PROSPECTUS OCTOBER 16, 1998
AS REVISED, OCTOBER 20, 1998
ISG FUNDS
The ISG Funds (the "Portfolios") are separate series of The Infinity
Mutual Funds, Inc. (the "Fund"), an open-end, management investment company. By
this Prospectus, the Fund is offering shares of eight Portfolios, each with a
different investment policy:
o The LARGE CAP EQUITY PORTFOLIO seeks to provide investors with
long-term capital appreciation and, as a secondary objective, current
income. This Portfolio will invest primarily in equity securities of
large capitalization (over $1 billion) domestic issuers that have the
potential to provide capital appreciation and income.
o The SMALL CAP OPPORTUNITY PORTFOLIO seeks to provide investors with
capital appreciation. This Portfolio will invest primarily in equity
securities of small capitalization (under $1 billion) domestic issuers.
o The INTERNATIONAL EQUITY PORTFOLIO seeks to provide investors with
capital appreciation. This Portfolio will invest primarily in equity
securities of foreign issuers which are established companies in
economically developed countries.
o The MUNICIPAL INCOME PORTFOLIO seeks to provide investors with dividend
income exempt from Federal income tax. This Portfolio will invest
primarily in investment grade Municipal Obligations.
o The GOVERNMENT INCOME PORTFOLIO seeks to provide investors with current
income. This Portfolio will invest primarily in securities guaranteed
as to payment of principal and interest by the U.S. Government, its
agencies or instrumentalities.
o The LIMITED DURATION U.S. GOVERNMENT PORTFOLIO seeks to provide
investors with high current income without assuming undue risk. This
Portfolio will invest primarily in a portfolio of U.S. Government
securities that, under normal market conditions, has an effective
duration that approximates that of the Merrill Lynch Government 1 to 5
Year Bond Index.
o The PRIME MONEY MARKET 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. This Portfolio will invest
in short-term money market instruments and will seek a stable net asset
value of $1.00 per share.
o The U.S. TREASURY MONEY MARKET 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. This
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.
Each Portfolio's investment adviser is First American National Bank
(the "Adviser").
BISYS Fund Services Limited Partnership ("BISYS") serves as each
Portfolio's administrator and distributor.
By this Prospectus, Trust Shares, Class A Shares and Class B Shares of
each Portfolio, other than the U.S. Treasury Money Market Portfolio, are being
offered.
-----------------------------------
AN INVESTMENT IN A MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT EITHER MONEY
MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE.
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. 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 October 16, 1998 with
respect to the Large Cap Equity, Small Cap Opportunity, International Equity,
Municipal Income and Government Income Portfolios, and April 24, 1998 with
respect to the Limited Duration U.S. Government, Prime Money Market and U.S.
Treasury Money Market Portfolios, 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. Each has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. The
Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains each Statement of Additional Information, material incorporated by
reference, and other information regarding the Fund and Portfolios. For a free
copy of a Portfolio's Statement of Additional Information, write to the Fund at
3435 Stelzer Road, Columbus, Ohio 43219-3035, or call 1-800-852-0045.
<PAGE>
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.............................................................
Financial Highlights..................................................
Description of the Portfolios.........................................
Management of the Portfolios..........................................
How to Buy Shares.....................................................
How to Redeem Shares..................................................
Shareholder Services and Privileges...................................
Dividends, Distributions and Taxes....................................
Performance Information...............................................
General Information...................................................
Appendix..............................................................A-1
- -------------------------------------------------------------------------------
DISTRIBUTED BY: INVESTMENT ADVISER:
BISYS Fund Services Limited Partnership First American National Bank
3435 Stelzer Road 315 Deaderick Street
Columbus, Ohio 43219-3035 Nashville, Tennessee 37237
0 For information about opening an account and other Fund services call:
(800) 824-3741.
For voice recorded price and yield information call: (800) 852-0045.
0 To execute purchases, redemptions and exchanges and for information about
the status of your account call: (800) 852-0045.
- -------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
FEE TABLE
LARGE CAP EQUITY PORTFOLIO SMALL CAP OPPORTUNITY INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO
TRUST CLASS A CLASS B TRUST CLASS A CLASS B TRUST CLASS A CLASS B
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)......... None 4.75% None None 4.75% None None 4.75% None
Maximum Deferred Sales
Load (as a percentage of
the amount subject to
charge)................ None None+ 4.00% None None+ 4.00% None None+ 4.00%
ANNUAL OPERATING EXPENSES
(as a percentage of
average daily net assets)
Management Fees............. .75% .75% .75% .95% .95% .95% 1.00% 1.00% 1.00%
12b-1 Fees.................. None .25% .75% None .25% .75% None .25% .75%
Other Expenses.............. .29% .29% .39% .38% .38% .48% 1.27% 1.27% 1.37%
Total Portfolio Operating
Expenses................. 1.04% 1.29% 1.89% 1.33% 1.58% 2.18% 2.27% 2.52% 3.12%
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.................. $ 11 $ 60 $ 59 $ 14 $ 63 $ 62 $ 23 $ 72 $71
3 Years................. $ 33 $ 86 $ 89 $ 42 $ 95 $ 98 $ 71 $122 $126
5 Years................. $ 57 $115 $122 $ 73 $129 $137 $122 $175 $183
10 Years................ $127 $196 $198* $160 $226 $229* $261 $319 $331*
An investor would pay the
following expenses on the same
investment, assuming no
redemption:
1 Year................. $ 11 $ 60 $ 19 $ 14 $ 63 $ 22 $ 23 $ 72 $31
3 Years................ $ 33 $ 86 $ 59 $ 42 $ 95 $ 68 $ 71 $122 $96
5 Years................ $ 57 $115 $102 $ 73 $129 $117 $122 $175 $163
10 Years............... $127 $196 $198* $160 $226 $229* $261 $319 $331*
- -----------------
+ A contingent deferred sales charge of 1.00% may be assessed on certain
redemptions of Class A Shares purchased without an initial sales charge
as part of an investment of $1 million or more.
* Ten-year figures assume conversions of Class B Shares to Class A Shares
at the end of the seventh year following the date of purchase.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FEE TABLE
LIMITED DURATION
MUNICIPAL INCOME GOVERNMENT INCOME U.S. GOVERNMENT
PORTFOLIO PORTFOLIO PORTFOLIO
TRUST CLASS A CLASS B TRUST CLASS A CLASS B TRUST CLASS A CLASS B
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
SHAREHOLDER TRANSACTION
EXPENSES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed
on Purchases (as a percentage
of offering price)....... None 3.00% None None 3.00% None None 3.00% None
Maximum Deferred Sales Load
(as a percentage of the amount
subject to charge)...... None None+ 4.00% None None+ 4.00% None None+ 4.00%
ANNUAL OPERATING EXPENSES (as a percentage of average daily net
assets)
Management Fees............ .60% .60% .60% .60% .60% .60% .34%* .34%* .34%*
12b-1 Fees................. None .25% .75% None .25% .75% None .25% .75%
Other Expenses............. .60% .60% .70% .31% .31% .41% .41% .41% .92%
Total Portfolio Operating
Expenses................ 1.20% 1.45% 2.05% .91% 1.16% 1.76% .75%* 1.00%* 2.01%*
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................... $ 12 $ 44 $ 61 $ 9 $ 41 $ 58 $ 8 $ 40 $ 60
3 Years.................. $ 38 $ 75 $ 94 $ 29 $ 66 $ 85 $ 24 $ 61 $ 93
5 Years................... $66 $107 $130 $ 50 $ 92 $115 $ 42 $ 84 $128
10 Years................. $145 $198 $215** $112 $167 $184** $ 93 $149 $195**
An investor would pay the
following expenses on the same
investment, assuming no
redemption:
1 Year..................... $ 12 $ 44 $ 21 $ 9 $ 41 $ 18 $ 8 $ 40 $ 20
3 Years.................... $ 38 $ 75 $ 64 $ 29 $ 66 $ 55 $ 24 $ 61 $ 63
5 Years.................... $66 $107 $110 $ 50 $ 92 $95 $ 42 $ 84 $108
10 Years................... $145 $198 $215** $ 112 $167 $184** $ 93 $149 $195**
- -----------------
+ A contingent deferred sales charge of 1.00% may be assessed on certain
redemptions of Class A Shares purchased without an initial sales charge
as part of an investment of $1 million or more.
* After fee waiver.
** Ten-year figures assume conversion of Class B Shares to Class A Shares
at the end of the seventh year following the date of purchase.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRIME MONEY MARKET U.S. TREASURY MONEY
PORTFOLIO MARKET PORTFOLIO
TRUST CLASS A CLASS B TRUST CLASS A
SHARES SHARES SHARES SHARES SHARES
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)............... None None None None None
Maximum Deferred Sales Load
(as a percentage of the amount
subject to charge)......... None None 4.00% None None
ANNUAL OPERATING EXPENSES (as a
percentage of average daily net
assets)
Management Fees................ .25% .25% .25% .25% .25%
12b-1 Fees..................... None None .75% None None
Other Expenses................. .37% .62% .61% .25% .50%
Total Portfolio
Operating Expenses......... .62% .87% 1.61% .50% .75%
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.................. $ 6 $ 9 $ 56 $ 5 $ 8
3 Years.................. $ 20 $ 28 $ 81 $ 16 $ 24
5 Years.................. $ 35 $ 48 $108 $ 28 $ 42
10 Years................. $ 77 $107 $162* $ 63 $ 93
An investor would pay the
following expenses on the same
investment, assuming no
redemption:
1 Year................... $ 6 $ 9 $ 16 $ 5 $ 8
3 Years.................. $ 20 $ 28 $ 51 $ 16 $ 24
5 Years.................. $ 35 $ 48 $ 88 $ 28 $ 42
10 Years................. $ 77 $107 $162* $ 63 $ 93
- ---------------
* Ten-year figures assume conversion of Class B Shares to Class A Shares
at the end of the seventh year following the date of purchase.
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
THE AMOUNTS LISTED IN THE EXAMPLES 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 EXAMPLES ASSUME 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 tables 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 each
Portfolio, other than the Limited Duration U.S. Government Portfolio, Prime
Money Market Portfolio and U.S. Treasury Money Market Portfolio, are estimated
based on amounts for the current fiscal year. Other Expenses for the Limited
Duration U.S. Government Portfolio, Prime Money Market Portfolio and U.S.
Treasury Money Market Portfolio reflect amounts for the fiscal year ended
December 31, 1997. Long- term investors in Class A Shares subject to 12b-1 fees
or Class B Shares could pay more in aggregate 12b-1 fees and sales charges than
the economic equivalent of the maximum initial sales charge permitted by the
National Association of Securities Dealers, Inc. The fees noted above for the
Limited Duration U.S. Government Portfolio, without fee waivers, would be:
Management Fees, .50% and Total Portfolio Operating Expenses, .91% for Trust
Shares, 1.16% for Class A Shares and 2.17% for Class B shares. The expenses
noted above do not reflect any other fee waiver or expense reimbursement
arrangements that may be in effect. 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. For a further description of the various costs and expenses
incurred in a Portfolio's operation, as well as expense reimbursement or waiver
arrangements, see "Management of the Portfolios."
FINANCIAL HIGHLIGHTS
Contained below for the Limited Duration U.S. Government Portfolio,
Prime Money Market Portfolio and U.S. Treasury Money Market Portfolio, which are
the only operational Portfolios as of the date hereof offered by this
Prospectus, 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 financial
highlights has been audited (except where noted) by KPMG Peat Marwick LLP, the
Portfolios' independent auditors. Further financial data, related notes and
reports of independent auditors with respect to Trust Shares and Class A Shares
of such Portfolios accompany the Statement of Additional Information, which is
available upon request. No financial information is available for Trust Shares
of the Limited Duration U.S. Government Portfolio or for Class B Shares of the
Prime Money Market Portfolio which had not been offered as of the date of the
financials.
<TABLE>
<CAPTION>
LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
CLASS A CLASS B
SHARES SHARES
--------------------------------------------------- ------------
SIX MONTHS PERIOD PERIOD ENDED
ENDED ENDED JUNE 30, 1998**
JUNE 30, 1998 DECEMBER 31, 1997*
(Unaudited) (UNAUDITED)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............. $ 10.12 $10.00 $ 10.12
------- ------ -------
Income from investment operations:
Net investment income................................... 0.26 0.42 0.23
Net realized and unrealized gains on
securities transactions................................ 0.01 0.12 0.02
------- ---- -------
Net income from investment operations.................... 0.27 0.54 0.25
------- ---- -------
Less distributions:
Net investment income................................... (0.26) (0.42) (0.23)
--------- ------ ---------
Net change in net asset value............................. 0.01 0.12 0.02
------- ------ -------
Net Asset Value, End of Period............................ $ 10.13 $10.12 $ 10.14
======= ====== =======
Total Return (excluding sales charge).................... 2.74%(a) 5.54%(a) 1.61%(a)
Ratios/Supplemental Data:
Net assets, end of period (000's)...................... $20,050 $20,103 $153
Ratio of expenses to average net assets................ 1.02%(b) 1.00%(b) 1.93%(b)
Ratio of net investment income to average net assets... 5.25%(b) 5.34%(b) 3.91%(b)
Ratio of expenses to average net assets***............. 1.55%(b) 1.62%(b) 2.95%(b)
Ratio of net investment income to average
net assets***....................................... 4.72%(b) 4.72%(b) 2.89%(b)
Portfolio Turnover (c).................................. 19%
52% 19%
- ------------------------
* For the period from February 28, 1997 (commencement of operations) through December 31, 1997.
** For the period from March 4, 1998 (commencement of operations) through June 30, 1998.
*** During the period certain fees were voluntarily reduced.
If such voluntary fee reductions had not occurred, the ratios would
have been as indicated.
(a) Not annualized.
(b) Annualized.
(c) Portfolio turnover is calculated on the basis of the Portfolio as a
whole, without distinguishing between the classes of shares issued.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRIME MONEY MARKET PORTFOLIO
TRUST SHARES CLASS A SHARES
SIX YEAR PERIOD SIX YEAR YEAR YEAR PERIOD
MONTHS ENDED ENDED MONTHS ENDED ENDED ENDED ENDED
ENDED DECEMBER DECEMBER ENDED DECEMBER DECEMBER DECEMBER DECEMBER
JUNE 31, 31, JUNE 30, 31, 31, 31, 31,
30, 1997 1996* 1998 1997 1996 1995 1994**
1998
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ----- ------ ----- ----- ----- -----
Income from investment
operations:
Net investment income... 0.025 0.051 0.024 0.024 0.048 0.048 0.054 0.031
----- ----- ----- ----- ----- ----- ----- -----
Less distributions:
Net investment income... (0.025) (0.051) (0.024) (0.024) (0.048) (0.048) (0.054) (0.031)
------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value,
End of Period...... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== ===== ===== =====
Total Return......... 2.54%(a) 5.17% 2.46%(a) 2.41%(a) 4.90% 4.88% 5.51% 3.13%(a)
Ratios/Supplemental Data:
Net assets, end
of period (000's)........ $55,716 $26,389 $48,101 $107,989 $56,163 $ 22,836 $ 63,919 $ 82,351
Ratio of expenses
to average net assets... 0.59%(b) 0.62% 0.65%(b) 0.84%(b) 0.87% 0.68% 0.65% 0.63%(b)
Ratio of net
investment income
to average net assets... 5.06%(b) 5.05% 4.86%(b) 4.82%(b) 4.82% 4.83% 5.37% 4.00%(b)
Ratio of expenses
to average net assets***.. 0.59%(b)(c) 0.62%(c) 0.65%(b)(c) 0.84%(b)(c) 0.87%(c) 0.86% 0.90% 0.93%(b)
Ratio of net
investment income
to average net assets***.. 5.06%(b)(c) 5.05%(c) 4.86%(b)(c) 4.82%(b)(c) 4.82%(c) 4.65% 5.12% 3.76%(b)
(c)
- ------------------------
* For the period from July 1, 1996 (commencement of initial offering) through December 31, 1996.
** For the period from 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.
(a) Not annualized.
(b) Annualized.
(c) There were no fee waivers or expense reimbursements during the period.
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY MONEY MARKET PORTFOLIO
TRUST SHARES CLASS A SHARES
SIX SIX
MONTHS YEAR PERIOD MONTHS YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE DECEMBER DECEMBER JUNE DECEMBER DECEMBER DECEMBER DECEMBER
30, 31, 31, 30, 31, 31 31, 31,
1998 1997 1996* 1998 1997 1996 1995 1994**
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- ----- ----- -----
Beginning of
Period...........................
Income from
investment
operations:
Net investment 0.025 0.049 0.024 0.023 0.047 0.047 0.053 0.030
----- ------ ----- ----- ----- ----- ----- -----
income...........................
Less
distributions:
Net investment (0.025) (0.049) (0.024) (0.023) (0.047) (0.047) (0.053) (0.030)
-------- -------- ------- -------- ------- ------- ------- -------
income...........................
Net Asset Value, $1.00 $1.00 $1.00 $1.00 $ 1.00 $1.00 $1.00 $1.00
====== ====== ===== ====== ====== ===== ===== =====
End of Period....................
Total Return..................... 2.48%(a) 5.05% 2.43%(a) 2.35%(a) 4.78% 4.78% 5.41% 3.01%(a)
Ratios/Supplemental
Data:
Net assets, end $85,625 $114,175 $109,698 $85,829 $77,065 $78,308 $168,430 $139,715
of period (000's)................
Ratio of expenses 0.54%(b) 0.50% 0.52%(b) 0.79%(b) 0.75% 0.56% 0.50% 0.54%(b)
to average net
assets...........................
Ratio of net
investment income 4.95%(b) 4.94% 4.78%(b) 4.70%(b) 4.68% 4.72% 5.28% 4.02%(b)
to average net
assets...........................
Ratio of expenses
to average net 0.54%(b)(c) 0.50%(c) 0.52%(b) 0.79%(b)(c) 0.75%(c) 0.74% 0.75% 0.83%(b)
assets***........................
Ratio of net
investment income 4.95%(b)(c) 4.94%(c) 4.78%(b) 4.70%(b)(c) 4.68%(c) 4.54% 5.03% 3.73%(b)
to average net
assets***........................
- -------------------------------
* For the period from July 1, 1996 (commencement of operations) through December 31, 1996.
** For the period from 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.
(a) Not annualized.
(b) Annualized.
(c) There were no fee waivers or expense reimbursements during this period.
</TABLE>
Further information about performance for the operational Portfolios is
contained in the Portfolios' annual report, which may be obtained without charge
by writing to the address or calling the number set forth on the cover page of
this Prospectus.
DESCRIPTION OF THE PORTFOLIOS
GENERAL
Each Portfolio offers Trust Shares and Class A Shares and, except for
the U.S. Treasury Money Market Portfolio, Class B Shares. Each Trust Share,
Class A Share and Class B Share represents an identical pro rata interest in the
relevant Portfolio's investment portfolio. See "How to Buy Shares--Alternative
Purchase Methods."
