Performance Information--(Capital Growth Portfolio and Investment
Grade Bond Portfolio only) The Capital Growth Portfolio and Investment Grade
Bond Portfolio will com mence operations through a transfer of assets from
common trust funds managed by the Adviser, using substantially the same
investment objective, policies, restrictions and methodologies as the
corresponding Portfolio. Set forth below is historical performance information
for each common trust fund for various periods ended November 30, 1995, which
reflects the maximum operating expenses that may be charged the Investor Class
of the respective Portfolio as set forth in the Fee Table above. The common
trust funds did not charge any expenses. This performance information is not
necessarily indicative of the future performance of either Portfolio. Because
each Portfolio will be actively managed, its investments will vary from time to
time and will not be identical to the past portfolio investments of the
predecessor. Moreover, the predecessor common trust funds were not registered
under the 1940 Act and therefore were not subject to certain investment
restrictions that are imposed by the 1940 Act, which, if imposed, could have
adversely affected the common trust funds' performance. Each Portfolio's
performance will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------------------------------------------
Since
1 Year 3 Years 5 Years 10 Years 12/31/80
----------- ----------- ----------- ----------- -----------
Capital Growth Portfolio
<S> <C> <C> <C> <C> <C>
Maximum Offering Price........................................... 28.06% 9.89% 11.82% 11.33% 10.32%
Net Asset Value.................................................. 32.06% 11.01% 12.50% 11.67% 10.55%
Investment Grade Bond Portfolio
Maximum Offering Price........................................... 12.34% 6.39% 7.97% 8.05% 10.08%
Net Asset Value.................................................. 15.80% 7.47% 8.63% 8.38% 10.30%
</TABLE>
GENERAL INFORMATION
The Fund was incorporated under Maryland law on March 6, 1990, and commenced
operations on August 28, 1990.
The Fund is authorized to issue eleven billion shares of Common Stock (with 500
million shares allocated to each Portfolio), par value $.001 per share. Each
Portfolio's shares are classified into Investor Shares (250 million) and Trust
Shares (250 million). Trust Shares, which are described in a separate
prospectus, are sold only to clients of the Adviser for their qualified trust,
custody and/or agency accounts and to clients of the Adviser's affiliated and
correspondent banks and other affiliated and non-affiliated institutions for
their similar accounts maintained at such affiliates or institutions. As of the
date of this Prospectus, Trust Shares have not been offered. Each share has one
vote and shareholders will vote in the aggregate and not by class except as
otherwise required by law. Only holders of the Investor Shares, however, will be
entitled to vote on matters submitted to shareholders pertaining to the
Distribution Plan.
Unless otherwise required by the 1940 Act, ordinarily it will not be necessary
for the Fund to hold annual meetings of shareholders. As a result, shareholders
may not consider each year the election of Directors or the appointment of
auditors. However, pursuant to the Fund's By-Laws, the holders of at least 10%
of the shares outstanding and entitled to vote may require the Fund to hold a
special meeting of shareholders for purposes of removing a Director from office
or for any other purpose. Shareholders may remove a Director by the affirmative
vote of a majority of the Fund's outstanding voting shares. In addition, the
Board of Directors will call a meeting of shareholders for the purpose of
electing Directors if, at any time, less than a majority of the Directors then
holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios, each of which is treated as a separate entity for certain matters
under the 1940 Act and for other purposes. A shareholder of one portfolio is not
deemed to be a shareholder of any other portfolio. For certain matters Fund
shareholders vote together as a group; as to others they vote separately by
portfolio. By this Prospectus, Investor Shares of four of the Fund's ValueStar
Portfolios are being offered--Capital Growth Portfolio, Short-Intermediate
Duration Bond Portfolio, Investment Grade Bond Portfolio and Tennessee Tax
Exempt Bond Portfolio, each of which is non-diversified. From time to time,
other portfolios may be established and sold pursuant to other offering
documents.