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
LARGE CAP EQUITY PORTFOLIO--The Large Cap Equity Portfolio will invest
at least 70% of the value of its total assets in equity securities of companies
with market capitalizations of over $1 billion. Market capitalization of a
company's stock is its market price per share times the number of shares
outstanding. The Portfolio will invest in securities that the Adviser believes
have the potential to provide capital appreciation and current income. The
equity securities in which the Portfolio may invest consist of common stocks,
preferred stocks and convertible securities, including depositary receipts, as
well as warrants to purchase such securities. The Portfolio also may invest in
debt securities of domestic issuers rated no lower than investment grade
(Baa/BBB) by a credit rating agency, such as Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P"), Fitch IBCA, Inc. ("Fitch")
or Duff & Phelps Credit Rating Co. ("Duff"), or, if unrated, deemed to be of
comparable quality by the Adviser. See "Appendix--Portfolio Securities."
The Large Cap Equity Portfolio may invest 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 Large Cap Equity Portfolio also may engage in various investment
techniques such as options and futures transactions and lending portfolio
securities, each of which involves risk. For a discussion of these investment
techniques and their related risks, see "Investment Considerations and Risk
Factors" below, and "Appendix--Investment Techniques." The Portfolio also may
invest, to a limited extent, in securities issued by other investment companies
which principally invest in securities of the type in which the Portfolio
invests.
SMALL CAP OPPORTUNITY PORTFOLIO--The Small Cap Opportunity Portfolio
will invest at least 65% of the value of its total assets in equity securities
of companies with market capitalizations of less than $1 billion. Womack Asset
Management, Inc. ("Womack Management"), the Small Cap Opportunity Portfolio's
sub-investment adviser, will employ a fundamental growth-oriented approach with
technical analysis to select investments for the Portfolio. The Portfolio will
invest primarily in the securities of small- to medium-sized domestic issuers,
while attempting to maintain volatility and diversification similar to that of
the small capitalization sector of the United States equity market. The
securities of smaller capitalization companies may be subject to more abrupt or
erratic market movements than larger, more established companies, because these
securities typically are traded in lower volume and the issuers typically are
more subject to changes in earnings and prospects. In all other respects, the
Small Cap Opportunity Portfolio's management policies are identical to those of
the Large Cap Equity Portfolio.
INTERNATIONAL EQUITY PORTFOLIO--The International Equity Portfolio
will invest at least 65% of the value of its total assets in equity securities
of non-United States companies (i.e., incorporated or organized outside the
United States). The Portfolio will invest primarily in equity securities of
established companies in economically developed countries that Lazard Asset
Management ("Lazard"), the International Equity Portfolio's sub-investment
adviser, considers inexpensively priced relative to the return on total capital
or equity. The Portfolio also may invest up to 25% of the value of its total
assets in equity securities of issuers located, or doing significant business,
in emerging markets. The Portfolio will engage primarily in a value- oriented
search for equity securities before they have attracted wide investor interest.
Lazard will attempt to identify undervalued securities through traditional
measures of value, including low price to earnings ratio, high yield,
unrecognized assets, potential for management change and/or the potential to
improve profitability. Lazard's global investment specialists apply both
quantitative and qualitative analysis to securities selection. Lazard will focus
on individual stock selection (a "bottom-up" approach) rather than on
forecasting stock market trends (a "top-down" approach).
Under normal market conditions, the International Equity Portfolio
will invest at least 80% of the value of its total assets in the equity
securities of companies within not less than three different countries (not
including the United States). The percentage of the Portfolio's assets invested
in particular geographic sectors may shift from time to time in accordance with
the judgment of the Adviser and Lazard. In addition, the Portfolio may engage in
various investment techniques, such as foreign currency transactions,
short-selling and such other investment techniques as the Large Cap Equity
Portfolio may engage in, as described above. For a description of the risks
associated with investing in foreign securities, see "Investment Considerations
and Risks--Foreign Securities Risk."
Lazard recognizes that some of the best opportunities are in securities
not generally followed by investment professionals. Thus, Lazard relies on its
research capability and maintains a dialogue with foreign brokers and with the
management of foreign companies in an effort to gather the type of "local
knowledge" that it believes is critical to successful investment abroad. To this
end, Lazard communicates with its affiliates, Lazard Freres Gestion Banque in
Paris, Lazard Asset Management Ltd. in London and Lazard Japan Asset Management
K.K. in Tokyo, for information concerning current business trends, as well as
for a better understanding of the management of local businesses.
The International Equity Portfolio is not required to invest
exclusively in common stocks or other equity securities, and, if deemed
advisable, the Portfolio may invest in fixed-income securities and Money Market
Instruments. The Portfolio will not invest in fixed-income securities rated
lower than A by Moody's, S&P, Fitch or Duff, or, if unrated, deemed to be of
comparable quality by the Adviser. In addition, the Portfolio may have
substantial investments in American and Global Depositary Receipts and in
convertible bonds and other convertible securities.
When, in the Adviser's or Lazard's judgment, business or financial
conditions warrant, the Portfolio may assume a temporary defensive position and
invest without limit in the equity securities of U.S. companies or Money Market
Instruments of the types described in "Appendix-- Certain Portfolio
Securities--Money Market Instruments" or hold its assets in cash.
MUNICIPAL INCOME PORTFOLIO--The Municipal Income 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 debt securities the
interest from which is, in the opinion of bond counsel to the issuer, exempt
from Federal income tax ("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. 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 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 Obligations and purchased and sold separately. See "Investment
Considerations and Risk Factors--Risk of Investing in Municipal Obligations"
below, and "Appendix--Portfolio Securities--Municipal Obligations."
The Municipal Income Portfolio will invest in Municipal Obligation
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 Portfolio also may invest
in Municipal Obligations which, while not rated, are determined by the Adviser
to be of comparable quality to the rated securities in which the Portfolio may
invest. See "Investment Portfolio's Considerations and Risk
Factors--Fixed-Income Securities Risk" below, and "Appendix" in the Statement of
Additional Information.
The Municipal Income Portfolio may invest 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 Portfolio
may invest without limitation in such Municipal Obligations if the Adviser
determines that their purchase is consistent with the Portfolio's investment
objective.
The Municipal Income 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 Municipal Income 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.
Under normal market conditions, the Adviser 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.
The Municipal Income Portfolio also may lend securities from its
portfolio as described under "Appendix--Investment Techniques--Lending Portfolio
Securities," which may give rise to taxable income. The Portfolio also may
invest, to a limited extent, in securities issued by other investment companies
which principally invest in securities of the type in which the Portfolio
invests.
GOVERNMENT INCOME PORTFOLIO--The Government Income Portfolio will
invest at least 65% of the value of its total assets in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities and
repurchase agreements in respect of such securities. The Portfolio also may
invest in corporate bonds, mortgage-related securities, including collateralized
mortgage obligations, asset-backed securities and bank obligations. See
"Appendix--Portfolio Securities." A security guaranteed by the U.S. Government
is guaranteed only as to principal and interest, and there is no guarantee as to
the security's market value.
The Government Income Portfolio may lend securities from its portfolio
as described under "Appendix--Investment Techniques--Lending Portfolio
Securities." The Portfolio also may invest, to a limited extent, in securities
issued by other investment companies which principally invest in securities of
the type in which the Portfolio invests.
LIMITED DURATION U.S. GOVERNMENT PORTFOLIO--The Limited Duration U.S.
Government Portfolio will invest in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities and repurchase agreements in
respect of such securities. See "Appendix-- Portfolio Securities." Under normal
market conditions, the Limited Duration U.S. Government Portfolio will invest
primarily in a portfolio of U.S. Government securities that has an effective
duration that approximates that of the Merrill Lynch Government 1 to 5 Year Bond
Index. The Adviser will seek to maintain a duration ranging between one year and
four years depending on 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.
The maturity of any single instrument held by the Limited Duration
U.S. Government 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 Limited
Duration U.S. Government 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 Merrill Lynch Government 1 to 5 Year Bond Index is comprised of
U.S. Government securities with maturities equal to or greater than one year. As
of December 31, 1997, the securities comprising the Merrill Lynch Government 1
to 5 Year Bond Index had an effective duration of approximately 2.20 years.
The Limited Duration U.S. Government Portfolio also may lend
securities from its portfolio as described under "Appendix--Investment
Techniques--Lending Portfolio Securities." The Portfolio also may invest, to a
limited extent, in securities issued by other investment companies which
principally invest in securities of the type in which the Portfolio invests.
PRIME MONEY MARKET PORTFOLIO--The Prime Money Market 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, asset-backed securities, 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 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 Portfolio will not invest more than
35% of the value of its total assets in foreign securities. Securities in which
the Prime Money Market 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. See
"Appendix-- Portfolio Securities." The 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 Techniques." During normal market conditions, at least
25% of the Prime Money Market Portfolio's total assets will be invested in
domestic and/or foreign bank obligations. See "Investment Considerations and
Risk Factors--Bank Securities Risk" below.
The Prime Money Market Portfolio seeks to maintain a net asset value
of $1.00 per share for purchases and redemptions. To do so, the Portfolio uses
the amortized cost method of valuing its securities pursuant to Rule 2a-7 under
the 1940 Act, which includes various maturity, quality and diversification
requirements, certain of which are summarized below.
In accordance with Rule 2a-7, the Prime Money Market Portfolio is
required to maintain a dollar-weighted average portfolio maturity of 90 days or
less, purchase only instruments having remaining maturities of 397 days 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 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 Portfolio may purchase are
Moody's, S&P, Duff, Fitch 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 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.
U.S. TREASURY MONEY MARKET PORTFOLIO--The U.S. Treasury Money Market
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
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 1993, as amended. See "Appendix--Investment Techniques."
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 Money Market 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.
The U.S. Treasury Money Market Portfolio seeks to maintain a net asset
value of $1.00 per share for purchases and redemptions. To do so, the Portfolio
uses the amortized cost method of valuing its securities pursuant to Rule 2a-7
under the 1940 Act. See "Prime Money Market Portfolio" above, and "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.
INVESTMENT CONSIDERATIONS AND RISK FACTORS
GENERAL RISK--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. Generally, if the securities owned by a Portfolio increase in
value, the value of the shares of the Portfolio will increase. Similarly, if the
securities owned by the Portfolio decrease in value, the value of the
Portfolio's shares will also decline. In this way, investors participate in any
change in the value of the securities owned by their Portfolio. Investors could
lose money by investing in a Portfolio. 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. See also "Appendix--Investment
Techniques."
EQUITY SECURITIES RISK--(Large Cap Equity Portfolio, Small Cap
Opportunity Portfolio and International Equity Portfolio) While stocks and other
securities have historically been a leading choice of long-term investors, they
do 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 investment securities will result in changes in the value of the
Portfolio's shares and thus its total return to investors.
Because different types of stocks tend to shift in and out of favor
depending on market and economic conditions, the performance of a Portfolio
investing primarily in large capitalization stocks (such as the Large Cap Equity
Portfolio) may be lower or higher than that of a Portfolio investing primarily
in smaller capitalization stocks (such as Small Cap Opportunity Portfolio).
Moreover, the investment returns of a Portfolio investing in stocks that
emphasize particular investment characteristics, such as "value" or "growth,"
may fluctuate independently from the broad stock market as represented by the
S&P 500 Index, and may demonstrate greater volatility over short or extended
periods relative to the broad market.
Small Cap Opportunity Portfolio invests primarily in small cap
companies, which carry additional risks because their earnings tend to be less
predictable, their share prices more volatile and their securities less liquid
than larger, more established companies. They may be dependent on management for
one or a few key persons, and can be more susceptible to losses and the risk of
bankruptcy. In addition, some of these investments may rise and fall based on
investor perception rather than economics.
FOREIGN SECURITIES RISK--(International Equity Portfolio and, to a
limited extent, Large Cap Equity Portfolio and Prime Money Market Portfolio) The
value of foreign securities also is affected by general economic conditions and
individual company and industry earning prospects. While foreign securities may
offer opportunities for gain, they also involve additional risks that can
increase the potential for losses in the Portfolio. These risks can be
significantly greater for investments in emerging markets.
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. In some foreign countries, there is also less information
available about foreign issuers and markets because of less rigorous accounting
and regulatory standards 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 or restrict
the payment of principal, interest and dividends on the foreign securities to
investors located outside the country of the issuers, whether from currency
blockage or otherwise. The Portfolio may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining judgments
with respect to foreign investments in foreign courts than with respect to
domestic issuers in U.S. courts.
Emerging market countries have economic structures that generally are
less diverse and mature, and political systems that are less stable, than those
of developed countries. Emerging markets may be more volatile than the markets
of more mature economies; however, such markets may provide higher rates of
return to investors. Many emerging market countries providing investment
opportunities for the International Equity Portfolio have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have adverse effects on the economies and securities markets of
certain of these countries.
Since foreign securities may be purchased by the International Equity
Portfolio with and be payable in currencies of foreign countries, the value of
these assets as measured in U.S. dollars, and thus the price of the Portfolio's
shares, may be affected favorably or unfavorably by changes in currency rates
and exchange control regulations.
FIXED-INCOME SECURITIES RISK--(All Portfolios) A Portfolio's
investments in fixed- income securities will be subject primarily to interest
rate and credit risk. Interest rate risk is the potential for a decline in bond
prices due to rising interest rates. In general, 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 change in
price depends on several factors, including the security's maturity date;
generally, bonds with longer maturities are more sensitive to changes in
interest rates than bonds with shorter maturities. These principles of interest
rate risk also apply to U.S. Treasury and U.S. Government agency securities. A
security backed by the U.S. Treasury or the full faith and credit of the United
States is guaranteed only as to timely payment of interest and principal when
held to maturity. The current market prices for such securities are not
guaranteed and will fluctuate.
Each Portfolio's investment in fixed-income securities also is subject
to credit risk, which is the possibility that the issuer of the security will
fail to make timely payments of interest or principal to the Portfolio. The
credit risk of a Portfolio depends on the quality of its investments. 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. 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. See "Appendix--Portfolio Securities--Ratings" below, and "Appendix" in
the Portfolios' Statement of Additional Information.
Mortgage-related securities in which the Government Income Portfolio
may invest are complex derivative instruments, subject to both credit and
prepayment risk, and may be more volatile and less liquid than more traditional
debt securities. Some mortgage-related securities have structures that make
their reactions to interest rate changes and other factors difficult to predict,
making their value highly volatile. No assurance can be given as to the
liquidity of the market for certain mortgage-backed securities, such as
collateralized mortgage obligations and stripped mortgage-backed securities.
Determination as to the liquidity of interest-only and principal-only fixed
mortgage-backed securities issued by the U.S. Government or its agencies and
instrumentalities will be made in accordance with guidelines established by the
Fund's Board of Directors. In accordance with such guidelines, the Adviser will
monitor investments in such securities with particular regard to trading
activity, availability of reliable price information and other relevant
information. The Fund intends to treat other stripped mortgage-backed securities
as illiquid securities. See "Appendix--Portfolio Securities--Mortgage-Related
Securities" and "--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.
RISK OF INVESTING IN MUNICIPAL OBLIGATIONS--(Municipal Income
Portfolio only) The Municipal Income 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 or
securities whose issuers are located in the same state. 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 Municipal Income
Portfolio and thus reduce its available yield. 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 Municipal Income
Portfolio so as to adversely affect its shareholders, the Fund would reevaluate
the 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 Municipal Income Portfolio would treat such security as a
permissible taxable investment within the applicable limits set forth herein.
DERIVATIVE SECURITIES RISK--Each Portfolio, other than the Municipal
Income Portfolio and Money Market Portfolios, may invest in, or enter into,
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 Large Cap Equity Portfolio, Small Cap Opportunity Portfolio and
International Equity Portfolio, options and futures, and, with respect to the
Government Income Portfolio, options, 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,
decrease the liquidity of the Portfolio's investments and make more difficult
the accurate pricing of the Portfolio's investments.
BANK SECURITIES RISK--(Prime Money Market Portfolio only) To the
extent the Prime Money Market 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 Money Market 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 Money Market 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.
NON-DIVERSIFIED STATUS--(International Equity Portfolio and Limited
Duration U.S. Government Portfolio only) Each of the International Equity
Portfolio and Limited Duration U.S. Government Portfolio is classified as a
"non-diversified" investment company, which 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, 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 of these Portfolios' 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, and its investment return, 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 or, if applicable, sub-investment
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 May 1, 1998
of approximately $18 billion. On May 1, 1998, Deposit Guaranty Corp., located in
Jackson, Mississippi, merged with and into First American Corporation. First
American National Bank and its affiliates, including Deposit Guaranty National
Bank, provide personal trust, estate, employee benefit trust, corporate trust
and custody services to over 7,000 accounts and investment advisory services.
The Adviser, and its affiliates, as of May 1, 1998, had approximately $11
billion under trust and approximately $6 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 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.
The Adviser also is responsible for the selection of brokers to effect
securities transactions and the negotiation of brokerage commissions, if any.
Purchases and sale of securities on a securities exchange are effected through
brokers who charge a negotiated commission for their services. Brokerage
commissions may be paid to affiliates of the Adviser for executing securities
transactions if the use of such affiliates is likely to result in price and
execution at least as favorable as those of other qualified brokers. The
allocation of brokerage transactions also may take into account a broker's sales
of Portfolio shares. See "Portfolio Transactions" in the Portfolio's Statement
of Additional Information.
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 authority of the Fund's Board of Directors in
accordance with Maryland law. The primary portfolio manager for each Portfolio,
other than the Money Market Portfolios, is as follows:
LARGE CAP EQUITY PORTFOLIO--Ronald E. Lindquist. Mr. Lindquist, who has over 30
years' experience as a portfolio manager, has been the Large Cap Equity
Portfolio's primary portfolio manager since its inception and has been employed
by the Adviser since May 1998. Since 1978, he was employed by Deposit Guaranty
National Bank and Commercial National Bank, wholly- owned subsidiaries of
Deposit Guaranty Corp.
SMALL CAP OPPORTUNITY PORTFOLIO--William A. Womack. He has been the Small Cap
Opportunity Portfolio's primary portfolio manager since its inception. Mr.
Womack formed Womack Management in February 1997. For more than 12 years prior
thereto, he was a Senior Vice President and Trust Investment Officer of Deposit
Guaranty National Bank.
INTERNATIONAL EQUITY PORTFOLIO--Herbert W. Gullquist and John R. Reinsberg.
Messrs. Gullquist and Reinsberg have been the International Equity Portfolio's
primary portfolio managers since its inception, and have been Managing Directors
of Lazard for over five years.
MUNICIPAL INCOME PORTFOLIO-- Sharon S. Brown and John Mark McKenzie. Ms. Brown
and Mr. McKenzie have been the Municipal Income Portfolio's primary portfolio
managers since its inception. Ms. Brown has been a Trust Officer of the Adviser
since 1988. Mr. McKenzie has been employed by the Adviser since May 1998 and by
Deposit Guaranty National Bank since 1984.
GOVERNMENT INCOME PORTFOLIO--John Mark McKenzie. He has been the Government
Income Portfolio's primary portfolio manager since its inception and has been
employed by the Adviser since May 1998. Since 1984, he was employed by Deposit
Guaranty National Bank.
LIMITED DURATION U.S. GOVERNMENT PORTFOLIO--Donald F. Turk. He has been the
Limited Duration U.S. Government Portfolio's primary portfolio manager since its
inception and has been a Trust Officer of the Adviser since 1980.
Under the terms of the Investment Advisory Agreement, the Fund has
agreed to pay the Adviser a monthly fee at the annual rate set forth below as a
percentage of the relevant Portfolio's average daily net assets.
<PAGE>
ANNUAL RATE OF
INVESTMENT
NAME OF PORTFOLIO ADVISORY FEE
PAYABLE
Large Cap Equity Portfolio .75%
Small Cap Opportunity Portfolio .95%
International Equity Portfolio 1.00%
Municipal Income Portfolio .60%
Government Income Portfolio .60%
Limited Duration U.S. Government Portfolio .50%
Prime Money Market Portfolio .25%*
U.S. Treasury Money Market Portfolio .25%
- ----------------
* For the fiscal year ended December 31, 1997, the Fund paid the Prime
Money Market Portfolio's former sub-adviser .15% and the Adviser .10%
of the value of the Portfolio's average daily net assets.
For the fiscal year ended December 31, 1997, the Adviser waived a
portion of its advisory fee with respect to the Limited Duration U.S. Government
Portfolio which resulted in the Portfolio paying the Adviser an advisory fee at
the effective annual rate of .24% 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 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.
SUB-INVESTMENT ADVISERS
Lazard Asset Management, located at 30 Rockefeller Plaza, New York,
New York 10020, serves as the sub-investment adviser to the International Equity
Portfolio. Lazard, a division of Lazard Freres & Co. LLC, provides investment
management services to client discretionary accounts with assets totaling
approximately $67 billion as of June 30, 1998. Under the terms of the
sub-investment advisory agreement with Lazard, the Adviser has agreed to pay
Lazard a monthly fee at the annual rate of .50% of the value of the
International Equity Portfolio's average daily net assets.
Womack Asset Management, Inc., located at 2120 DG Plaza, Jackson,
Mississippi 39201, serves as the sub-investment adviser to the Small Cap
Opportunity Portfolio. Womack Management provides investment management services
to client discretionary accounts totaling approximately $300 million as of June
30, 1998. Under the terms of the sub-investment advisory agreement with Womack
Management, the Adviser has agreed to pay Womack Management a monthly fee at the
annual rate of .35% of the value of the Small Cap Opportunity Portfolio's
average daily net assets.
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services Limited Partnership, located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, serves as each Portfolio's administrator and
distributor. BISYS currently provides administrative services or
sub-administrative services to, and distributes the shares of, other investment
companies with over $200 billion in assets. BISYS is a wholly-owned subsidiary
of The BISYS Group, Inc.
Under its Administration Agreement with the Fund, BISYS 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, BISYS 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 BISYS a monthly fee at the annual rate of .10% of the value of the Prime
Money Market Portfolio's and U.S. Treasury Money Market Portfolio's average
daily net assets and .15% of the value of each other Portfolio's average daily
net assets. For the fiscal year ended December 31, 1997, BISYS waived a portion
of its administrative fee with respect to the Limited Duration U.S. Government
Portfolio which resulted in the Portfolio paying BISYS an administration fee at
the effective annual rate of .03% of the value of the Portfolio's average daily
net assets.
BISYS, as 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 BISYS 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 BISYS
for advertising, marketing and distributing Class A Shares (other than the Prime
Money Market and U.S. Treasury Money Market Portfolios) and Class B Shares
(other than the U.S. Treasury Money Market Portfolio which does not offer Class
B Shares) at an annual rate of .25% of the value of the average daily net assets
represented by Class A Shares and .75% of the value of the average daily net
assets represented by Class B Shares. Under the Distribution Plan, BISYS may
make payments to certain financial institutions, securities dealers and other
industry professionals that have entered into agreements with BISYS ("Service
Organizations") in respect of these services. BISYS determines the amounts to be
paid to Service Organizations. Service Organizations receive such fees in
respect of the average daily value of Class A Shares or Class B Shares owned by
their clients. From time to time, BISYS 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 BISYS under the
Distribution Plan for advertising, marketing and distributing are payable
without regard to actual expenses incurred.
SHAREHOLDER SERVICES PLAN
Under a shareholder services plan adopted by the Fund's Board of
Directors (the "Shareholder Services Plan"), each Portfolio pays BISYS for the
provision of certain services at an annual rate of .15% of the value of the
average daily net assets represented by Trust Shares and Class A Shares (.25% in
the case of Class A Shares of the Money Market Portfolios) and at an annual rate
of .25% of the value of the average daily net assets represented by Class B
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 the NASD Conduct Rules. Under
the Shareholder Services Plan, BISYS may make payments to certain Service
Organizations in respect of these services. BISYS determines the amounts to be
paid to Service Organizations. Service Organizations receive such fees in
respect of the average daily value of the relevant Class of shares owned by
their clients. From time to time, BISYS may defer or waive receipt of fees under
the Shareholder Services Plan while retaining the ability to be paid by the Fund
under the Plan thereafter. The fees payable to BISYS under the Shareholder
Services Plan are payable without regard to actual expenses incurred.
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 BISYS,
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, BISYS, any sub-investment adviser, 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
ALTERNATIVE PURCHASE METHODS
This Prospectus offers investors three methods of purchasing Portfolio
shares. Orders for purchases of Trust Shares, however, may be placed only for
certain eligible investors as described below. An investor who is not eligible
to purchase Trust Shares may choose from Class A Shares and Class B Shares the
Class of shares that best suits the investor's needs, given the amount of
purchase, the length of time the investor expects to hold the shares and any
other relevant circumstances. Class B Shares are not offered for the U.S.
Treasury Money Market Portfolio. Each Class A, Class B and Trust Share
represents an identical pro rata interest in a Portfolio's investment portfolio.
Class A Shares are sold at net asset value per share plus, for each
Portfolio, other than the Money Market Portfolios, an initial sales charge
imposed at the time of purchase, which may be reduced or waived for certain
purchases, as described below.
Class B Shares are sold at net asset value per share with no initial
sales charge at the time of purchase; as a result, the entire purchase price is
immediately invested in the Portfolio. Class B Shares are subject to a
contingent deferred sales charge ("CDSC"), which is assessed only if Class B
Shares are redeemed within six years of purchase. Shareholders investing
directly in Class B Shares of the Prime Money Market Portfolio, as opposed to
obtaining such shares through an exchange, will be required to participate in
the Prime Money Market Portfolio's Auto- Exchange Plan. In accordance with said
Plan, shareholders will be required to establish the time and amount of their
automatic exchanges such that all of the Prime Money Market Portfolio Class B
Shares so purchased will have been exchanged for Class B Shares of the other
Portfolios within two years of purchase. See "Shareholder Services and
Privileges--Auto-Exchange Plan." Approximately seven years after the date of
purchase, Class B Shares automatically will convert to Class A Shares, based on
the relative net asset values for shares of each such Class. See "How to Redeem
Shares--Class B Shares."
Trust Shares are sold at net asset value with no sales charge. Trust
Shares are sold exclusively 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 certain other affiliated and non-affiliated institutions
for their similar accounts maintained at such affiliates or institutions. These
accounts are referred to herein as "Fiduciary Accounts."
Class B Shares will receive lower per share dividends and at any given
time the performance of Class B should be expected to be lower than for shares
of each other Class because of the higher expenses borne by Class B. Similarly,
Class A Shares will receive lower per share dividends and the performance of
Class A should be expected to be lower than Trust Shares because of the higher
expenses borne by Class A. See "Fee Table."
An investor who is not eligible to purchase Trust Shares should
consider whether, during the anticipated life of the investor's investment in
the Portfolio, the accumulated distribution and service fees and CDSC on Class B
Shares prior to conversion would be less than the initial sales charge, if any,
on Class A Shares purchased at the same time, and to what extent, if any, such
differential would be offset by the return of Class A. Additionally, investors
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time might consider purchasing Class A
Shares because the accumulated continuing distribution fees on Class B Shares
may exceed the initial sales charge on Class A Shares during the life of the
investment.
GENERAL PURCHASE INFORMATION
Class A Shares and Class B 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 BISYS. Orders for
purchases of Trust Shares may be placed only for clients of the Adviser, its
affiliated and correspondent banks and other affiliated and non-affiliated
institutions (collectively, "Institutions") for their Fiduciary Accounts
maintained at such Institutions. When purchasing Portfolio shares, you must
specify the Portfolio and Class of shares being purchased. 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 Municipal Income
Portfolio be used as a vehicle for Keogh, IRA and other qualified plans, because
such plans are otherwise entitled to tax deferred benefits. The Fund reserves
the right to reject any purchase order 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.
The minimum initial investment for Trust Shares of each Portfolio is
$100,000, with no subsequent minimum investment. The Institution through which
Trust Shares are purchased 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.
Investors may purchase Trust Shares through procedures established by
their Institution and an investor should contact such entity directly for
appropriate instructions, as well as for information about conditions pertaining
to the account and any related fees. The investor's Institution will transmit an
investor's payment to the Fund and will supply the Fund with the required
information. It is the Institution's responsibility to transmit the order
properly on a timely basis.
The minimum initial investment for Class A Shares or Class B Shares of
each Portfolio is $1,000, and subsequent investments must be at least $100. The
minimum initial investment is $100 for IRAs, and subsequent investments for IRAs
must be at least $50. For full-time or part-time employees of the Adviser or any
of its affiliates, the minimum initial investment is $500, and subsequent
investments must be at least $50. For full-time or part-time employees of the
Adviser or any of its affiliates who elect to have a portion of their pay
directly deposited into their ISG Fund accounts, the minimum initial or
subsequent investment must be at least $25. 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
of shares made in connection with certain shareholder privileges may have
different minimum investment requirements. See "Shareholder Services and
Privileges."
You may purchase Class A Shares or Class B Shares by check or wire, or
through TeleTrade or, for the Money Market Portfolios only, 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.
For written orders for Class A Shares or Class B Shares, you may send
your initial or subsequent purchase order, together with the Fund's Account
Application for initial orders and your check or money order payable to: The ISG
Funds (Portfolio Name), to The ISG Funds, c/o BISYS Fund Services, Inc.,
Department L-1686, Columbus, Ohio 43260-1686. For subsequent investments, your
Fund account number should appear on the check or money order. All payments
should be made in U.S. dollars and, to avoid fees and delays, should be drawn
only on U.S. banks. A charge will be imposed if a check used for investment in
your account does not clear.
For wire orders for Class A Shares or Class B Shares, 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.
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.
The Fund determines net asset value per share for each Money Market
Portfolio as of 2:00 p.m., Eastern time, and for each other Portfolio as of the
close of trading on the floor of the New York Stock Exchange (currently 4:00
p.m., Eastern time), on each business day (which, as used herein, shall include
each day the New York Stock Exchange is open for business, except Columbus Day
and Veterans' Day), except on days where there are not sufficient changes in the
value of a Portfolio's investment securities to materially affect the
Portfolio's net asset value and no purchase orders or redemption requests have
been received. The New York Stock Exchange 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, Thanksgiving Day and
Christmas Day. Net asset value per share of each class is computed by dividing
the value of the Portfolio's net assets attributable to such class (i.e., the
value of its assets less liabilities) by the total number of Portfolio shares of
such class outstanding. Each Money Market Portfolio uses the amortized cost
method of valuing its investments. Each other 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.
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").
TERMS OF PURCHASE
ALL PORTFOLIOS, EXCEPT THE MONEY MARKET PORTFOLIOS--Portfolio shares
are sold on a continuous basis at the public offering price (i.e., net asset
value plus the applicable sales load, if any, set forth below) per share next
determined after an order in proper form is received by the Transfer Agent or
other entity authorized to receive orders on behalf of the Fund. Orders for the
purchase of Class A or Class B 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.
MONEY MARKET PORTFOLIOS ONLY--Portfolio shares of each Money Market
Portfolio 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.
If your purchase order for shares of a Money Market Portfolio is
received by the Transfer Agent by 2:00 p.m., Eastern time, on a business day,
shares will be purchased as of 2:00 p.m., Eastern time, on such business day if
payment is received in, or is converted into, Federal Funds by 4:00 p.m.,
Eastern time, by the Transfer Agent on that day. If your purchase order is
received after 2:00 p.m., Eastern time, or if payment in Federal Funds is not
received by 4:00 p.m., Eastern time, shares will be purchased as of 2:00 p.m.,
Eastern time, on the business day on which Federal Funds are available. If you
request transactions through the Adviser, its affiliates or a Service
Organization or Institution, 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.
TELETRADE--CLASS A AND CLASS B SHARES ONLY--You may purchase Class A or Class B
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 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. 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 shares by telephoning the Transfer
Agent at 1-800-852-0045.
AUTOMATICALLY THROUGH "SWEEP" PROGRAMS--CLASS A AND CLASS B SHARES OF THE MONEY
MARKET PORTFOLIOS ONLY--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
Class A Shares of either Money Market Portfolio or Class B Shares of the Prime
Money Market 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 an 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.
PURCHASE PRICE
CLASS A SHARES--The public offering price of Class A Shares of the
Government Income Portfolio, Limited Duration U.S. Government Portfolio and
Municipal Income Portfolio is the net asset value per share of that Class, plus,
except for shareholders who beneficially acquired Class A Shares of such
Portfolios in connection with the reorganization of a corresponding DG Investor
Series fund, a sales load as shown below:
<TABLE>
<CAPTION>
TOTAL SALES LOAD
AS A % OF AS A % OF NET DEALERS' REALLOWANCE
AMOUNT OF TRANSACTION OFFERING PRICE ASSET VALUE AS A % OF OFFERING PRICE
<S> <C> <C> <C>
Less than $50,000 3.00% 3.09% 2.70%
$50,000 to less than
$100,000 2.50% 2.56% 2.25%
$100,000 to less than
$250,000 2.00% 2.04% 1.80%
$250,000 to less than
$500,000 1.50% 1.52% 1.35%
$500,000 to less than
$1,000,000 1.00% 1.01% 0.90%
$1,000,000 or more -0- -0- -0-
</TABLE>
For shareholders who beneficially acquired Class A Shares of the Government
Income Portfolio, Limited Duration U.S. Government Portfolio and Municipal
Income Portfolio in connection with the reorganization of a corresponding DG
Investor Series fund, the public offering price of Class A Shares of such
Portfolios (until May 1, 2000) is the net asset value per share of that Class,
plus a sales load as shown below:
<TABLE>
<CAPTION>
TOTAL SALES LOAD
AS A % OF AS A % OF NET DEALERS' REALLOWANCE
AMOUNT OF TRANSACTION OFFERING PRICE ASSET VALUE AS A % OF OFFERING PRICE
<S> <C> <C> <C>
Less than $100,000 2.00% 2.04% 1.80%
$100,000 to less than 1.58%
$250,000 1.75% 1.78%
$250,000 to less than 1.35%
$500,000 1.50% 1.52%
$500,000 to less than 0.90%
$1,000,000 1.00% 1.01%
$1,000,000 or more -0- -0- -0-
</TABLE>
The public offering price of Class A Shares of the Large Cap Equity Portfolio,
Small Cap Opportunity Portfolio and International Equity Portfolio is the net
asset value per share of that Class, plus, except for shareholders who
beneficially acquired Class A Shares of such Portfolios in connection with the
reorganization of a corresponding DG Investor Series Fund, a sales load as shown
below:
<TABLE>
<CAPTION>
TOTAL SALES LOAD
AS A % OF AS A % OF NET DEALERS' REALLOWANCE
AMOUNT OF TRANSACTION OFFERING PRICE ASSET VALUE AS A % OF OFFERING PRICE
<S> <C> <C> <C>
Less than $50,000 4.75% 4.99% 4.28%
$50,000 to less than
$100,000 4.00% 4.17% 3.60%
$100,000 to less than
$250,000 3.25% 3.36% 2.93%
$250,000 to less than
$500,000 2.50% 2.56% 2.25%
$500,000 to less than
$1,000,000 1.75% 1.78% 1.58%
$1,000,000 or more -0- -0- -0-
</TABLE>
For shareholders who beneficially acquired Class A Shares of the International
Equity Portfolio in connection with the reorganization of a corresponding DG
Investor Series fund, the public offering price for Class A Shares of such
Portfolio (until May 1, 2000) is the net asset value per share of that Class.
Until May 1, 2000, no initial sales charge is imposed at the time of purchase of
Class A Shares of the International Equity Portfolio by such shareholders.
For shareholders who beneficially acquired Class A Shares of the Large Cap
Equity Portfolio and Small Cap Opportunity Portfolio in connection with the
reorganization of a corresponding DG Investor Series fund, the public offering
price of Class A Shares of such Portfolios (until May 1, 2000) is the net asset
value per share of that Class, plus a sales load as shown below:
<TABLE>
<CAPTION>
TOTAL SALES LOAD
AS A % OF AS A % OF NET DEALERS' REALLOWANCE
AMOUNT OF TRANSACTION OFFERING PRICE ASSET VALUE AS A % OF OFFERING PRICE
<S> <C> <C> <C>
Less than $100,000 3.50% 3.63% 3.15%
$100,000 to less than
$250,000 3.00% 3.09% 2.70%
$250,000 to less than
$500,000 2.50% 2.56% 2.25%
$500,000 to less than
$1,000,000 1.00% 1.01% 0.90%
$1,000,000 or more -0- -0- -0-
</TABLE>
Except for shareholders who beneficially acquired Class A Shares of a
Portfolio in connection with the reorganization of a corresponding DG Investor
Series fund, a CDSC of 1% will be assessed at the time of redemption of Class A
Shares purchased without an initial sales charge as part of an investment of at
least $1,000,000 and redeemed within one year after purchase. For shareholders
who beneficially acquired Class A Shares of a Portfolio in connection with such
reorganization and the Portfolio charges such shareholders an initial sales
charge, a CDSC of .50% will be assessed at the time of redemption of Class A
Shares purchased without an initial sales charge as part of an investment of at
least $1,000,000 (.25% will be assessed on purchases over $2,000,000) and
redeemed within one year after purchase. BISYS may pay Service Organizations an
amount up to 1% of the net asset value of Class A Shares purchased by their
clients that are subject to a CDSC. The terms contained in the section of the
Prospectus entitled "How to Redeem Shares--Contingent Deferred Sales Charge"
(other than the amount of the CDSC and time periods) are applicable to the Class
A Shares subject to a CDSC. Letter of Intent and Right of Accumulation apply to
such purchases of Class A Shares.
The dealer reallowance may be changed from time to time but will
remain the same for all dealers. From time to time, BISYS may make or allow
additional payments or promotional incentives in the form of cash or other
compensation to dealers that sell Portfolio shares. Such compensation may
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding the Portfolios, and/or other dealer-sponsored special
events. Compensation may include payment for travel expenses, including lodging,
to various locations for meetings or seminars of a business nature. Compensation
also may include the following types of non-cash compensation offered through
promotional contests: travel and lodging at vacation locations; tickets for
entertainment events; and merchandise. In some instances, these incentives may
be offered only to certain dealers who have sold or may sell significant amounts
of Portfolio shares. None of the aforementioned compensation is paid for by the
Fund, any Portfolio or its shareholders.