To date, 12 portfolios have been authorized. The other portfolios are not being
offered by this Prospectus. All consideration received by the Fund for shares of
one of the portfolios, and all assets in which such consideration is invested,
belong to that portfolio (subject only to the rights of creditors of the Fund)
and will be subject to the liabilities related thereto. The income attributable
to, and expenses of, one portfolio are treated separately from those of the
other portfolios.
The Transfer Agent maintains a record of each investor's ownership and sends
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
<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. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities, the possible seizure or nationalization of foreign deposits
and the possible subordination of deposits in foreign branches to receivership
expenses and U.S. office deposits in the event of insolvency. See "Description
of the Portfolios--Investment Considerations and Risk Factors--Investing in
Foreign Securities."
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by a Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of a bank
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations, bearing fixed, floating or variable interest
rates.
Commercial Paper and other Short-Term Corporate Obligations--Each Portfolio may
invest in commercial paper, which consists of short-term, unsecured promissory
notes issued to finance short-term credit needs. The commercial paper purchased
by the Portfolios will consist only of direct obligations which, at the time of
their purchase, are (a) rated not lower than Prime-1 by Moody's, A-1 by S&P, F-1
by Fitch or Duff-1 by Duff, or (b) issued by companies having an outstanding
unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by
S&P, Fitch or Duff, or (c) if unrated, determined by the Adviser to be of
comparable quality to those rated obligations which may be purchased by such
Portfolio.
Repurchase Agreements--Each Portfolio may enter into repurchase agreements,
which involve the acquisition by a Portfolio of an underlying debt instrument,
subject to an obligation of the seller to repurchase, and such Portfolio to
resell, the instrument at a fixed price usually not more than one week after its
purchase. Certain costs may be incurred by a Portfolio in connection with the
sale of the securities if the seller does not repurchase them in accordance with
the repurchase agreement. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the securities, realization on the securities by a
Portfolio may be delayed or limited.
Zero Coupon and Stripped Securities--Each Portfolio may invest in zero coupon
U.S. Treasury securities, which are Treasury Notes and Bonds that have been
stripped of their unmatured interest coupons, the coupons themselves and
receipts or certificates representing interests in such stripped debt
obligations and coupons. Each Portfolio also may invest in zero coupon
securities issued by corporations and financial institutions which constitute a
proportionate ownership of the issuer's pool of underlying U.S. Treasury
securities. A zero coupon security pays no interest to its holder during its
life and is sold at a discount to its face value at maturity. The amount of the
discount fluctuates with the market price of the security. The market prices of
zero coupon securities generally are more volatile than the market prices of
securities that pay interest periodically and are likely to respond to a greater
degree to changes in interest rates than non-zero coupon securities having
similar maturities and credit qualities. The Tennessee Tax Exempt Bond Portfolio
will invest no more than 25% of the value of its net assets in zero coupon and
stripped securities.
Foreign Government Obligations; Securities of Supranational Entities--Each
Portfolio may invest in obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Adviser to be of comparable quality
to the other obligations in which such Portfolio may invest. Such securities
also include debt obligations of supranational entities. Supranational entities
include international organizations designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Coal and Steel Community, the Asian Development Bank and the
InterAmerican Development Bank. The percentage of a Portfolio's assets invested
in securities issued by foreign governments will vary depending on the relative
yields of such securities, the economic and financial markets of the countries
in which the investments are made and the interest rate climate of such
countries.
Floating and Variable Rate Obligations--Each Portfolio may purchase floating and
variable rate demand notes and bonds, which are obligations ordinarily having
stated maturities in excess of 13 months, but which permit the holder to demand
payment of principal at any time, or at specified intervals. Variable rate
demand notes include master demand notes which are obligations that permit the
Portfolio to invest fluctuating amounts, at varying rates of interest, pursuant
to direct arrangements between the Portfolio, as lender, and the borrower. These
obligations permit daily changes in the amount borrowed. Because these
obligations are direct lending arrangements between the lender and borrower, it
is not contemplated that such instruments generally will be traded, and there
generally is no established secondary market for these obligations, although
they are redeemable at face value. Accordingly, where these obligations are not
secured by letters of credit or other credit support arrangements, the
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and a Portfolio may invest in obligations which are not
so rated only if the Adviser determines that at the time of investment the
obligations are of comparable quality to the other obligations in which the
Portfolio may invest. The Adviser, on behalf of each Portfolio, will consider on
an ongoing basis the creditworthiness of the issuers of the floating and
variable rate demand obligations purchased by such Portfolio.