NO SALES LOAD--CLASS A SHARES--Class A 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 BISYS pertaining to the sale of
Portfolio shares, full-time employees of the Adviser or BISYS, their spouses and
minor children, current and retired directors of the Adviser or Deposit Guaranty
National Bank or any of their affiliates, and accounts opened by a bank, trust
company or thrift institution which is acting as a fiduciary and has entered
into an agreement with BISYS pertaining to the sale of Portfolio shares,
provided that they have furnished BISYS appropriate notification of such status
at the time of the investment and with such information as BISYS 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, BISYS 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--CLASS A SHARES--Reduced sales loads apply to
any purchase of Class A Shares by you and any related "purchaser" as defined in
the Statement of Additional Information, where the aggregate investment in Class
A Shares among any of the Portfolios offered with a sales load, including such
purchase, is $50,000 or more. If, for example, you previously purchased and
still hold Class A Shares of the Municipal Income Portfolio, with an aggregate
current market value of $40,000 and subsequently purchase Class A Shares of the
Municipal Income 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). Class A Shares of the other Portfolios may
be subject to different sales load schedules, as described above under "Purchase
Price--Class A Shares." All present holdings of Class A 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.
CLASS B SHARES--The public offering price for Class B Shares is the
net asset value per share of that Class. No initial sales charge is imposed at
the time of purchase. A CDSC is imposed, however, on certain redemptions of
Class B Shares as described under "How to Redeem Shares." BISYS compensates
certain Service Organizations for selling Class B Shares at the time of purchase
from BISYS' own assets. The proceeds of the CDSC and the distribution fee, in
part, are used to defray these expenses.
TRUST SHARES--The public offering price for Trust Shares is the net
asset value per share of that Class.
HOW TO REDEEM SHARES
GENERAL
An investor who has purchased Class A or Class B Shares through an
account with the Adviser, its affiliates or a Service Organization, or Trust
Shares through a Fiduciary Account, must redeem shares by following instructions
pertaining to such account. With respect to Class A and Class B Shares, if such
investor also is the shareholder of record of the account on the books of the
Transfer Agent, the investor may redeem shares as described below under
"Procedures." Such investors wishing to use the other redemption methods
described below must arrange with the Adviser, its affiliates or the Service
Organization for delivery of the required application(s), to the Transfer Agent.
It is the responsibility of the Adviser, its affiliates, or the Service
Organization, as the case may be, to transmit the redemption order to the
Transfer Agent and credit the investor's account with the redemption proceeds on
a timely basis. Other investors may redeem all or part of their Class A or Class
B Shares in accordance with the procedures described below.
When a request is received in proper form by the Transfer Agent or
other entity authorized to receive orders on behalf of the Fund, the Fund will
redeem the shares at the next determined net asset value as described below. If
you hold Portfolio shares of more than one Class, any request for redemption
must specify the Class of shares being redeemed. If you fail to specify the
Class of shares to be redeemed or if you own fewer shares of the Class than
specified to be redeemed, the redemption request may be delayed until the
Transfer Agent receives further instructions from you or your Service
Organization. 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 SHARES BY CHECK OR BY TELETRADE AND
SUBSEQUENTLY SUBMIT A REDEMPTION REQUEST BY MAIL, THE REDEMPTION PROCEEDS WILL
NOT BE TRANSMITTED TO YOU UNTIL BANK CLEARANCE OF THE CHECK OR TELETRADE PAYMENT
USED FOR INVESTMENT WHICH MAY TAKE UP TO SEVEN BUSINESS DAYS. THE FUND WILL NOT
TRANSMIT REDEMPTION PROCEEDS PURSUANT TO A REQUEST TO REDEEM SHARES BY WIRE FOR
A PERIOD OF UP TO SEVEN BUSINESS DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE
PURCHASE CHECK OR TELETRADE ORDER AGAINST WHICH SUCH REDEMPTION IS REQUESTED.
THIS PROCEDURE DOES NOT APPLY TO SHARES PURCHASED BY WIRE PAYMENT.
With respect to redemption requests for Trust Shares of a Money Market
Portfolio, if a request for redemption is received in proper form by the
Transfer Agent prior to 2:00 p.m., Eastern time, on a business day, the proceeds
of the redemption, if transfer by wire is requested, ordinarily will be made in
Federal Funds wired to the investor's account at his or her Institution on the
same day. To allow the Adviser to most effectively manage each Money Market
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 $1 million. The Fund reserves the right to wire
redemption proceeds up to seven days after receiving the redemption order if an
earlier payment could adversely affect the Fund. In making redemption requests
the names of the registered shareholders and their account numbers must be
supplied.
The Fund imposes no charges when shares are redeemed. Class B Shares
and, in certain cases, Class A Shares, however, are subject to a CDSC. The
Adviser, its affiliates, Service Organizations and Institutions may charge their
clients a 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 an investor's 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, for reasons other than market conditions,
and remains so during the notice period.
CONTINGENT DEFERRED SALES CHARGE
CLASS B SHARES--A CDSC payable to BISYS, as the Fund's distributor, is
imposed on any redemption of Class B Shares which reduces the current net asset
value of the investor's Class B Shares to an amount which is lower than the
dollar amount of all payments by the investor for the purchase of Class B Shares
of the relevant Portfolio held by the investor at the time of redemption. No
CDSC will be imposed to the extent that the net asset value of the Class B
Shares redeemed does not exceed (i) the current net asset value of Class B
Shares acquired through reinvestment of dividends or capital gain distributions,
plus (ii) increases in the net asset value of the investor's Class B Shares
above the dollar amount of all payments for the purchase of Class B Shares of
the Portfolio held by the investor at the time of redemption.
If the aggregate value of the Class B Shares redeemed has declined
below their original cost as a result of the Portfolio's performance, a CDSC may
be applied to the then-current net asset value rather than the purchase price.
In circumstances where the CDSC is imposed, the amount of the charge
will depend on the number of years from the time the investor purchased the
Class B Shares until the time of redemption of such shares. Solely for purposes
of determining the number of years from the time of any payment for the purchase
of Class B Shares, all payments during a month will be aggregated and deemed to
have been made on the first day of the month.
The following table sets forth the rates of the CDSC for Class B
Shares:
CDSC AS A % OF AMOUNT
YEAR SINCE PURCHASE PAYMENT WAS MADE INVESTED OR REDEMPTION PROCEEDS
First........................................ 4.00
Second....................................... 3.00
Third........................................ 3.00
Fourth....................................... 2.00
Fifth........................................ 2.00
Sixth........................................ 1.00
Seventh...................................... 0.00
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
Therefore, it will be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in net asset value of
Class B Shares above the total amount of payments for the purchase of Class B
Shares made during the preceding six years; then of amounts representing the
cost of shares purchased six years prior to the redemption; and finally, of
amounts representing the cost of shares held for the longest period of time
within the applicable six-year period.
For example, assume an investor purchased 100 shares at $10 per share
for a cost of $1,000. Subsequently, the shareholder acquired 5 additional shares
through dividend reinvestment. During the second year after the purchase the
investor decided to redeem $500 of his or her investment. Assuming at the time
of the redemption the net asset value had appreciated to $12 per share, the
value of the investor's shares would be $1,260 (105 shares at $12 per share).
The CDSC would not be applied to the value of the reinvested dividend shares and
the amount which represents appreciation ($260). Therefore, $240 of the $500
redemption proceeds ($500 minus $260) would be charged at a rate of 3% (the
applicable rate in the second year after purchase) for a total CDSC of $7.20.
BISYS compensates certain Service Organizations for selling Class B
Shares at the time of purchase from BISYS' own assets. The proceeds of the CDSC
and distribution fee, in part, are used to defray these expenses.
WAIVER OF CDSC--The CDSC may be waived in connection with (a)
redemptions made within one year after the death or disability, as defined in
Section 72(m)(7) of the Code, of the shareholder, (b) redemptions by
participants in qualified or non-qualified employee benefit plans or other
programs (such as 401(k), 403(b)(7), 457 and Keogh plans) sponsored by the
Adviser, BISYS or their affiliates or subsidiaries or which make direct
investments in the Portfolio by means of electronic data transmission, (c)
redemptions as a result of a combination of any investment company with the
Portfolio by merger, acquisition of assets or otherwise, (d) a distribution
following retirement under a tax-deferred retirement plan or upon attaining age
70- 1/2 in the case of an IRA or Keogh plan or custodial account pursuant to
Section 403(b) of the Code, and (e) redemptions pursuant to the Automatic
Withdrawal Plan, as described in the Portfolios' Prospectus. Any Portfolio
shares subject to a CDSC which were purchased prior to the termination of such
waiver will have the CDSC waived as provided in the Portfolios' Prospectus at
the time of the purchase of such shares.
CONVERSION OF CLASS B SHARES--Approximately seven years after the date
of purchase, Class B Shares automatically will convert to Class A Shares, based
on the relative net asset values for shares of each such Class, and will no
longer be subject to the distribution fee and shareholder services fee charged
Class B Shares, but will be subject to the distribution fee charged Class A
Shares. At that time, Class B Shares that have been acquired through the
reinvestment of dividends and distributions ("Dividend Shares") will be
converted in the proportion that a shareholder's Class B Shares (other than
Dividend Shares) converting to Class A Shares bears to the total Class B Shares
then held by the shareholder which were not acquired through the reinvestment of
dividends and distributions.
PROCEDURES
WRITTEN ORDERS--CLASS A AND CLASS B SHARES--Written requests for
redemption, indicating the name of the Portfolio and that Class A or Class B
Shares are being redeemed, with signature appropriately guaranteed, if required,
and otherwise in accordance with the requirements listed below, should be mailed
to The ISG Funds, c/o BISYS Fund Services, Inc., Department L-1686, Columbus,
Ohio 43260-1686.
WIRE REDEMPTION PRIVILEGE--CLASS A AND CLASS B SHARES--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--CLASS A AND CLASS B SHARES--You may redeem shares (minimum
$500, maximum $50,000 per transaction) 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 shares by telephoning the Transfer Agent at
1-800-852-0045.
AUTOMATICALLY THROUGH "SWEEP" PROGRAMS--CLASS A AND CLASS B SHARES OF
THE MONEY MARKET PORTFOLIOS ONLY--See page 23.
REDEMPTION REQUIREMENTS
Written redemption instructions, indicating the name of the Portfolio
and that Class A or Class B 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 or Institution, 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 SERVICES AND PRIVILEGES
The services and privileges described under this heading may not be
available to certain clients of the Adviser, its affiliates, certain Service
Organizations and Institutions, and the Adviser, its affiliates, some Service
Organizations and Institutions may impose certain conditions on their clients
which are different from those described in this Prospectus. Such investors
should consult the Adviser, its affiliates, their Service Organization or
Institution in this regard.
EXCHANGE PRIVILEGE
The Exchange Privilege enables you to purchase, in exchange for shares
of a Portfolio, shares of the same Class of another Portfolio in the ISG Family
of Funds, 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 or Institution where you maintain your account, your Service
Organization or BISYS 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 or
Institution 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,
the investor's Institution or BISYS. 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, which may be waived or reduced as described below, may be
charged with respect to exchanges of Class A Shares. No CDSC will be imposed on
Class B Shares at the time of an exchange; however, shares acquired through an
exchange will be subject to the CDSC applicable to the exchanged or acquired
shares. The CDSC applicable on redemption of the acquired shares will be
calculated from the date of the initial purchase of the Class B Shares
exchanged. If you are exchanging Class A Shares 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 administrative 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.
AUTO-EXCHANGE PLAN--PRIME MONEY MARKET PORTFOLIO ONLY
The Auto-Exchange Plan enables holders of Class B Shares of the Prime
Money Market Portfolio to make regular monthly or quarterly exchanges into Class
B Shares of another Portfolio. The Transfer Agent will exchange automatically
Class B Shares of the Prime Money Market Portfolio in the amount specified
(subject to applicable minimums) according to the schedule the investor has
selected. Shares will be exchanged at the then-current net asset value. No CDSC
will be imposed at the time of the exchange; however, the Class B Shares
acquired through an exchange will be subject on redemption to the applicable
CDSC, which will be calculated from the date of the initial purchase of the
Class B Shares exchanged.
Shareholders investing directly in Class B Shares of the Prime Money
Market Portfolio, as opposed to through an exchange, will be required to
participate in the Auto-Exchange Plan and to establish the time and amount of
their automatic exchanges such that all of the Class B Shares of the Prime Money
Market Portfolio so purchased will have been exchanged for Class B Shares of the
other Portfolios within two years of purchase.
To participate in the Auto-Exchange Plan, shareholders must complete
the appropriate section of the Account Application. The Auto-Exchange Plan may
be modified or canceled by the Fund or BISYS at any time. You may modify your
instructions or cancel your participation in the Auto-Exchange Plan at any time
by mailing written notification to The ISG Funds, c/o BISYS Fund Services, Inc.,
Department L-1686, Columbus, Ohio 43260-1686.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan permits you to purchase Class A or Class
B 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,
Class A or Class B 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 Class A or Class B 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 BISYS. 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 ISG 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 Class A
or Class B Shares of another Portfolio of which you are a shareholder. Class A
or Class B Shares of the other Portfolio will be purchased at the then-current
net asset value. 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), with respect to Class A or Class B
Shares, 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.
No CDSC with respect to Class B Shares will be imposed on withdrawals
made under the Automatic Withdrawal Plan, provided that the amounts withdrawn
under the plan do not exceed on an annual basis 10% of the account value at the
time the shareholder elects to participate in the Automatic Withdrawal Plan.
Withdrawals with respect to Class B Shares under the Automatic Withdrawal Plan
that exceed on an annual basis 10% of the value of the shareholder's account
will be subject to a CDSC on the amounts exceeding 10% of the initial account
value. Purchases of additional Class A Shares where the sales load is imposed
concurrently with withdrawals of Class A Shares generally are undesirable.
REINSTATEMENT PRIVILEGE
The Reinstatement Privilege enables investors who have redeemed Class
A or Class B Shares to repurchase, within 90 days of such redemption, Class A or
Class B 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. Upon reinstatement
for Class B Shares, the investor's account will be credited with an amount equal
to the CDSC previously paid upon redemption of the Class B Shares reinvested. 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 BISYS or certain
Service Organizations, you become eligible for the reduced sales load applicable
to the total number of Class A 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 Class A 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 Class A Shares, you must
indicate your intention to do so under a Letter of Intent. Purchases pursuant to
a Letter of Intent will be made at the then-current net asset value plus the
applicable sales load in effect at the time such Letter of Intent was executed.
DIVIDENDS, DISTRIBUTIONS AND TAXES
INTERNATIONAL EQUITY PORTFOLIO--Declares and pays dividends from net
investment income and distributes any net capital gain annually.
LARGE CAP EQUITY AND SMALL CAP OPPORTUNITY PORTFOLIOS--Declare and pay
dividends from net investment income quarterly and distribute any net capital
gain annually.
MUNICIPAL INCOME AND GOVERNMENT INCOME PORTFOLIOS--Declare and pay
dividends from net investment income monthly and distribute any net capital gain
annually.
LIMITED DURATION U.S. GOVERNMENT, PRIME MONEY MARKET AND U.S. TREASURY
MONEY MARKET PORTFOLIOS--Declare dividends from net investment income on each
business day. Dividends usually are paid on the last calendar day of each month.
The earnings for Saturdays, Sundays and holidays are declared as dividends on
the preceding business day. Shares begin accruing income dividends on the day
the purchase order is effective.
APPLICABLE TO ALL PORTFOLIOS (EXCEPT WHERE INDICATED)--Each Portfolio
will make distributions from net realized securities gains, if any, once a year,
but may make distributions on a more frequent basis to comply with the
distribution requirements of the Code, in all events in a manner consistent with
the provisions of the 1940 Act. No Portfolio will make distributions from net
realized securities gains unless capital loss carryovers, if any, have been
utilized or have expired. Dividends are automatically reinvested in additional
Portfolio shares of the same class from which they were paid at net asset value,
unless payment in cash is requested. If all shares in an account are redeemed at
any time, all dividends to which the shareholder is entitled will be paid along
with the proceeds of the redemption. Dividends paid by each class of shares of a
Portfolio will be calculated at the same time and in the same manner and will be
of the same amount, except that the expenses attributable solely to a class will
be borne exclusively by such class.
If you elect to receive distributions in cash and your distribution
checks (1) are returned to the Fund marked "undeliverable" or (2) remain
uncashed for six months, your cash election will be changed automatically and
your future dividend and capital gains distributions will be reinvested in
Portfolio shares at the net asset value determined as of the date of payment of
the distribution. In addition, any such undeliverable checks or checks that
remain uncashed for six months will be canceled and will be reinvested in
Portfolio shares at the net asset value determined as of the date of
cancellation.
Dividends and distributions of the Municipal Income 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 income tax.
Dividends paid by each other 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 for Federal income tax purposes, whether received in cash or 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 an
individual generally will be taxed on his or her net capital gain at a maximum
rate of 20% with respect to capital gains from securities held for more than 12
months. 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. The Fund will 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.
Although all or a substantial portion of the dividends paid by the
Municipal Income Portfolio may be excluded by shareholders of such Portfolio
from their gross income for Federal income tax purposes, the Municipal Income
Portfolio may purchase specified private activity bonds, the interest from which
may be (i) a preference item for purposes of the alternative minimum tax, or
(ii) a factor in determining the extent to which a shareholder's Social Security
benefits are taxable. If the Municipal Income 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 Class A Shares if an investor exchanges his or her Class A 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 Class A 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 Class A 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, IRS individual taxpayer
identification 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.
The Adviser believes that each of the Limited Duration U.S. Government
Portfolio, Prime Money Market Portfolio and U.S. Treasury Money Market Portfolio
has qualified for the fiscal year ended December 31, 1997 as a "regulated
investment company" under the Code. Each of these Portfolios intends to continue
to so qualify if such qualification is in the best interests of its
shareholders. The Adviser expects that each other 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
LARGE CAP EQUITY, SMALL CAP OPPORTUNITY AND INTERNATIONAL EQUITY
PORTFOLIOS--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 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 a 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 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 (or maximum
offering price in the case of Class A Shares) 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 for Class A Shares or without giving effect to any applicable CDSC
at the end of the period for Class B Shares. Calculations based on the net asset
value per share do not reflect the deduction of the applicable sales charge,
which, if reflected, would reduce the performance quoted.
MUNICIPAL INCOME, GOVERNMENT INCOME AND LIMITED DURATION U.S.
GOVERNMENT 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 Municipal Income 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.
PRIME MONEY MARKET AND U.S. TREASURY MONEY MARKET PORTFOLIOS--From
time to time, each Money Market 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.
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 payable by Class B Shares, absent fee waivers or
expense reimbursement, are higher than those payable by Class A Shares and Trust
Shares. As a result, at any given time, the performance of Class B Shares should
be expected to be lower than that of Class A Shares and the performance of Class
A Shares and Class B Shares should be expected to be lower than that of Trust
Shares. 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., Bank Rate MonitorTM, IBC Money
Fund Averages ReportTM, Bond Buyer's 20-Bond Index, Moody's Bond Survey Bond
Index, Lehman Brothers Aggregate Bond Index and components thereof, S&P 500
Index, the Dow Jones Industrial Average, CDA/Wiesenberger Investment Companies
Service, Mutual Fund Values; Mutual Fund Forecaster, Mutual Fund Investing and
other industry publications.
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 25 billion shares of Common Stock
(with 1 billion 250 million shares allocated to the Prime Money Market Portfolio
and 750 million shares allocated to each other Portfolio), par value $.001 per
share. Each Portfolio's shares are classified into Class A Shares (250 million,
500 million in the case of each Money Market Portfolio), Class B Shares (250
million, except for U.S. Treasury Money Market Portfolio which does not offer
Class B Shares) and Trust Shares (250 million, 500 million in the case of each
Money Market Portfolio). 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, 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. 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. From time to time, other portfolios may be established
and sold pursuant to other offering documents. The Fund's corporate Charter
established the Portfolios under the name AmeriStar.