Illiquid Securities--Each Portfolio may invest up to 10% of the value of its net
assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with its investment objective. Such
securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, certain privately negotiated, non-exchange traded options and securities
used to cover such options, certain mortgage-backed securities, floating and
variable rate demand obligations as to which the Portfolio cannot exercise the
related demand feature described above on not more than seven days' notice and
as to which there is no secondary market and repurchase agreements providing for
settlement in more than seven days after notice. As to these securities, the
Portfolio is subject to a risk that should the Portfolio desire to sell them
when a ready buyer is not available at a price the Portfolio deems
representative of their value, the value of the Portfolio's net assets could be
adversely affected.
Mortgage-Related Securities--(Capital Growth Portfolio, Short-Intermediate
Duration Bond Portfolio and Investment Grade Bond Portfolio) Mortgage-related
securities are a form of Derivative collateralized by pools of mortgages. The
mortgage-related securities in which these Portfolios may invest include those
with fixed, floating and variable interest rates, those with interest rates that
change based on multiples of changes in interest rates and those with interest
rates that change inversely to changes in interest rates, as well as stripped
mortgage-backed securities. Stripped mortgage-backed securities usually are
structured with two classes that receive different proportions of interest and
principal distributions on a pool of mortgage-backed securities or whole loans.
A common type of stripped mortgage-backed security will have one class receiving
some of the interest and most of the principal from the mortgage collateral,
while the other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the interest
(the interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). Although certain mortgage-related
securities are guaranteed by a third party or otherwise similarly secured, the
market value of the security, which may fluctuate, is not secured. If a
Portfolio purchases a mortgage-related security at a premium, all or part of the
premium may be lost if there is a decline in the market value of the security,
whether resulting from changes in interest rates or prepayments in the
underlying mortgage collateral. As with other interest-bearing securities, the
prices of certain of these securities are inversely affected by changes in
interest rates. However, though the value of a mortgage-related security may
decline when interest rates rise, the converse is not necessarily true, since in
periods of declining interest rates the mortgages underlying the security are
more likely to be prepaid. For this and other reasons, a mortgage-related
security's stated maturity may be shortened by unscheduled prepayments on the
underlying mortgages, and, therefore, it is not possible to predict accurately
the security's return to the Portfolio. Moreover, with respect to stripped
mortgage-backed securities, if the underlying mortgage securities experience
greater than anticipated prepayments of principal, the Portfolio may fail to
fully recoup its initial investment in these securities even if the securities
are rated in the highest rating category by a nationally recognized statistical
rating organization. For further discussion concerning the investment
considerations involved, see "Description of the Portfolios--Investment
Considerations and Risk Factors--Fixed-Income Securities" and "Illiquid
Securities" above and "Investment Objectives and Management Policies--Portfolio
Securities--Mortgage-Related Securities" in the Statement of Additional
Information.
Asset-Backed Securities--(Capital Growth Portfolio, Short-Intermediate Duration
Bond Portfolio and Investment Grade Bond Portfolio) Asset-backed securities are
a form of Derivative. The securitization techniques used for asset-backed
securities are similar to those used for mortgage-related securities. These
securities include debt securities and securities with debt-like
characteristics. The collateral for these securities has included home equity
loans, automobile and credit card receivables, boat loans, computer leases,
airplane leases, mobile home loans, recreational vehicle loans and hospital
account receivables. Each of these Portfolios may invest in these and other
types of asset-backed securities that may be developed in the future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may provide the
Portfolio with a less effective security interest in the related collateral than
do mortgage-backed securities. Therefore, there is the possibility that
recoveries on the underlying collateral may not, in some cases, be available to
support payments on these securities.
American Depositary Receipts--(Capital Growth Portfolio) The Capital Growth
Portfolio's assets may be invested in the securities of foreign issuers in the
form of American Depositary Receipts ("ADRs"). These securities 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 unspon- sored 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.