To date, 25 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.
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, except the Limited Duration U.S.
Government Portfolio and U.S. Treasury Money Market 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--Foreign Securities Risk."
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, except the Limited Duration U.S. Government Portfolio and U.S.
Treasury Money Market Portfolio, may invest in commercial paper, which consists
of short-term, unsecured promissory notes issued to finance short-term credit
needs. The commercial paper purchased by the Portfolios will consist only of
direct obligations which, at the time of their purchase, are (a) rated not lower
than Prime-1 by Moody's, A-1 by S&P, F-1 by Fitch or Duff-1 by Duff, or (b)
issued by companies having an outstanding unsecured debt issue currently rated
not lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated,
determined by the Adviser to be of comparable quality to those rated obligations
which may be purchased by such Portfolio.
REPURCHASE AGREEMENTS--Each Portfolio may enter into repurchase
agreements, which involve the acquisition by a Portfolio of an underlying debt
instrument, subject to an obligation of the seller to repurchase, and such
Portfolio to resell, the instrument at a fixed price usually not more than one
week after its purchase. Certain costs may be incurred by a Portfolio in
connection with the sale of the securities if the seller does not repurchase
them in accordance with the repurchase agreement. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the securities,
realization on the securities by a Portfolio may be delayed or limited. Each
Portfolio will consider on an ongoing basis the creditworthiness of the
institutions with which it enters into repurchase agreements.
ZERO COUPON AND STRIPPED SECURITIES--Each Portfolio may invest in zero
coupon U.S. Treasury securities, which are Treasury Notes and Bonds that have
been stripped of their unmatured interest coupons, the coupons themselves and
receipts or certificates representing interests in such stripped debt
obligations and coupons. Each Portfolio, except the Limited Duration U.S.
Government Portfolio, Prime Money Market Portfolio and U.S. Treasury Money
Market 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.
FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL
ENTITIES--Each Portfolio, except the Limited Duration U.S. Government Portfolio
and U.S. Treasury Money Market 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, except the
Limited Duration U.S. Government Portfolio and U.S. Treasury Money Market
Portfolio, may purchase floating and variable rate demand notes and bonds, which
are obligations ordinarily having stated maturities in excess of 397 days, 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.
NOTES--Each Portfolio, except the Limited Duration U.S. Government
Portfolio and U.S. Treasury Money Market Portfolio, may purchase unsecured
promissory notes ("Notes") which are not readily marketable and have not been
registered under the Securities Act of 1933, as amended, provided such
investments are consistent with its investment objective. No Portfolio will
invest more than 10% of its net assets in such Notes and in other securities
that are illiquid.
PARTICIPATION INTERESTS AND TRUST RECEIPTS--Each Portfolio, except the
Limited Duration U.S. Government Portfolio and U.S. Treasury Money Market
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. A participation
interest or receipt gives the Portfolio an undivided interest in the security in
the proportion that the 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 397 days or
less. If the instrument is unrated, or has been given a rating below that which
is permissible for purchase by the 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 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
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 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 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 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
Portfolio will have the unconditional right to demand payment, on not more than
seven days' notice, for all or any part of the Portfolio's 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.
GUARANTEED INVESTMENT CONTRACTS--Each Portfolio, except the Limited
Duration U.S. Government Portfolio and U.S. Treasury Money Market Portfolio, may
make limited investments in guaranteed investment contracts ("GICs") issued by
highly rated U.S. insurance companies. Pursuant to such a contract, the
Portfolio would make cash contributions to a deposit fund of the insurance
company's general account. The insurance company would then credit to the
Portfolio on a monthly basis interest which is based on an index (in most cases
the Salomon Smith Barney CD Index), but is guaranteed not to be less than a
certain minimum rate. The Prime Money Market Portfolio currently does not expect
to invest more than 5% of its net assets in GICs.
ILLIQUID SECURITIES--Each Portfolio may invest up to 15% (10% in the
case of the Limited Duration U.S. Government Portfolio and each Money Market
Portfolio) 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--(Government Income Portfolio)
Mortgage-related securities are a form of Derivative collateralized by pools of
commercial or residential mortgages. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations. These securities may include complex instruments such as
collateralized mortgage obligations, stripped mortgage-backed securities,
mortgage pass-through securities, interests in real estate mortgage investment
conduits ("REMICs"), adjustable rate mortgages, real estate investment trusts
("REITs"), including debt and preferred stock issued by REITs, as well as other
real estate-related securities. The mortgage-related securities in which the
Portfolio may invest include those with fixed, floating or variable interest
rates, those with interest rates that change based on multiples of changes in a
specified index of interest rates and those with interest rates that change
inversely to changes in interest rates, as well as those that do not bear
interest. 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).
Mortgage-related securities are subject to credit risks associated
with the performance of the underlying mortgage properties. Adverse changes in
economic conditions and circumstances are more likely to have an adverse impact
on mortgage-related securities secured by loans on certain types of commercial
properties than on those secured by loans on residential properties. In
addition, these securities are subject to prepayment risk, although commercial
mortgages typically have shorter maturities than residential mortgages and
prepayment protection features. In certain instances, the credit risk associated
with mortgage-related securities can be reduced by third party guarantees or
other forms of credit support. Improved credit risk does not reduce prepayment
risk which is unrelated to the rating assigned to the mortgage-related security.
Prepayment risk can lead to fluctuations in value of the mortgage-related
security which may be pronounced. If a mortgage-related security is purchased 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. Certain mortgage-related
securities that may be purchased by the Portfolio, such as inverse floating rate
collateralized mortgage obligations, have coupons that move inversely to a
multiple of a specific index which may result in a form of leverage. As with
other interest-bearing securities, the prices of certain mortgage-related
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 certain 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. During periods of rapidly rising interest rates, prepayments of
mortgage-related securities may occur at slower than expected rates. Slower
prepayments effectively may lengthen a mortgage-related security's expected
maturity which generally would cause the value of such security to fluctuate
more widely in response to changes in interest rates. Were the prepayments on
the Portfolio's mortgage-related securities to decrease broadly, the Portfolio's
effective duration, and thus sensitivity to interest rate fluctuations, would
increase. For further discussion concerning the investment considerations
involved, see "Description of the Portfolios--Investment Considerations and Risk
Factors--Fixed-Income Securities Risk" and "Illiquid Securities" above and
"Investment Objectives and Management Policies--Portfolio
Securities--Mortgage-Related Securities" in the Portfolio's Statement of
Additional Information.
ASSET-BACKED SECURITIES--(Government Income Portfolio and Prime Money
Market 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.
The Prime Money Market Portfolio may purchase asset-backed securities
issued by special purpose entities whose primary assets consist of a pool of
mortgages, loans, receivables or other assets. Payment of principal and interest
may depend largely on the cash flows generated by the assets backing the
securities and, in certain cases, supported by letters of credit, surety bonds
or other forms of credit or liquidity enhancements. The value of asset-backed
securities also may be affected by the creditworthiness of the servicing agent
for the pool of assets, the originator of the loans or receivables or the
financial institution providing the credit support.
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--(Large Cap Equity Portfolio, Small Cap
Opportunity Portfolio and International Equity Portfolio) Each of these
Portfolios' assets may be invested in the securities of foreign issuers in the
form of American Depositary Receipts ("ADRs"). These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a United States
bank or trust company which evidence ownership of underlying securities issued
by a foreign corporation. Generally, ADRs in registered form are designed for
use in the United States securities markets. Each of these Portfolios may invest
in ADRs through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the underlying security and a depositary,
whereas a depositary may establish an unsponsored facility without participation
by the issuer of the deposited security. Holders of unsponsored depositary
receipts generally bear all the costs of such facilities and the depositary of
an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited security or
to pass through voting rights to the holders of such receipts in respect of the
deposited securities.
CONVERTIBLE SECURITIES--(Large Cap Equity Portfolio, Small Cap
Opportunity Portfolio and International Equity 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--(Large Cap Equity Portfolio, Small Cap Opportunity Portfolio
and International Equity Portfolio) Each of these Portfolios 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--(Municipal Income Portfolio and, to a limited
extent, Prime Money Market Portfolio) 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. Dividends received by
shareholders of the Prime Money Market Portfolio which are attributable to
interest income received by it from Municipal Obligations generally will be
subject to Federal income tax. The Prime Money Market Portfolio currently
intends to invest no more than 5% of its assets in Municipal Obligations.
However, this percentage may be varied from time to time without shareholder
approval.
TENDER OPTION BONDS--(Municipal Income 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.
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.
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
INVESTMENT TECHNIQUES AND PORTFOLIO TURNOVER RATES--Each Portfolio may
engage in various investment techniques the use of which involves risk.
Investors in the Municipal Income Portfolio should be aware that the use of
these techniques may give rise to taxable income. 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. No Portfolio will consider portfolio turnover to be a limiting factor in
making investment decisions. Under normal market conditions, the portfolio
turnover rate for the current fiscal year is anticipated to be less than 200%
for the Small Cap Opportunity Portfolio and International Equity Portfolio, and
is anticipated to be less than 100% for the Large Cap Equity Portfolio,
Municipal Income Portfolio, Government Income Portfolio and Limited Duration
U.S. Government Portfolio. A portfolio turnover rate of 100% is equivalent to
the Portfolio buying and selling all of the securities in its portfolio once in
the course of a year. Higher portfolio turnover rates are likely to result in
comparatively greater brokerage commissions or transaction costs. In addition,
short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income. Each Money Market Portfolio will have a high
portfolio turnover, but that should not adversely affect the Portfolio since it
usually does not pay brokerage commissions when it purchases short-term debt
obligations.
CALL AND PUT OPTIONS ON SPECIFIED SECURITIES--(Large Cap Equity
Portfolio, Small Cap Opportunity Portfolio, Government Income Portfolio and
International Equity Portfolio) Each of these Portfolios may purchase call and
put options in respect of specific securities in which the Portfolio may invest
and write covered call and put option contracts. 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,
permissible liquid assets are placed in a segregated account 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 its 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.
STOCK INDEX OPTIONS--(Large Cap Equity Portfolio, Small Cap
Opportunity Portfolio and International Equity Portfolio) Each of these
Portfolios 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 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 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 Portfolio writes an option on a stock index, it will place in
a segregated account permissible liquid assets 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--(Large Cap Equity Portfolio, Small
Cap Opportunity Portfolio and International Equity Portfolio) None 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, none 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
permissible liquid assets 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--(Large Cap
Equity Portfolio, Small Cap Opportunity Portfolio and International Equity
Portfolio) Each of these Portfolios 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, each of these Portfolios 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.
Each of these Portfolios may use index futures as a substitute for a
comparable market position in the underlying securities.
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 331/3% 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.
FOREIGN CURRENCY TRANSACTIONS--(International Equity Portfolio)
Foreign currency transactions may be entered into for a variety of purposes,
including: to fix in U.S. dollars, between trade and settlement date, the value
of a security the Portfolio has agreed to buy or sell; to hedge the U.S. dollar
value of securities the Portfolio already owns, particularly if it expects a
decrease in the value of the currency in which the foreign security is
denominated; or to gain exposure to the foreign currency in an attempt to
realize gains.
Foreign currency transactions may involve, for example, the
Portfolio's purchase of foreign currencies for U.S. dollars or the maintenance
of short positions in foreign currencies, which would involve the Portfolio
agreeing to exchange an amount of a currency it did not currently own for
another currency at a future date in anticipation of a decline in the value of
the currency sold relative to the currency the Portfolio contracted to receive
in the exchange. The Portfolio's success in these transactions will depend
principally on Lazard's ability to predict accurately the future exchange rates
between foreign currencies and the U.S. dollar.
SHORT-SELLING--(International Equity Portfolio and, to a limited
extent, Limited Duration U.S. Government Portfolio) In these transactions the
Portfolio sells a security it does not own in anticipation of a decline in the
market value of the security. To complete the transaction, the Portfolio must
borrow the security to make delivery to the buyer. The Portfolio is obligated to
replace the security borrowed by purchasing it subsequently at the market price
at the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Portfolio, which would result in a
loss or gain, respectively. Securities will not 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. The Limited
Duration U.S. Government Portfolio will limit its short sales to those that are
"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 either of these Portfolios have more than
15% of the value of its net assets in deposits on short sales against the box.
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 331/3% 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 331/3%
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. In addition, each
Money Market Portfolio may borrow for investment purposes on a secured basis
through entering into reverse repurchase agreements as described below.
REVERSE REPURCHASE AGREEMENTS--(Money Market Portfolios only) The
Prime Money Market Portfolio and U.S. Treasury Money Market 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 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 of the Prime Money Market Portfolio and U.S.
Treasury Money Market 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 such Portfolio's investment objective and
management policies.
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>
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THE INFINITY MUTUAL FUNDS, INC.
ISG Funds
LARGE CAP EQUITY PORTFOLIO
SMALL CAP OPPORTUNITY PORTFOLIO
MID CAP PORTFOLIO
EQUITY VALUE PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
MUNICIPAL INCOME PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
TAX FREE MONEY MARKET PORTFOLIO
GOVERNMENT MONEY MARKET PORTFOLIO
CLASS A SHARES, CLASS B SHARES AND TRUST SHARES
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 16, 1998
-------------------------------------------------------------------
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus for
the ISG Funds listed above (each, a "Portfolio" and collectively, the
"Portfolios") of The Infinity Mutual Funds, Inc. (the "Fund"), dated October __,
1998, as each may be revised from time to time. To obtain a copy of the relevant
Prospectus, please write to the Fund at 3435 Stelzer Road, Columbus, Ohio
43219-3035. This Statement of Additional Information relates only to the
Portfolios and not to any of the Fund's other portfolios.
First American National Bank (the "Adviser") serves as each Portfolio's
investment adviser.
BISYS Fund Services Limited Partnership ("BISYS") serves as each
Portfolio's administrator and distributor.
<PAGE>
TABLE OF CONTENTS
Page
Investment Objectives and Management Policies............ B-3
Management of the Fund................................... B-22
Management Arrangements.................................. B-24
Purchase and Redemption of Shares........................ B-29
Determination of Net Asset Value......................... B-31
Performance Information.................................. B-34
Dividends, Distributions and Taxes....................... B-36
Portfolio Transactions................................... B-40
Information About the Portfolios......................... B-41
Custodian, Transfer and Dividend Disbursing
Agent, Counsel and Independent Auditors................ B-42
Financial Statements..................................... B-42
Appendix................................................. B-43
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION
WITH THE SECTIONS IN THE PROSPECTUS ENTITLED "DESCRIPTION OF THE PORTFOLIOS" AND
"APPENDIX."
PORTFOLIO SECURITIES
BANK OBLIGATIONS. (All Portfolios) Domestic commercial banks organized
under Federal law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by the Portfolio are insured by the Bank Insurance Fund
administered by the FDIC (although such insurance may not be of material benefit
to the Portfolio, depending upon the principal amount of the CDs of each bank
held by the Portfolio) and are subject to Federal examination and to a
substantial body of Federal law and regulation. As a result of Federal and state
laws and regulations, domestic branches of domestic banks, among other things,
are generally required to maintain specified levels of reserves, and are subject
to other supervision and regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic branches of foreign banks, such as
CDs and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation or governmental regulation. Such obligations are subject to different
risks than are those of domestic banks. These risks include foreign economic and
political developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. Foreign
branches and subsidiaries are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank. If a domestic bank with deposits insured by the FDIC
becomes insolvent, unsecured deposits and other general obligations of such
bank's foreign branches will be subordinated to the receivership expenses of the
FDIC and such bank's domestic deposits and would be subject to the loss of
principal to a greater extent than such bank's domestic branch deposits.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. In addition, Federal branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may be required to: (1) pledge to the regulator, by depositing assets
with a designated bank within the state, a certain percentage of their assets as
fixed from time to time by the appropriate regulatory authority; and (2)
maintain assets within the state in an amount equal to a specified percentage of
the aggregate amount of liabilities of the foreign bank payable at or through
all of its agencies or branches within the state. The deposits of Federal and
State Branches generally must be insured by the FDIC if such branches take
deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, or by domestic branches of foreign banks, the Adviser carefully
evaluates such investments on a case-by-case basis.
Each Portfolio may purchase CDs issued by banks, savings and loan
associations and similar thrift institutions with less than $1 billion in
assets, which are members of the FDIC, provided the Portfolio purchases any such
CD in a principal amount of not more than $100,000, which amount would be fully
insured by the Bank Insurance Fund or the Savings Association Insurance Fund
administered by the FDIC. Interest payments on such a CD are not insured by the
FDIC. No Portfolio will own more than one such CD per such issuer.
Each Portfolio may invest in short-term U.S. dollar denominated
corporate obligations that are originated, negotiated and structured by a
syndicate of lenders ("Co-Lenders") consisting of commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions one or more of which administers the security on behalf of the
syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third
parties called "Participants." The Portfolio may invest in such securities
either by participating as a Co-Lender at origination or by acquiring an
interest in the security from a Co-Lender or a Participant (collectively,
"participation interests"). Co-Lenders and Participants interposed between the
Fund and the corporate borrower (the "Borrower"), together with Agent Banks, are
referred herein as "Intermediate Participants." The Portfolio also may purchase
a participation interest in a portion of the rights of an Intermediate
Participant, which would not establish any direct relationship between the
Portfolio and the Borrower. In such cases, the Portfolio would be required to
rely on the Intermediate Participant that sold the participation interest not
only for the enforcement of the Portfolio's rights against the Borrower but also
for the receipt and processing of payments due to the Portfolio under the
security. Because it may be necessary to assert through an Intermediate
Participant such rights as may exist against the Borrower, in the event the
Borrower fails to pay principal and interest when due, the Portfolio may be
subject to delays, expenses and risks that are greater than those that would be
involved if the Portfolio could enforce its rights directly against the
Borrower. Moreover, under the terms of a participation interest, the Portfolio
may be regarded as a creditor of the Intermediate Participant (rather than of
the Borrower), so that the Portfolio also may be subject to the risk that the
Intermediate Participant may become insolvent. Similar risks may arise with
respect to the Agent Bank if, for example, assets held by the Agent Bank for the
benefit of the Portfolio were determined by the appropriate regulatory authority
or court to be subject to the claims of the Agent Bank's creditors. In such
cases, the Portfolio might incur certain costs and delays in realizing payment
in connection with the participation interest or suffer a loss of principal
and/or interest. Further, in the event of the bankruptcy or insolvency of the
Borrower, the obligation of the Borrower to repay the loan may be subject to
certain defenses that can be asserted by such Borrower as a result of improper
conduct by the Agent Bank or Intermediate Participant.
REPURCHASE AGREEMENTS. (All Portfolios) Each Portfolio may enter into
repurchase agreements. The Fund's custodian or sub-custodian employed in
connection with third-party repurchase transactions will have custody of, and
will hold in a segregated account, securities acquired by a Portfolio under a
repurchase agreement. In connection with its third-party repurchase
transactions, the Fund will employ only eligible sub-custodians that meet the
requirements set forth in Section 17(f) of the Investment Company Act of 1940,
as amended (the "1940 Act"). Repurchase agreements are considered by the staff
of the Securities and Exchange Commission to be loans by the Portfolio entering
into them. In an attempt to reduce the risk of incurring a loss on a repurchase
agreement, each Portfolio will enter into repurchase agreements only with
registered or unregistered securities dealers or banks with total assets in
excess of one billion dollars or primary government securities dealers reporting
to the Federal Reserve Bank of New York, with respect to securities of the type
in which such Portfolio may invest or government securities regardless of their
remaining maturities, and will require that additional securities be deposited
with it if the value of the securities purchased should decrease below resale
price. The Adviser will monitor on an ongoing basis the value of the collateral
to assure that it always equals or exceeds the repurchase price. Each Portfolio
will consider on an ongoing basis the creditworthiness of the institutions with
which it enters into repurchase agreements.
ILLIQUID SECURITIES. (All Portfolios) Each Portfolio may invest up to
10% of the value of its net assets in illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Portfolio has valued the securities and includes, among other things,
restricted securities other than those the Adviser has determined to be liquid
pursuant to guidelines established by the Fund's Board and repurchase agreements
maturing in more than seven days. Commercial paper issues include securities
issued by major corporations without registration under the Securities Act of
1933, as amended ("1933 Act"), in reliance on the exemption from such
registration afforded by Section 3(a)(3) thereof and commercial paper and medium
term notes issued in reliance on the so-called "private placement" exemption
from registration which is afforded by Section 4(2) of the 1933 Act ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
Federal securities laws in that any resale must similarly be made in an exempt
transaction. Section 4(2) paper ordinarily is resold to other institutional
investors through or with the assistance of investment dealers who make a market
in Section 4(2) paper, thus providing liquidity.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
To facilitate the increased size and liquidity of the institutional
markets for unregistered securities, the Securities and Exchange Commission
adopted Rule 144A under the 1933 Act. Rule 144A establishes a "safe harbor" from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Section 4(2) paper that is issued by a
company that files reports under the Securities Exchange Act of 1934, as
amended, generally is eligible to be sold in reliance on the safe harbor of Rule
144A. Pursuant to Rule 144A, the institutional restricted securities markets may
provide both readily ascertainable values for restricted securities and the
ability to liquidate an investment in order to satisfy share redemption orders
on a timely basis. Where a substantial market of qualified institutional buyers
has developed for certain restricted securities purchased by the Fund pursuant
to Rule 144A under the Securities Act of 1933, as amended, the Fund intends to
treat such securities as liquid securities in accordance with procedures
approved by the Fund's Board. Because it is not possible to predict with
assurance how the market for specific restricted securities sold pursuant to
Rule 144A will develop, the Fund's Board has directed the Adviser to monitor
carefully each Portfolio's investments in such securities with particular regard
to trading activity, availability of reliable price information and other
relevant information. To the extent that, for a period of time, qualified
institutional buyers cease purchasing restricted securities pursuant to Rule
144A, a Portfolio's investing in such securities may have the effect of
increasing the level of illiquidity in its investment portfolio during such
period.
FORWARD COMMITMENTS. (All Portfolios) Securities purchased on a
forward commitment or when-issued basis are subject to changes in value
(generally changing in the same way, i.e., appreciating when interest rates
decline and depreciating when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Securities purchased on a forward
commitment or when-issued basis may expose the Portfolio to risks because they
may experience such fluctuations prior to their actual delivery. Purchasing
securities on a when-issued basis can involve the additional risk that the yield
available in the market when the delivery takes place actually may be higher
than that obtained in the transaction itself. Purchasing securities on a forward
commitment or when-issued basis when the Portfolio is fully or almost fully
invested may result in greater potential fluctuation in the value of the
Portfolio's net assets and its net asset value per share.
MORTGAGE-RELATED SECURITIES. (Government Income Portfolio)
Mortgage-related securities are a form of Derivative collateralized by pools of
commercial or residential mortgages. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations. These securities may include complex instruments such as
collateralized mortgage obligations and stripped mortgage-backed securities,
mortgage pass-through securities, interests in REMICs or other kinds of
mortgage-backed securities, including those with fixed, floating and variable
interest rates, those with interest rates that change based on multiples of
changes in a specified index of interest rates and those with interest rates
that change inversely to changes in interest rates.
GOVERNMENT AGENCY SECURITIES--Mortgage-related securities issued by the
Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
GOVERNMENT RELATED SECURITIES--Mortgage-related securities issued by the Federal
National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the Untied States. The FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of
the United States created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. The FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When the FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
PRIVATE ENTITY SECURITIES--These mortgage-related securities are issued by
commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other non-governmental issuers. Timely payment
of principal and interest on mortgage-related securities backed by pools created
by non-governmental issuers often is supported partially by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or mortgage poolers can meet their obligations under the
policies, so that if the issuers default on their obligations the holders of the
security could sustain a loss. No insurance or guarantee covers the Portfolio or
the price of the Portfolio's shares. Mortgage-related securities issued by
non-governmental issuers generally offer a higher rate of interest than
government-agency and government-related securities because there are no direct
or indirect government guarantees of payment.
COMMERCIAL MORTGAGE-RELATED SECURITIES--Commercial mortgage-related securities
generally are multi-class debt or pass-through certificates secured by mortgage
loans on commercial properties. These mortgage-related securities generally are
structured to provide protection to the senior classes investors against
potential losses on the underlying mortgage loans. This protection generally is
provided by having the holders of subordinated classes of securities
("Subordinated Securities") take the first loss if there are defaults on the
underlying commercial mortgage loans. Other protection, which may benefit all of
the classes or particular classes, may include issuer guarantees, reserve funds,
additional Subordinated Securities, cross-collateralization and
over-collateralization.
Each of these Portfolios may invest in Subordinated Securities issued
or sponsored by commercial banks, savings and loan institutions, mortgage
bankers, private mortgage insurance companies and other non-governmental
issuers. Subordinated Securities have no governmental guarantee, and are
subordinated in some manner as to the payment of principal and/or interest to
the holders of more senior mortgage-related securities arising out of the same
pool of mortgages. The holders of Subordinated Securities typically are
compensated with a higher stated yield than are the holders of more senior
mortgage-related securities. On the other hand, Subordinated Securities
typically subject the holder to greater risk than senior mortgage-related
securities and tend to be rated in a lower rating category, and frequently a
substantially lower rating category, than the senior mortgage-related securities
issued in respect of the same pool of mortgage. Subordinated Securities
generally are likely to be more sensitive to changes in prepayment and interest
rates and the market for such securities may be less liquid than is the case for
traditional fixed-income securities and senior mortgage-related securities.
The market for commercial mortgage-related securities developed more
recently and in terms of total outstanding principal amount of issues is
relatively small compared to the market for residential single-family
mortgage-related securities. In addition, commercial lending generally is viewed
as exposing the lender to a greater risk of loss than one- to four-family
residential lending. Commercial lending, for example, typically involves larger
loans to single borrowers or groups of related borrowers than residential one-
to four-family mortgage loans. In addition, the repayment of loans secured by
income producing properties typically is dependent upon the successful operation
of the related real estate project and the cash flow generated therefrom.
Consequently, adverse changes in economic conditions and circumstances are more
likely to have an adverse impact on mortgage-related securities secured by loans
on commercial properties than on those secured by loans on residential
properties.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs")--A CMO is a multiclass bond backed
by a pool of mortgage pass-through certificates or mortgage loans. CMOs may be
collateralized by (a) Ginnie Mae, Fannie Mae, or Freddie Mac pass-through
certificates, (b) unsecuritized mortgage loans insured by the Federal Housing
Administration or guaranteed by the Department of Veterans' Affairs, (c)
unsecuritized conventional mortgages, (d) other mortgage-related securities, or
(e) any combination thereof. Each class of CMOs, often referred to as a
"tranche," is issued at a specific coupon rate and has a stated maturity or
final distribution date. Principal prepayments on collateral underlying a CMO
may cause it to be retired substantially earlier than the stated maturities or
final distribution dates. The principal and interest on the underlying mortgages
may be allocated among the several classes of a series of a CMO in many ways.
One or more tranches of a CMO may have coupon rates which reset periodically at
a specified increment over an index, such as the London Interbank Offered Rate
("LIBOR") (or sometimes more than one index). These floating rate CMOs typically
are issued with lifetime caps on the coupon rate thereon. Each of these
Portfolios also may invest in inverse floating rate CMOs. Inverse floating rate
CMOs constitute a tranche of a CMO with a coupon rate that moves in the reverse
direction to an applicable index such a LIBOR. Accordingly, the coupon rate
thereon will increase as interest rates decrease. Inverse floating rate CMOs are
typically more volatile than fixed or floating rate tranches of CMOs.
Many inverse floating rate CMOs have coupons that move inversely to a
multiple of the applicable indexes. The effect of the coupon varying inversely
to a multiple of an applicable index creates a leverage factor. Inverse floaters
based on multiples of a stated index are designed to be highly sensitive to
changes in interest rates and can subject the holders thereof to extreme
reductions of yield and loss of principal. The markets for inverse floating rate
CMOs with highly leveraged characteristics at times may be very thin. The
Portfolio's ability to dispose of its positions in such securities will depend
on the degree of liquidity in the markets for such securities. It is impossible
to predict the amount of trading interest that may exist in such securities, and
therefore the future degree of liquidity.
STRIPPED MORTGAGE-BACKED SECURITIES--The Portfolio also may invest in stripped
mortgage-backed securities. Stripped mortgage-backed securities are created by
segregating the cash flows from underlying mortgage loans or mortgage securities
to create two or more new securities, each with a specified percentage of the
underlying security's principal or interest payments. Mortgage securities may be
partially stripped so that each investor class receives some interest and some
principal. When securities are completely stripped, however, all of the interest
is distributed to holders of one type of security, known as an interest-only
security, or IO, and all of the principal is distributed to holders of another
type of security known as a principal-only security, or PO. Strips can be
created in a pass-through structure or as tranches of a CMO. The yields to
maturity on IOs and POs are very sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may not fully recoup its initial investment in IOs.
Conversely, if the underlying mortgage assets experience less than anticipated
prepayments of principal, the yield on POs could be materially and adversely
affected.
REAL ESTATE INVESTMENT TRUSTS--A REIT is a corporation, or a business trust that
would otherwise be taxed as a corporation, which meets the definitional
requirements of the Internal Revenue Code of 1986, as amended (the "Code"). The
Code permits a qualifying REIT to deduct dividends paid, thereby effectively
eliminating corporate level Federal income tax and making the REIT a
pass-through vehicle for Federal income tax purposes. To meet the definitional
requirements of the Code, a REIT must, among other things, invest substantially
all of its assets in interests in real estate (including mortgages and other
REITs) or cash and government securities, derive most of its income from rents
from real property or interest on loans secured by mortgages on real property,
and distribute to shareholders annually a substantial portion of its otherwise
taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid
REITs. Equity REITs, which may include operating or finance companies, own real
estate directly and the value of, and income earned by, the REITs depends upon
the income of the underlying properties and the rental income they earn. Equity
REITs also can realize capital gains (or losses) by selling properties that have
appreciated (or depreciated) in value. Mortgage REITs can make construction,
development or long-term mortgage loans and are sensitive to the credit quality
of the borrower. Mortgage REITs derive their income from interest payments on
such loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs are affected by tax and
regulatory requirements and by perceptions of management skill. They also are
subject to heavy cash flow dependency, defaults by borrowers or tenants,
self-liquidation and the possibility of failing to qualify for tax-free status
under the Code or to maintain exemption from the 1940 Act.
ADJUSTABLE-RATE MORTGAGE LOANS ("ARMs")--ARMs eligible for inclusion in a
mortgage pool will generally provide for a fixed initial mortgage interest rate
for a specified period of time, generally for either the first three, six,
twelve, thirteen, thirty-six, or sixty scheduled monthly payments. Thereafter,
the interest rates are subject to periodic adjustment based on changes in an
index. ARMs typically have minimum and maximum rates beyond which the mortgage
interest rate may not vary over the lifetime of the loans. Certain ARMs provide
for additional limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Negatively amortizing ARMs may
provide limitations on changes in the required monthly payment. Limitations on
monthly payments can result in monthly payments that are greater or less than
the amount necessary to amortize a negatively amortizing ARM by its maturity at
the interest rate in effect during any particular month.
OTHER MORTGAGE-RELATED SECURITIES--Other mortgage-related securities include
securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals. Other mortgage-related securities may
be equity or debt securities issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
American and Global Depositary Receipts. (Large Cap Equity Portfolio,
Small Cap Opportunity Portfolio, Mid Cap Portfolio, Equity Value Portfolio and
International Equity Portfolio) Each of these Portfolios may invest in the
securities of foreign issuers in the form of American Depositary Receipts
("ADRs") and, with respect to the International Equity Portfolio, Global
Depositary Receipts ("GDRs") and other forms of depositary receipts. 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. GDRs are receipts issued outside the
United States typically by non-United States banks and trust companies that
evidence ownership of either foreign or domestic securities. Generally, ADRs in
registered form are designed for use in the United States securities markets and
GDRs in bearer form are designed for use outside the United States.
STANDARD & POOR'S DEPOSITARY RECEIPTS. (Large Cap Equity Portfolio,
Small Cap Opportunity Portfolio, Mid Cap Portfolio and Equity Value Portfolio)
These securities, commonly referred to as "spiders," represent an interest in a
fixed portfolio of common stocks designed to track the price and dividend yield
performance of the Standard & Poor's 500 Index or the Standard & Poor's MidCap
400 Index, as the case may be.
MUNICIPAL OBLIGATIONS. (Municipal Income Portfolio and Tax Free Money
Market Portfolio) The term "Municipal Obligations" generally includes debt
obligations issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Municipal Obligations may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and lending such funds to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to obtain funds to provide for the
construction, equipment, repair or improvement of privately operated housing
facilities, sports facilities, convention or trade show facilities, airport,
mass transit, industrial, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity, or sewage or solid waste disposal; the interest paid on such
obligations may be exempt from Federal income tax, although current tax laws
place substantial limitations on the size of such issues. There are, of course,
variations in the security of Municipal Obligations, both within a particular
classification and between classifications.
Floating and variable rate demand notes and bonds are tax exempt
obligations ordinarily having stated maturities in excess of one year, but which
permit the holder to demand payment of principal at any time, or at specified
intervals. The issuer of such obligations ordinarily has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders thereof. The interest rate on a floating rate demand
obligation is based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The interest rate on a
variable rate demand obligation is adjusted automatically at specified
intervals.
The yields on Municipal Obligations are dependent on a variety of
factors, including general economic and monetary conditions, money market
factors, conditions in the Municipal Obligations market, size of a particular
offering, maturity of the obligation and rating of the issue. The imposition of
the advisory and administration fees, as well as other operating expenses, will
have the effect of reducing the yield to investors.
Each of these Portfolios may invest up to 5% of the value of its total
assets in municipal lease obligations or installment purchase contract
obligations (collectively, "lease obligations"). Lease obligations have special
risks not ordinarily associated with Municipal Obligations. Although lease
obligations do not constitute general obligations of the municipality for which
the municipality's taxing power is pledged, a lease obligation ordinarily is
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. Certain lease obligations in which
these Portfolios may invest may contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease payments in future
years unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the leased property in the event of foreclosure might prove
difficult. In addition, no assurance can be given as to the liquidity of certain
lease obligations. The staff of the Securities and Exchange Commission currently
considers certain lease obligations to be illiquid. The Fund's Board of
Directors has established guidelines for the Adviser to determine the liquidity
and appropriate valuation of lease obligations based on factors which include:
(1) the frequency of trades and quotes for the lease obligation or similar
securities; (2) the number of dealers willing to purchase or sell the lease
obligation or similar securities and the number of other potential buyers; (3)
the willingness of dealers to undertake to make a market in the security or
similar securities; and (4) the nature of the marketplace trades, including the
time needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer.
Each of these Portfolios will purchase tender option bonds only when
the Adviser is satisfied that the custodial and tender option arrangements,
including the fee payment arrangements, will not adversely affect the tax exempt
status of the underlying Municipal Obligations and that payment of any tender
fees will not have the effect of creating taxable income for the Portfolio.
Based on the tender option bond agreement, each of these Portfolios expects to
be able to value the tender option bond at par; however, the value of the
instrument will be monitored to assure that is valued at fair value.
RATINGS OF MUNICIPAL OBLIGATIONS. Subsequent to its purchase by a
Portfolio, an issue of rated Municipal Obligations may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require the sale of such Municipal Obligations by the
Portfolio, but the Adviser will consider such event in determining whether the
Portfolio should continue to hold the Municipal Obligations. To the extent that
the ratings given by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("S&P") or Fitch IBCA, Inc. ("Fitch") for Municipal
Obligations may change as a result of changes in such organizations or their
rating systems, the Portfolio will attempt to use comparable ratings as
standards for its investments in accordance with the investment policies
contained in the relevant Portfolio's Prospectus and this Statement of
Additional Information. The ratings of Moody's, S&P and Fitch represent their
opinions as to the quality of the Municipal Obligations which they undertake to
rate. It should be emphasized, however, that ratings are relative and subjective
and are not absolute standards of quality. Although these ratings may be an
initial criterion for selection of portfolio investments, the Adviser also will
evaluate these securities and the creditworthiness of the issuers of such
securities based upon financial and other available information.
MANAGEMENT POLICIES
OPTIONS TRANSACTIONS. (Large Cap Equity Portfolio, Small Cap
Opportunity Portfolio, Mid Cap Portfolio, Equity Value Portfolio, Government
Income Portfolio and International Equity Portfolio) Each of these Portfolios
may engage in options transactions, such as purchasing or writing covered call
or put options. The principal reason for the Portfolio writing covered call
options is to realize, through the receipt of premiums, a greater return than
would be realized on its portfolio securities alone. In return for a premium,
the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the call writer retains the risk of a decline in the price of the underlying
security. Similarly, the principal reason for writing covered put options is to
realize income in the form of premiums. The writer of a covered put option
accepts the risk of a decline in the price of the underlying security. The size
of the premiums that the Portfolio may receive may be adversely affected as new
or existing institutions, including other investment companies, engage in or
increase their option-writing activities.
Options written ordinarily will have expiration dates between one and
nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
time the options are written. In the case of call options, these exercise prices
are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. The Portfolio may write (a) in-the-money call options when the
Adviser expects that the price of the underlying security will remain stable or
decline moderately during the option period, (b) at-the-money call options when
the Adviser expects that the price of the underlying security will remain stable
or advance moderately during the option period and (c) out-of-the-money call
options when the Adviser expects that the premiums received from writing the
call option plus the appreciation in market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the Portfolio's obligation as the writer of an option
continues, it may be assigned an exercise notice by the broker-dealer through
which the option was sold, requiring it to deliver, in the case of a call, or
take delivery of, in the case of a put, the underlying security against payment
of the exercise price. This obligation terminates when the option expires or the
Portfolio effects a closing purchase transaction. The Portfolio can no longer
effect a closing purchase transaction with respect to an option once it has been
assigned an exercise notice.