Warrants--(Capital Growth Portfolio) The Capital Growth Portfolio may invest up
to 5% of its net assets in warrants, except that this limitation does not apply
to warrants acquired in units or attached to securities. A warrant is an
instrument issued by a corporation which gives the holder the right to subscribe
to a specified amount of the corporation's capital stock at a set price for a
specified period of time.
Municipal Obligations--(Short-Intermediate Duration Bond Portfolio, Investment
Grade Bond Portfolio and Tennessee Tax Exempt Bond Portfolio) Municipal
Obligations are debt obligations issued by states, territories and possessions
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, or multistate agencies or
authorities. While in general, Municipal Obligations are tax exempt securities
having relatively low yields as compared to taxable, non-municipal obligations
of similar quality, certain issues of Municipal Obligations, both taxable and
non-taxable, offer yields comparable and in some cases greater than the yields
available on other permissible investments. Municipal Obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities. Municipal Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from the general taxing
power. Industrial development bonds, in most cases, are revenue bonds and
generally do not carry the pledge of the credit of the issuing municipality, but
generally are guaranteed by the corporate entity on whose behalf they are
issued. Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Municipal Obligations include
municipal lease/purchase agreements which are similar to installment purchase
contracts for property or equipment issued by municipalities. Municipal
Obligations bear fixed, floating or variable rates of interest, which are
determined in some instances by formulas under which the Municipal Obligation's
interest rate will change directly or inversely to changes in interest rates or
an index, or multiples thereof, in many cases subject to a maximum and minimum.
Certain Municipal Obligations are subject to redemption at a date earlier than
their stated maturity pursuant to call options, which may be separated from the
related Municipal Obligation and purchased and sold separately. Dividends
received by shareholders of the Short-Intermediate Duration Bond Portfolio or
Investment Grade Bond Portfolio which are attributable to interest income
received by it from Municipal Obligations generally will be subject to Federal
income tax. The Short-Intermediate Duration Bond Portfolio and Investment Grade
Bond Portfolio currently intend to invest no more than 25% of their respective
total assets in Municipal Obligations. However, this percentage may be varied
from time to time without shareholder approval.
Tender Option Bonds--(Tennessee Tax Exempt Bond Portfolio) A tender option bond
is a Municipal Obligation (generally held pursuant to a custodial arrangement)
having a relatively long maturity and bearing interest at a fixed rate
substantially higher than prevailing short-term tax exempt rates, that has been
coupled with the agreement of a third party, such as a bank, broker-dealer or
other financial institution, pursuant to which such institution grants the
security holders the option, at periodic intervals, to tender their securities
to the institution and receive the face value thereof. As consideration for
providing the option, the financial institution receives periodic fees equal to
the difference between the Municipal Obligation's fixed coupon rate and the
rate, as determined by a remarketing or similar agent at or near the
commencement of such period, that would cause the securities, coupled with the
tender option, to trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-term tax exempt rate. The Adviser,
on behalf of the Portfolio, will consider on an ongoing basis the
creditworthiness of the issuer of the underlying Municipal Obligation, of any
custodian and of the third party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligations and for other reasons. The Portfolio will not invest more
than 10% of the value of its net assets in securities that are illiquid, which
would include tender option bonds as to which it cannot exercise the tender
feature on not more than seven days' notice if there is no secondary market
available for these obligations.
Ratings--Debt securities which are rated Baa by Moody's are considered medium
grade obligations; they are neither highly protected nor poorly secured, and are
considered by Moody's to have speculative characteristics. Debt securities rated
BBB by S&P are regarded as having adequate capacity to pay interest and repay
principal, and while such debt securities ordinarily exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt securities in this category than in higher rated categories. Fitch
considers the obligor's ability to pay interest and repay principal on debt
securities rated BBB to be adequate; adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these debt
securities and, therefore, impair timely payment. Debt securities rated BBB by
Duff are considered to have below average protection factors but still
considered sufficient for prudent investment.