While it may choose to do otherwise, the Portfolio generally will
purchase or write only those options for which the Adviser believes there is an
active secondary market so as to facilitate closing transactions. There is no
assurance that sufficient trading interest to create a liquid secondary market
on a securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may exist. A
liquid secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading activity or
order flow, or other unforeseen events, at times have rendered certain clearing
facilities inadequate and resulted in the institution of special procedures,
such as trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance that
similar events, or events that otherwise may interfere with the timely execution
of customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If, as a covered call option
writer, the Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
The Portfolio intends to treat options in respect of specific
securities that are not traded on a national securities exchange and the
securities underlying covered call options written by the Portfolio as illiquid
securities.
Each of these Portfolios will purchase options only to the extent
permitted by the policies of state securities authorities in states where shares
of the Portfolio are qualified for offer and sale.
STOCK INDEX OPTIONS. (Large Cap Equity Portfolio, Small Cap
Opportunity Portfolio, Mid Cap Portfolio, Equity Value Portfolio and
International Equity Portfolio) Each of these Portfolios may purchase and write
put and call options on stock indexes to the extent of 15% of the value of its
net assets. Options on stock indexes are similar to options on stock except that
(a) the expiration cycles of stock index options are monthly, while those of
stock options are currently quarterly, and (b) the delivery requirements are
different. Instead of giving the right to take or make delivery of a stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (i) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (ii) a fixed "index multiplier." Receipt
of this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the option. The amount of cash
received will be equal to such difference between the closing price of the index
and the exercise price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position in
stock index options prior to expiration by entering into a closing transaction
on an exchange or it may let the option expire unexercised.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. (Large Cap Equity
Portfolio, Small Cap Opportunity Portfolio, Mid Cap Portfolio, Equity Value
Portfolio and International Equity Portfolio) Upon exercise of an option, the
writer of the option delivers to the holder of the option the futures position
and the accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. The potential loss related to the
purchase of options on futures contracts is limited to the premium paid for the
option (plus transaction costs). Because the value of the option is fixed at the
time of sale, there are no daily cash payments to reflect changes in the value
of the underlying contract; however, the value of the option does change daily
and that change would be reflected in the net asset value of the Portfolio.
FUTURE DEVELOPMENTS. Each Portfolio may take advantage of
opportunities in the area of options and futures contracts and options on
futures contracts and any other derivative investments which are not presently
contemplated for use by such Portfolio or which are not currently available but
which may be developed, to the extent such opportunities are both consistent
with its investment objective and legally permissible for the Portfolio. Before
entering into such transactions or making any such investment, the Portfolio
will provide appropriate disclosure in its prospectus.
LENDING PORTFOLIO SECURITIES. To a limited extent, each Portfolio may
lend its portfolio securities to brokers, dealers and other financial
institutions, provided it receives cash collateral which at all times is
maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, a Portfolio can
increase its income through the investment of the cash collateral. For purposes
of this policy, each Portfolio considers collateral consisting of U.S.
Government securities to be the equivalent of cash. From time to time, a
Portfolio may return to the borrower or a third party which is unaffiliated with
the Fund, and which is acting as a "placing broker," a part of the interest
earned from the investment of collateral received for securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Portfolio must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Portfolio must be
able to terminate the loan at any time; (4) the Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) the Portfolio may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned securities may pass to
the borrower, the Fund's Board of Directors must terminate the loan and regain
the right to vote the securities if a material event adversely affecting the
investment occurs. These conditions may be subject to future modification.
REVERSE REPURCHASE AGREEMENTS. (Government Money Market Portfolio) The
Portfolio may enter into reverse repurchase agreements. The Portfolio will
maintain in a segregated account permissible liquid assets equal to the
aggregate amount of its reverse repurchase obligations, plus accrued interest,
in certain cases, in accordance with releases promulgated by the Securities and
Exchange Commission.
INVESTMENT RESTRICTIONS
Each Portfolio has adopted investment restrictions numbered 1 through
8 as fundamental policies and each Portfolio, other than International Equity
Portfolio, has adopted investment restrictions numbered 13 and 14 as additional
fundamental policies. These restrictions cannot be changed, as to a Portfolio,
without approval by the holders of a majority (as defined in the 1940 Act) of
such Portfolio's outstanding voting securities. Investment restrictions numbered
9 through 12 are not fundamental policies and may be changed by vote of a
majority of the Fund's Directors at any time. No Portfolio may:
1. Invest in commodities, except that each Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
2. Purchase, hold or deal in real estate, or oil, gas or other mineral
leases or exploration or development programs, but each Portfolio may purchase
and sell securities that are secured by real estate or issued by companies that
invest or deal in real estate.
3. Borrow money, except that each Portfolio may borrow up to 33-1/3%
of the value of its total assets. For purposes of this investment restriction, a
Portfolio's entry into options, forward contracts, futures contracts, including
those relating to indexes, and options on futures contracts or indexes shall not
constitute borrowing.
4. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Portfolio
may lend its portfolio securities in an amount not to exceed 33-1/3% of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the Securities and Exchange Commission
and the Fund's Board of Directors.
5. Act as an underwriter of securities of other issuers, except to the
extent the Portfolio may be deemed an underwriter under the 1933 Act by virtue
of disposing of portfolio securities, and except that the Municipal Income
Portfolio and Tax Free Money Market Portfolio each may bid separately or as part
of a group for the purchase of Municipal Obligations directly from an issuer for
its own portfolio to take advantage of the lower purchase price available.
6. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act). A Portfolio's investments permitted under Investment
Restriction Nos. 1, 3 and 10 are not considered senior securities for purposes
of this Investment Restriction.
7. Purchase securities on margin, but each Portfolio may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes.
8. Invest more than 25% of its assets in the securities of issuers in
any single industry, provided that, in the case of the Municipal Income
Portfolio and Tax Free Money Market Portfolio, there shall be no such limitation
on the purchase of tax exempt municipal obligations and, in the case of each
Portfolio, there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
9. Invest in the securities of a company for the purpose of exercising
management or control, but each Portfolio will vote the securities it owns as a
shareholder in accordance with its views.
10. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
11. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid, if, in
the aggregate, more than 10% of the value of the Portfolio's net assets would be
so invested.
12. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
The following investment restrictions numbered 13 and 14 are
fundamental policies which apply to each Portfolio, except the International
Equity Portfolio. None of these Portfolios may:
13. With respect to 75% of its total assets, invest more than 5% of
its assets in the obligations of any single issuer. This investment restriction
does not apply to the purchase of U.S. Government securities.
14. Hold more than 10% of the outstanding voting securities of any
single issuer. This investment restriction applies only with respect to 75% of
the Portfolio's total assets.
For purposes of Investment Restriction No. 8, industrial development
bonds, where the payment of principal and interest is the ultimate
responsibility of companies within the same industry, are grouped together as an
"industry."
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of shares of a Portfolio in certain
states. Should the Fund determine that a commitment is no longer in the best
interest of the Portfolio, and its shareholders, the Fund reserves the right to
revoke the commitment by terminating the sale of such Portfolio's shares in the
state involved.
MANAGEMENT OF THE FUND
Directors and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Director who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
DIRECTORS OF THE FUND
*WILLIAM B. BLUNDIN, PRESIDENT AND CHAIRMAN OF THE BOARD OF DIRECTORS. An
employee of BISYS Fund Services, Inc., BISYS' general partner. Mr.
Blundin also is an officer of other investment companies administered
by BISYS or its affiliates. He is 60 years old and his address is 90
Park Avenue, New York, New York 10016.
NORMA A. COLDWELL, DIRECTOR. International Economist and Consultant;
Executive Vice President of Coldwell Financial Consultants; Trustee
and Treasurer of Meridian House International (International Education
and Cultural Group); Member of the Board of Advisors of Meridian
International Center and Emerging Capital Markets, S.A. (Montevideo,
Uruguay); formerly, Chief International Economist of Riggs National
Bank, Washington, D.C. She is 72 years old and her address is 3330
Southwestern Boulevard, Dallas, Texas 75225.
RICHARD H. FRANCIS, DIRECTOR. Former Executive Vice President and Chief
Financial Officer of Pan American World Airways, Inc. (currently,
debtor-in-possession under the U.S. Bankruptcy Code), March 1988 to
October 1991; Senior Vice President and Chief Financial Officer of
American Standard Inc., 1960 to March 1988. Mr. Francis is a director
of Allendale Mutual Insurance and The Indonesia Fund, Inc. He is 66
years old and his address is 40 Grosvenor Road, Short Hills, New
Jersey 07078.
WILLIAM W. McINNES, DIRECTOR. Private investor. From July 1978 to February
1993, he was Vice-President--Finance and Treasurer of Hospital Corp.
of America. He is also a director of Gulf South Medical Supply and
Diversified Trust Co. He is 48 years old and his address is 116 30th
Avenue South, Nashville, Tennessee 37212.
ROBERT A. ROBINSON, DIRECTOR. Private investor. Since 1991, President
Emeritus, and from 1968 to 1991, President of The Church Pension
Group, NYC. From 1956 to 1966, Senior Vice President of Colonial Bank
& Trust Co. He is also a director of Mariner Institutional Funds,
Inc., Mariner Tax-Free Institutional Funds, Inc., UST Master Funds,
UST Master Tax Exempt Funds, H.B. and F.H. Bugher Foundation,
Morehouse-Barlow Co. Publishers, The Canterbury Cathedral Trust in
America, The Living Church Foundation and Hoosac School. He is 71
years old and his address is 2 Hathaway Common, New Canaan,
Connecticut 06840.
OFFICERS OF THE FUND
JEFFREY C. CUSICK, VICE PRESIDENT AND ASSISTANT SECRETARY. An employee of
BISYS Fund Services, Inc. since July 1995, and an officer of other
investment companies administered by BISYS or its affiliates. From
September 1993 to July 1995, he was Assistant Vice President and, from
1989 to September 1993, he was Manager--Client Services, of Federated
Administrative Services. He is 38 years old and his address is 3435
Stelzer Road, Columbus, Ohio 43219.
WILLIAM TOMKO, VICE PRESIDENT. An employee of BISYS Fund Services, Inc. and an
officer of other investment companies administered by BISYS or its
affiliates. He is 38 years old and his address is 3435 Stelzer Road,
Columbus, Ohio 43219.
GARY R. TENKMAN, TREASURER. An employee of BISYS Fund Services, Inc. since
April 1998, and an officer of other investment companies administered
by BISYS or its affiliates. For more than five years prior thereto, he
was an audit manager with Ernst & Young LLP. He is 34 years old and
his address is 3435 Stelzer Road, Columbus, Ohio 43219.
ROBERT L. TUCH, ASSISTANT SECRETARY. An employee of BISYS Fund Services, Inc.
since June 1991, and an officer of other investment companies
administered by BISYS or its affiliates. From July 1990 to June 1991,
he was Vice President and Associate General Counsel with National
Securities Research Corp. Prior thereto, he was an Attorney with the
Securities and Exchange Commission. He is 45 years old and his address
is 3435 Stelzer Road, Columbus, Ohio 43219.
ALAINA METZ, ASSISTANT SECRETARY. An employee of BISYS Fund Services, Inc.
and an officer of other investment companies administered by BISYS or
its affiliates. She is 29 years old and her address is 3435 Stelzer
Road, Columbus, Ohio 43219.
For so long as the Distribution Plan described in the section
captioned "Management Arrangements--Distribution Plan" remains in effect, the
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the 1940 Act, will be selected and nominated by the Directors who are not
"interested persons" of the Fund.
Directors and officers of the Fund, as a group, owned less than 1% of
any Portfolio's shares of common stock outstanding on October 12, 1998.
The Fund does not pay any remuneration to its officers and Directors
other than fees and expenses to those Directors who are not directors, officers
or employees of the Adviser or BISYS or any of their affiliates. The aggregate
amount of compensation paid to each such Director by the Fund for year ended
December 31, 1997 was as follows:
Total Compensation
Aggregate from Fund
Name of Board Compensation from and Fund Complex Paid
Member Fund* to Board Member
- -------------------- ------------------ ---------------------
Norma A. Coldwell $18,000 $18,000
Richard H. Francis $18,000 $18,000
William W. McInnes $18,000 $18,000
Robert A. Robinson $18,000 $18,000
- -------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $13,422 for all Directors as a group.
MANAGEMENT ARRANGEMENTS
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "MANAGEMENT OF THE
PORTFOLIOS."
INVESTMENT ADVISORY AGREEMENT. The Adviser provides investment
advisory services pursuant to the Investment Advisory Agreement (the
"Agreement") dated February 15, 1994 with the Fund. As to each Portfolio, the
Agreement is subject to annual approval by (i) the Fund's Board of Directors or
(ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of such Portfolio, provided that in either event the continuance also
is approved by a majority of the Directors who are not "interested persons" (as
defined in the 1940 Act) of the Fund or the Adviser, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Agreement was
last approved by the Fund's Board of Directors, including a majority of the
Directors who are not "interested persons" of any party to the Agreement, at a
meeting held on May 14, 1998. As to each Portfolio, the Agreement is terminable
without penalty, on 60 days' notice, by the Fund's Board of Directors or by vote
of the holders of a majority of such Portfolio's shares, or, on not less than 90
days' notice, by the Adviser. The Agreement will terminate automatically, as to
the relevant Portfolio, in the event of its assignment (as defined in the 1940
Act).
As compensation for the Adviser's services, the Fund has agreed to pay
the Adviser a monthly investment advisory fee at the annual rate set forth in
the Portfolios' Prospectus.
With respect to Small Cap Opportunity Portfolio, the Adviser has
entered into a Sub-Investment Advisory Agreement (the "Womack Sub-Advisory
Agreement") with Womack Asset Management, Inc. ("Womack") dated May 14, 1998. As
to such Portfolio, the Womack Sub-Advisory Agreement is subject to annual
approval by (i) the Board or (ii) vote of a majority (as defined in the 1940
Act) of the Portfolio's outstanding voting securities, provided that in either
event the continuance also is approved by a majority of the Board members who
are not "interested persons" (as defined in the 1940 Act) of the Fund or Womack,
by vote cast in person at a meeting called for the purpose of voting on such
approval. The Womack Sub-Advisory Agreement is terminable without penalty, (i)
by the Adviser on 60 days' notice, (ii) by the Fund's Board or by vote of the
holders of a majority of the Portfolio's outstanding voting securities on 60
days' notice, or (iii) upon not less than 90 days' notice, by Womack. The Womack
Sub-Advisory Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
With respect to International Equity Portfolio, the Adviser has
entered into a Sub-Investment Advisory Agreement (the "Lazard Sub-Advisory
Agreement") with Lazard Asset Management ("Lazard") dated May 14, 1998. As to
such Portfolio, the Lazard Sub-Advisory Agreement is subject to annual approval
by (i) the Board or (ii) vote of a majority (as defined in the 1940 Act) of the
Portfolio's outstanding voting securities, provided that in either event the
continuance also is approved by a majority of the Board members who are not
"interested persons" (as defined in the 1940 Act) of the Fund or Lazard, by vote
cast in person at a meeting called for the purpose of voting on such approval.
The Lazard Sub-Advisory Agreement is terminable without penalty, (i) by the
Adviser on 60 days' notice, (ii) by the Fund's Board or by vote of the holders
of a majority of the Portfolio's outstanding voting securities on 60 days'
notice, or (iii) upon not less than 90 days' notice, by Lazard. The Lazard
Sub-Advisory Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
With respect to Mid Cap Portfolio, the Adviser has entered into a
Sub-Investment Advisory Agreement (the "Bennett Lawrence Sub-Advisory
Agreement") with Bennett Lawrence Management, LLC ("Bennett Lawrence") dated
August 12, 1998. As to such Portfolio, the Bennett Lawrence Sub-Advisory
Agreement is subject to annual approval by (i) the Board or (ii) vote of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
securities, provided that in either event the continuance also is approved by a
majority of the Board members who are not "interested persons" (as defined in
the 1940 Act) of the Fund or Bennett Lawrence, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Bennett Lawrence
Sub-Advisory Agreement is terminable without penalty, (i) by the Adviser on 60
days' notice, (ii) by the Fund's Board or by vote of the holders of a majority
of the Portfolio's outstanding voting securities on 60 days' notice, or (iii)
upon not less than 90 days' notice, by Bennett Lawrence. The Bennett Lawrence
Sub-Advisory Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
ADMINISTRATION AGREEMENT. BISYS provides certain administrative
services pursuant to the Administration Agreement (the "Administration
Agreement") dated April 25, 1996 with the Fund. As to each Portfolio, the
Administration Agreement will continue until April 25, 2001 and thereafter is
subject to annual approval by (i) the Fund's Board of Directors or (ii) vote of
a majority (as defined in the 1940 Act) of the outstanding voting securities of
such Portfolio, provided that in either event the continuance also is approved
by a majority of the Directors who are not "interested persons" (as defined in
the 1940 Act) of the Fund or BISYS, by vote cast in person at a meeting called
for the purpose of voting such approval. The Administration Agreement was last
approved by the Fund's Board of Directors, including a majority of the Directors
who are not "interested persons" of any party to the Administration Agreement,
at a meeting held on May 14, 1998. As to each Portfolio, the Administration
Agreement is terminable without penalty, at any time if for cause, by the Fund's
Board of Directors or by vote of the holders of a majority of such Portfolio's
outstanding voting securities, or, on not less than 90 days' notice, by BISYS.
The Administration Agreement will terminate automatically, as to the relevant
Portfolio, in the event of its assignment (as defined in the 1940 Act).
As compensation for BISYS' services, the Fund has agreed to pay BISYS
a monthly administration fee at the annual rate set forth in the Portfolios'
Prospectus.
DISTRIBUTION AGREEMENT. BISYS acts as the exclusive distributor of
each Portfolio's shares on a best efforts basis pursuant to a Distribution
Agreement (the "Distribution Agreement") dated November 11, 1997, with the Fund.
Shares are sold on a continuous basis by BISYS as agent, although BISYS is not
obliged to sell any particular amount of shares. No compensation is payable by
the Fund to BISYS for its distribution services.
DISTRIBUTION PLAN. (Applicable to Class A Shares of each Portfolio
other than the Tax Free Money Market Portfolio and Government Money Market
Portfolio and Class B Shares of each Portfolio) Rule 12b-1 (the "Rule") adopted
by the Securities and Exchange Commission under the 1940 Act provides, among
other things, that an investment company may bear expenses of distributing its
shares only pursuant to a plan adopted in accordance with the Rule. The Fund's
Directors have adopted such a plan (the "Distribution Plan") with respect to
Class A Shares of each Portfolio other than the Tax Free Money Market Portfolio
and Government Money Market Portfolio and Class B Shares of each Portfolio
pursuant to which each such Portfolio pays BISYS for advertising, marketing and
distributing Class A Shares and Class B Shares. The Fund's Directors believe
that there is a reasonable likelihood that the Distribution Plan will benefit
each such Portfolio and the holders of its Class A Shares and Class B Shares.