Securities rated Ba by Moody's are judged to have speculative elements; their
future cannot be considered as well assured and often the protection of interest
and principal payments may be very moderate. Securities rated BB by S&P, Fitch
or Duff are regarded as having predominantly speculative characteristics and,
while such obligations have less near-term vulnerability to default than other
speculative grade debt, they face major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
The ratings of Moody's, S&P, Fitch and Duff represent their opinions as to the
quality of the obligations which they undertake to rate. Ratings are relative
and subjective and, although ratings may be useful in evaluating the safety of
interest and principal payments, they do not evaluate the market value risk of
such obligations. Although these ratings may be an initial criterion for
selection of portfolio investments, the Adviser also will evaluate such
obligations and the ability of their issuers to pay interest and principal. The
Portfolios will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, the quality of the
issuer's management and regulatory matters.
Investment Company Securities--Each Portfolio may invest in securities issued by
other investment companies which principally invest in securities of the type in
which such Portfolio invests. Under the 1940 Act, a Portfolio's investment in
such securities currently is limited to, subject to certain exceptions, (i) 3%
of the total voting stock of any one investment company, (ii) 5% of such
Portfolio's total assets with respect to any one investment company and (iii)
10% of such Portfolio's total assets in the aggregate. Investments in the
securities of other investment companies will involve duplication of advisory
fees and certain other expenses.
Investment Techniques
Short-Selling--(All Portfolios) Each Portfolio may make short sales "against the
box," a transaction in which the Portfolio enters into a short sale of a
security which it owns. The proceeds of the short sale will be held by a broker
until the settlement date at which time the Portfolio delivers the security to
close the short position. The Portfolio receives the net proceeds from the short
sale. At no time will any of these Portfolios have more than 15% of the value of
its net assets in deposits on short sales against the box. It currently is
anticipated that each of these Portfolios will make short sales against the box
for purposes of protecting the value of its respective net assets.
Call and Put Options on Specified Securities-- (Capital Growth Portfolio) The
Capital Growth Portfolio may invest up to 5% of its total assets, represented by
the premium paid, in the purchase of call and put options in respect of specific
securities in which the Portfolio may invest. The Capital Growth Portfolio may
write covered call and put option contracts to the extent of 15% of the value of
its net assets at the time such option contracts are written. A call option
gives the purchaser of the option the right to buy, and obligates the writer to
sell, the underlying security at the exercise price at any time during the
option period. Conversely, a put option gives the purchaser of the option the
right to sell, and obligates the writer to buy, the underlying security at the
exercise price at any time during the option period. A covered call option sold
by the Capital Growth Portfolio, which is a call option with respect to which
the Portfolio owns the underlying security, exposes the Portfolio during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or to possible continued holding of
a security which might otherwise have been sold to protect against depreciation
in the market price of the security. A covered put option sold by the Capital
Growth Portfolio exposes the Portfolio during the term of the option to a
decline in price of the underlying security. A put option sold by the Capital
Growth Portfolio is covered when, among other things, cash or liquid securities
are placed in a segregated account with the Fund's custodian to fulfill the
obligation undertaken.
To close out a position when writing covered options, the Capital Growth
Portfolio may make a "closing purchase transaction," which involves purchasing
an option on the same security with the same exercise price and expiration date
as the option which it has previously written on the security. To close out a
position as a purchaser of an option, the Capital Growth Portfolio may make a
"closing sale transaction," which involves liquidating its position by selling
the option previously purchased. The Capital Growth Portfolio will realize a
profit or loss from a closing purchase or sale transaction depending upon the
difference between the amount paid to purchase an option and the amount received
from the sale thereof.
Stock Index Options--(Capital Growth Portfolio) The Capital Growth Portfolio may
purchase and write put and call options on stock indexes listed on national
securities exchanges or traded in the over-the-counter market to the extent of
15% of the value of its net assets. A stock index fluctuates with changes in the
market values of the stocks included in the index.
The effectiveness of the Capital Growth Portfolio's purchasing or writing stock
index options will depend upon the extent to which price movements in its
portfolio correlate with price movements of the stock index selected. Because
the value of an index option depends upon movements in the level of the index
rather than the price of a particular stock, whether the Portfolio will realize
a gain or loss from the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market generally or, in the
case of certain indexes, in an industry or market segment, rather than movements
in the price of a particular stock. Accordingly, successful use by the Capital
Growth Portfolio of options on stock indexes will be subject to the Adviser's
ability to predict correctly movements in the direction of the stock market
generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual stocks.
When the Capital Growth Portfolio writes an option on a stock index, it will
place in a segregated account with the Fund's custodian cash or liquid
securities in an amount at least equal to the market value of the underlying
stock index and will maintain the account while the option is open or will
otherwise cover the transaction.
Futures Transactions--In General--(Capital Growth Portfolio and Tennessee Tax
Exempt Bond Portfolio) Neither of these Portfolios will be a commodity pool.
However, as a substitute for a comparable market position in the underlying
securities or for hedging purposes, each of these Portfolios may engage in
futures and options on futures transactions, as described below.
The commodities transactions of each of these Portfolios must constitute bona
fide hedging or other permissible transactions pursuant to regulations
promulgated by the Commodity Futures Trading Commission. In addition, neither of
these Portfolios may engage in such transactions if the sum of the amount of
initial margin deposits and premiums paid for unexpired commodity options, other
than for bona fide hedging transactions, would exceed 5% of the liquidation
value of the Portfolio's total assets, after taking into account unrealized
profits and unrealized losses on such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission, each of these Portfolios may be required to segregate cash
or high quality money market instruments in connection with its commodities
transactions in an amount at least equal to the value of the underlying
commodity.
Initially, when purchasing or selling futures contracts a Portfolio will be
required to deposit with the Fund's custodian in the broker's name an amount of
cash or cash equivalents up to approximately 10% of the contract amount. This
amount is subject to change by the exchange or board of trade on which the
contract is traded and members of such exchange or board of trade may impose
their own higher requirements. This amount is known as "initial margin" and is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Portfolio upon termination of the futures position, assuming
all contractual obligations have been satisfied. Subsequent payments, known as
"variation margin," to and from the broker will be made daily as the price of
the index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." At any time prior to the expiration of a
futures contract, the Portfolio may elect to close the position by taking an
opposite position, at the then prevailing price, which will operate to terminate
its existing position in the contract.
Although each of these Portfolios intends to purchase or sell futures contracts
only if there is an active market for such contracts, no assurance can be given
that a liquid market will exist for any particular contract at any particular
time. Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the relevant
Portfolio to substantial losses. If it is not possible, or the Portfolio
determines not, to close a futures position in anticipation of adverse price
movements, it will be required to make daily cash payments of variation margin.
In such circumstances, an increase in the value of the portion of the portfolio
being hedged, if any, may offset partially or completely losses on the futures
contract. However, no assurance can be given that the price of the securities
being hedged will correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract.
To the extent a Portfolio is engaging in a futures transaction as a hedging
device, because of the risk of an imperfect correlation between securities in a
portfolio that are the subject of a hedging transaction and the futures contract
used as a hedging device, it is possible that the hedge will not be fully
effective if, for example, losses on the portfolio securities exceed gains on
the futures contract or losses on the futures contract exceed gains on the
portfolio securities. For futures contracts based on indexes, the risk of
imperfect correlation increases as the composition of a Portfolio's investments
varies from the composition of the index. In an effort to compensate for the
imperfect correlation of movements in the price of the securities being hedged
and movements in the price of futures contracts, the Portfolio may buy or sell
futures contracts in a greater or lesser dollar amount than the dollar amount of
the securities being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. Such "over hedging" or
"under hedging" may adversely affect the Portfolio's net investment results if
market movements are not as anticipated when the hedge is established.
Successful use of futures by a Portfolio also is subject to the Adviser's
ability to predict correctly movements in the direction of the market or
interest rates. For example, if a Portfolio has hedged against the possibility
of a decline in the market adversely affecting the value of securities held in
its portfolio and prices increase instead, such Portfolio will lose part or all
of the benefit of the increased value of securities which it has hedged because
it will have offsetting losses in its futures positions. Furthermore, if, in
such circumstances the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. The Portfolio may have
to sell such securities at a time when it may be disadvantageous to do so.
An option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
Call options sold by a Portfolio with respect to futures contracts will be
covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying, or instruments the prices of which are
expected to move relatively consistently with, the instruments underlying the
futures contract. Put options sold by a Portfolio with respect to futures
contracts will be covered in the same manner as put options on specific
securities as described above.
Stock Index Futures and Options on Stock Index Futures--(Capital Growth
Portfolio) The Capital Growth Portfolio may purchase and sell stock index
futures contracts and options on stock index futures contracts to the extent of
15% of the value of its net assets.
A stock index future obligates the seller to deliver (and the purchaser to take)
an amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
the underlying stocks in the index is made. With respect to stock indexes that
are permitted investments, the Capital Growth Portfolio intends to purchase and
sell futures contracts on the stock index for which it can obtain the best price
with consideration also given to liquidity.
The Capital Growth Portfolio may use index futures as a substitute for a
comparable market position in the underlying securities.
Interest Rate Futures Contracts and Options on Interest Rate Futures
Contracts--(Tennessee Tax Exempt Bond Portfolio) The Tennessee Tax Exempt Bond
Portfolio may invest in interest rate futures contracts and options on interest
rate futures contracts as a substitute for a comparable market position and to
hedge against adverse movements in interest rates to the extent of 15% of the
value of its net assets.
To the extent the Portfolio has invested in interest rate futures contracts or
options on interest rate futures contracts as a substitute for a comparable
market position, the Portfolio will be subject to the same investment risks had
it purchased the securities underlying the contract.
The Portfolio may purchase call options on interest rate futures contracts to
hedge against a decline in interest rates and may purchase put options on
interest rate futures contracts to hedge its portfolio securities against the
risk of rising interest rates. The Portfolio may sell call options on interest
rate futures contracts to partially hedge against declining prices of portfolio
securities. The Portfolio may sell put options on interest rate futures
contracts to hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contracts.
The Portfolio also may sell options on interest rate futures contracts as part
of closing purchase transactions to terminate its options positions. No
assurance can be given that such closing transactions can be effected or the
degree of correlation between price movements in the options on interest rate
futures and price movements in the Portfolio's investment securities which are
the subject of the hedge.
Lending Portfolio Securities--(All Portfolios) From time to time, each Portfolio
may lend securities from its investment portfolio to brokers, dealers and other
financial institutions needing to borrow securities to complete certain
transactions. Such loans may not exceed 33 1/3% of the value of the relevant
Portfolio's total assets. In connection with such loans, each Portfolio will
receive collateral consisting of cash or U.S. Government securities which will
be maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. Each Portfolio can increase its income
through the investment of such collateral. Each Portfolio continues to be
entitled to payments in amounts equal to the dividends, interest and other
distributions payable on the loaned security and receives interest on the amount
of the loan. Such loans will be terminable at any time upon specified notice. A
Portfolio might experience risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with such
Portfolio.
Forward Commitments--(All Portfolios) Each Portfolio may purchase securities on
a when-issued or forward commitment basis, which means that the price is fixed
at the time of commitment, but delivery and payment ordinarily take place a
number of days after the date of the commitment to purchase. Each Portfolio will
make commitments to purchase such securities only with the intention of actually
acquiring the securities, but the Portfolio may sell these securities before the
settlement date if it is deemed advisable. The Portfolio will not accrue income
in respect of a security purchased on a forward commitment basis prior to its
stated delivery date.
Borrowing Money--(All Portfolios) As a fundamental policy, each Portfolio is
permitted to borrow money in an amount up to 33 1/3% of the value of its total
assets. However, each Portfolio currently intends to borrow money only for
temporary or emergency (not leveraging) purposes, in an amount up to 33 1/3% of
the value of its total assets (including the amount borrowed) valued at the
lesser of cost or market, less liabilities (not including the amount borrowed)
at the time the borrowing is made. While borrowings exceed 5% of a Portfolio's
total assets, such Portfolio will not make any investments.