A quarterly report of the amounts expended under the Distribution
Plan, and the purposes for which such expenditures were incurred, must be made
to the Directors for their review. In addition, the Distribution Plan provides
that it may not be amended to increase materially the costs which holders of the
Class A Shares and Class B Shares may bear for distribution pursuant to the
Distribution Plan without approval of such shareholders and that other material
amendments of the Distribution Plan must be approved by the Board of Directors,
and by the Directors who are neither "interested persons" (as defined in the
1940 Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Distribution Plan or in the related Distribution Plan
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. The Distribution Plan and related agreements are
subject to annual approval by such vote of the Directors cast in person at a
meeting called for the purpose of voting on the Distribution Plan. The
Distribution Plan was last so approved on May 14, 1998. As to each Class, the
Distribution Plan is terminable at any time by vote of a majority of the
Directors who are not "interested persons" and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in the
Distribution Plan agreements or by vote of the holders of a majority of Class A
Shares or Class B Shares, as the case may be, voting separately as a Class. A
Distribution Plan agreement is terminable without penalty, at any time, by such
vote of the Directors, upon not more than 60 days' written notice to the parties
to such agreement or by vote of the holders of a majority of the Portfolio's
Class A Shares or Class B Shares, as the case may be, voting separately as a
Class. A Distribution Plan agreement will terminate automatically, as to the
relevant Class, in the event of its assignment (as defined in the 1940 Act).
SHAREHOLDER SERVICES PLAN. (Applicable to each Class of each
Portfolio) The Fund's Directors have adopted a shareholder services plan (the
"Shareholder Services Plan") with respect to each Class of each Portfolio
pursuant to which each Portfolio pays BISYS for the provision of certain
services to the holders of such shares. The Fund's Directors believe that there
is a reasonable likelihood that the Shareholder Services Plan will benefit each
such Portfolio and the holders of its Class A or Class B Shares, as the case may
be.
A quarterly report of the amounts expended under the Shareholder
Services Plan, and the purposes for which such expenditures were incurred, must
be made to the Directors for their review. In addition, the Shareholder Services
Plan provides that material amendments of the Plan must be approved by the Board
of Directors, and by the Directors who are neither "interested persons" (as
defined in the 1940 Act) of the Fund nor have any direct or indirect financial
interest in the operation of the Shareholder Services Plan or in the related
Shareholder Services Plan agreements, by vote cast in person at a meeting called
for the purpose of considering such amendments. The Shareholder Services Plan
and related agreements are subject to annual approval by such vote of the
Directors cast in person at a meeting called for the purpose of voting on the
Shareholder Services Plan. The Shareholder Services Plan was last so approved on
May 14, 1998. The Shareholder Services Plan is terminable at any time by vote of
a majority of the Directors who are not "interested persons" and who have no
direct or indirect financial interest in the operation of the Shareholder
Services Plan or in the Shareholder Services Plan agreements. A Shareholder
Services Plan agreement is terminable without penalty, at any time, by such vote
of the Directors. A Shareholder Services Plan agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
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, BISYS, any sub-investment adviser, or any of their affiliates,
Securities and Exchange Commission fees, state Blue Sky qualification fees,
advisory and administration fees, charges of custodians, transfer and dividend
disbursing agents' fees, certain insurance premiums, industry association fees,
auditing and legal expenses, costs of maintaining corporate existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
calculating the net asset value of each Portfolio's shares, costs of
shareholders' reports and corporate meetings, costs of preparing and printing
certain prospectuses and statements of additional information, and any
extraordinary expenses. Expenses attributable to a Portfolio are charged against
the assets of that Portfolio; other expenses of the Fund are allocated among the
Portfolios on the basis determined by the Board of Directors, including, but not
limited to, proportionately in relation to the net assets of each Portfolio.
PURCHASE AND REDEMPTION OF SHARES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTIONS IN THE PROSPECTUS ENTITLED "HOW TO BUY SHARES" AND
"HOW TO REDEEM SHARES."
TERMS OF PURCHASE. The Fund reserves the right to reject any purchase
order and to change the amount of the minimum investment and subsequent
purchases in the Portfolios.
SALES LOADS. (Applicable to Class A Shares of each Portfolio other
than the Tax Free Money Market Portfolio and Government Money Market Portfolio)
The scale of sales loads applies to purchases of Class A Shares of each
Portfolio other than the Tax Free Money Market Portfolio and Government Money
Market Portfolio made by any "purchaser," which term includes an individual
and/or spouse purchasing securities for his, her or their own account or for the
account of any minor children, or a trustee or other fiduciary purchasing
securities for a single trust estate or a single fiduciary account trust estate
or a single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Internal Revenue Code of 1986, as amended (the "Code")) although more than
one beneficiary is involved; or a group of accounts established by or on behalf
of the employees of an employer or affiliated employers pursuant to an employee
benefit plan or other program (including accounts established pursuant to
Sections 403(b), 408(k) and 457 of the Code); or an organized group which has
been in existence for more than six months, provided that it is not organized
for the purpose of buying redeemable securities of a registered investment
company and provided that the purchases are made through a central
administration or a single dealer, or by other means which result in economy of
sales effort or expense.
"SWEEP" PROGRAM. (Applicable to the Tax Free Money Market Portfolio
and Government Money Market Portfolio Only) Shares of the Tax Free Money Market
Portfolio and Government Money Market Portfolio may be purchased through the
"sweep" program established by certain financial institutions under which a
portion of their customers' accounts may be automatically invested in the
Portfolio. The customer becomes the beneficial owner of specific shares of the
Portfolio which may be purchased, redeemed and held by the financial institution
in accordance with the customer's instructions and may fully exercise all rights
as a shareholder. The shares will be held by BISYS Fund Services Ohio, Inc. (the
"Transfer Agent") in book-entry form. A statement with regard to the customer's
shares is generally supplied to the customer monthly, and confirmations of all
transactions for the account of the customer ordinarily are available to the
customer promptly on request. In addition, each customer is sent proxies,
periodic reports and other information from the Fund with regard to shares of
the Portfolios. The customer's shares are fully assignable and may be encumbered
by the customer. The "sweep" agreement can be terminated by the customer at any
time, without affecting its beneficial ownership of the shares.
To obtain the benefits of this service, a customer typically is
required to maintain a minimum balance subject to a monthly maintenance fee, or
a higher minimum balance for which no monthly fee would be imposed. In either
case, a penalty fee is imposed if the minimum should not be maintained. In
general, the automatic investment in the Portfolio's shares occurs on the same
day that withdrawals are made by the financial institution, at the next
determined net asset value after the order is received.
All agreements which relate to the service are with the financial
institution. Neither BISYS nor the Fund is a party to any of those agreements
and no part of the compensation received by the financial institution flows to
the Fund or to BISYS or to any of their affiliates, either directly or
indirectly. Further information concerning this program and any related charges
or fees is provided by the financial institution prior to any purchase of the
Portfolio's shares. Any fees charged by the financial institution effectively
reduces the Portfolio's yield for those customers.
REOPENING AN ACCOUNT. An investor may reopen an account with a minimum
investment of $100 without filing a new Account Application during the calendar
year the account is closed or during the following calendar year, provided the
information on the old Account Application is still applicable.
STOCK CERTIFICATES; SIGNATURES. Any certificate representing Portfolio
shares to be redeemed must be submitted with the redemption request. Written
redemption requests must be signed by each shareholder, including each holder of
a joint account, and each signature must be guaranteed. Signatures on endorsed
certificates submitted for redemption also must be guaranteed. The Fund's
Transfer Agent has adopted standards and procedures pursuant to which
signature-guarantees in proper form generally will be accepted from domestic
banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations,
as well as from participants in the New York Stock Exchange Medallion Signature
Program, the Securities Transfer Agents Medallion Program ("STAMP") and the
Stock Exchanges Medallion Program. Signature-guaranties may not be provided by
notaries public. If the signature is guaranteed by a broker or dealer, such
broker or dealer must be a member of a clearing corporation and maintain net
capital of at least $100,000. Guarantees must be signed by an authorized
signatory of the guarantor and "Signature-Guaranteed" must appear with the
signature.
REDEMPTION COMMITMENT. Each Portfolio has committed itself to pay in
cash all redemption requests by any shareholder of record, limited in amount
during any 90-day period to the lesser of $250,000 or 1% of the value of such
Portfolio's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of Directors reserves the right to make payments in whole or in part in
securities or other assets in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in the same
manner as the Portfolio is valued. If the recipient sold such securities,
brokerage charges might be incurred.
SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closing), (b) when
trading in the markets the Portfolio normally utilizes is restricted, or when an
emergency exists as determined by the Securities and Exchange Commission so that
disposal of the Portfolio's investments or determination of its net asset value
is not reasonably practicable, or (c) for such other periods as the Securities
and Exchange Commission by order may permit to protect the Portfolio's
shareholders.
DETERMINATION OF NET ASSET VALUE
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "HOW TO BUY SHARES."
GENERAL. Expenses and fees, including the advisory fee and fees paid
pursuant to the Distribution Plan or Shareholder Services Plan, are accrued
daily and taken into account for the purpose of determining the net asset value
of the relevant Class of Portfolio shares.
LARGE CAP EQUITY PORTFOLIO, SMALL CAP OPPORTUNITY PORTFOLIO, MID CAP
PORTFOLIO, EQUITY VALUE PORTFOLIO AND INTERNATIONAL EQUITY PORTFOLIO. Each of
these Portfolios' securities, including covered call options written by the
Portfolio, are valued at the last sale price on the securities exchange or
national securities market on which such securities primarily are traded.
Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of the
most recent bid and asked prices, except in the case of open short positions
where the asked price is used for valuation purposes. Bid price is used when no
asked price is available. Any assets or liabilities initially expressed in terms
of foreign currency will be translated into dollars at the midpoint of the New
York interbank market spot exchange rate as quoted on the day of such
translation by the Federal Reserve Bank of New York or if no such rate is quoted
on such date, at the exchange rate previously quoted by the Federal Reserve Bank
of New York or at such other quoted market exchange rate as may be determined to
be appropriate by the Adviser. Forward currency contracts will be valued at the
current cost of offsetting the contract. Since the International Equity
Portfolio has to obtain prices as of the close of trading on various exchanges
throughout the world, the calculation of net asset value may not take place
contemporaneously with the determination of prices of certain of the Portfolio's
securities. Debt securities maturing in 60 days or less are carried at amortized
cost, which approximates value, except where to do so would not reflect
accurately their fair value, in which case such securities would be valued at
their fair value as determined under the supervision of the Board of Directors.
Any securities or other assets for which recent market quotations are not
readily available are valued at fair value as determined in good faith by the
Fund's Board of Directors.
Restricted securities, as well as securities or other assets for which
market quotations are not readily available, or are not valued by a pricing
service approved by the Board of Directors, are valued at fair value as
determined in good faith by the Board of Directors. The Board of Directors will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Directors generally will take the
following factors into consideration: restricted securities which are, or are
convertible into, securities of the same class of securities for which a public
market exists usually will be valued at market value less the same percentage
discount at which purchased. This discount will be revised periodically by the
Board of Directors if the Directors believe that it no longer reflects the value
of the restricted securities. Restricted securities not of the same class as
securities for which a public market exists usually will be valued initially at
cost. Any subsequent adjustment from cost will be based upon considerations
deemed relevant by the Board of Directors.
GOVERNMENT INCOME PORTFOLIO. The Portfolio's investments are valued
each business day using available market quotations or at fair value as
determined by one or more independent pricing services (collectively, the
"Service") approved by the Board of Directors. The Service may use available
market quotations, employ electronic data processing techniques and/or a matrix
system to determine valuations. The Service's procedures are reviewed by the
Fund's officers under the general supervision of the Board of Directors.
MUNICIPAL INCOME PORTFOLIO. The Portfolio's investments are valued by
the Service. When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid prices
(as obtained by the Service from dealers in such securities) and asked prices
(as calculated by the Service based upon its evaluation of the market for such
securities). Other investments (which constitute a majority of the Portfolio's
securities) are carried at fair value as determined by the Service, based on
methods which include consideration of: yields or prices of municipal bonds of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. The Service may employ electronic data
processing techniques and/or a matrix system to determine valuations. The
Service's procedures are reviewed by the Fund's officers under the general
supervision of the Board of Directors.
TAX FREE MONEY MARKET PORTFOLIO AND GOVERNMENT MONEY MARKET PORTFOLIO.
The valuation of each of these Portfolios' investment securities is based upon
their amortized cost which does not take into account unrealized capital gains
or losses. This involves valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price the Portfolio would receive if it sold the instrument.
The Board of Directors has agreed, as a particular responsibility
within the overall duty of care owed to each of these Portfolios' investors, to
establish procedures reasonably designed to stabilize each such Portfolio's
price per share as computed for the purpose of purchases and redemptions at
$1.00. Such procedures include review of the Portfolio's investment holdings by
the Board of Directors, at such intervals as it deems appropriate, to determine
whether such Portfolio's net asset value calculated by using available market
quotations or market equivalents deviates from $1.00 per share based on
amortized cost. In such review, investments for which market quotations are
readily available will be valued at the most recent bid price or yield data for
such securities or for securities of comparable maturity, quality and type, as
obtained from one or more of the major market makers for the securities to be
valued. Other investments and assets will be valued at fair value as determined
in good faith by the Board of Directors.
The extent of any deviation between a Portfolio's net asset value
based upon available market quotations or market equivalents and $1.00 per share
based on amortized cost will be examined by the Board of Directors. If such
deviation exceeds 1/2 of 1%, the Board of Directors promptly will consider what
action, if any, will be initiated. In the event the Board of Directors
determines that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, it has agreed to
take such corrective action as it regards as necessary and appropriate,
including: selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding dividends
or paying distributions from capital or capital gains; redeeming shares in kind;
or establishing a net asset value per share by using available market quotations
or market equivalents.
PERFORMANCE INFORMATION
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE RELEVANT PROSPECTUS ENTITLED "PERFORMANCE
INFORMATION OR "YIELD INFORMATION."
Current yield is computed pursuant to a formula which operates as
follows: The amount of the Portfolio's expenses accrued for the 30-day period
(net of reimbursements) is subtracted from the amount of the dividends and
interest earned by the Portfolio during the period. That result is then divided
by the product of: (a) the average daily number of shares outstanding during the
period that were entitled to receive dividends, and (b) the maximum offering
price per share on the last day of the period less any undistributed earned
income per share reasonably expected to be declared as a dividend shortly
thereafter. The quotient is then added to 1, and that sum is raised to the 6th
power, after which 1 is subtracted. The current yield is then arrived at by
multiplying the result by 2.
Tax equivalent yield is computed by dividing that portion of the
current yield (calculated as described above) which is tax exempt by 1 minus a
stated tax rate and adding the quotient to that portion, if any, of the yield of
the Portfolio that is not tax exempt. The tax equivalent figure, however, does
not include the potential effect of any state or local (including, but not
limited to, county, district or city) taxes, including applicable surcharges. In
addition, there may be pending legislation which could affect such stated tax
rates or yield. Each investor should consult its tax adviser, and consider its
own factual circumstances and applicable tax laws, in order to ascertain the
relevant tax equivalent yield.
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased with a hypothetical $1,000 payment
made at the beginning of the period (assuming the reinvestment of dividends and
distributions), dividing by the amount of the initial investment, taking the
"n"th root of the quotient (where "n" is the number of years in the period) and
subtracting 1 from the result. A Class's average annual total return figures
calculated in accordance with such formula assume that in the case of Class A
the maximum sales load has been deducted from the hypothetical initial
investment at the time of purchase or, in the case of Class B, the maximum
applicable contingent deferred sales charge ("CDSC") has been paid upon
redemption at the end of the period.
Total return is calculated by subtracting the amount of the maximum
offering price per share at the beginning of a stated period from the net asset
value per share at the end of the period (after giving effect to the
reinvestment of dividends and distributions during the period and any applicable
CDSC), and dividing the result by the maximum offering price per share at the
beginning of the period. Total return also may be calculated based on the net
asset value per share at the beginning of the period for Class A Shares or
without giving effect to any applicable CDSC at the end of the period for Class
B Shares. In such cases, the calculation would not reflect the deduction of the
sales load with respect to Class A Shares or any applicable CDSC with respect to
Class B Shares, which, if reflected, would reduce the performance quoted.
Seven-day yield will be computed in accordance with a standardized
method which involves determining the net change in the value of a hypothetical
pre-existing Portfolio account having a balance of one share at the beginning of
a seven calendar day period for which yield is to be quoted, dividing the net
change by the value of the account at the beginning of the period to obtain the
base period return, and annualizing the results (i.e., multiplying the base
period return by 365/7). The net change in the value of the account reflects the
value of additional shares purchased with dividends declared on the original
share and any such additional shares and fees that may be charged to shareholder
accounts, in proportion to the length of the base period and the Portfolio's
average account size, but does not include realized gains and losses or
unrealized appreciation and depreciation. Effective annualized yield is computed
by adding 1 to the base period return (calculated as described above), raising
that sum to a power equal to 365 divided by 7, and subtracting 1 from the
result.
Yields will fluctuate and are not necessarily representative of future
results. The investor should remember that yield is a function of the type and
quality of the instruments held, their maturity and operating expenses. An
investor's principal in the Portfolio is not guaranteed. See "Determination of
Net Asset Value" for a discussion of the manner in which each Portfolio's price
per share is determined.
From time to time, advertising materials for a Portfolio may refer to
or discuss current or past business, political, economic or financial
conditions, such as U.S. monetary or fiscal policies and actual or proposed tax
legislation. In addition, from time to time, advertising materials for a
Portfolio may include information concerning retirement and investing for
retirement, average life expectancy and pension and social security benefits.
DIVIDENDS, DISTRIBUTION AND TAXES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN EACH PROSPECTUS ENTITLED "DIVIDENDS,
DISTRIBUTIONS AND TAXES."
Each Portfolio intends to qualify as a "regulated investment company"
under the Code if such qualification is in the best interests of its
shareholders. To qualify as a regulated investment company, the Portfolio must
pay out to its shareholders at least 90% of its net income (consisting of net
investment income from tax exempt obligations and net short-term capital gain),
and must meet certain asset diversification and other requirements.
Qualification as a regulated investment company relieves the Portfolio from any
liability for Federal income taxes to the extent its earnings are distributed in
accordance with the applicable provisions of the Code. The term "regulated
investment company" does not imply the supervision of management or investment
practices or policies by any government agency.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the aggregate net asset value of his shares
below the cost of his investment. Such a distribution would be a return on
investment in an economic sense although taxable as stated in "Dividends,
Distributions and Taxes" in the Prospectus. In addition, the Code provides that
if a shareholder holds shares for six months or less and has received a capital
gain dividend with respect to such shares, any loss incurred on the sale of such
shares will be treated as a long-term capital loss to the extent of the capital
gain dividend received.
Depending upon the composition of a Portfolio's income, the entire
amount or a portion of the dividends paid by the Portfolio from net investment
income may qualify for the dividends received deduction allowable to qualifying
U.S. corporate shareholders ("dividends received deduction"). In general,
dividend income from a Portfolio distributed to qualifying corporate
shareholders will be eligible for the dividends received deduction only to the
extent that such Portfolio's income consists of dividends paid by U.S.
corporations. However, Section 246(c) of the Code generally provides that if a
qualifying corporate shareholder has disposed of Portfolio shares held for less
than 46 days, which 46 days generally must be during the 90-day period
commencing 45 days before the shares become ex-dividend, and has received a
dividend from net investment income with respect to such shares, the portion
designated by the Portfolio as qualifying for the dividends received deduction
will not be eligible for such shareholder's dividends received deduction. In
addition, the Code provides other limitations with respect to the ability of a
qualifying corporate shareholder to claim the dividends received deduction in
connection with holding Portfolio shares.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gains and losses. However, a portion of the gain or loss
realized from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain financial futures and options, and certain
preferred stock) may be treated as ordinary income or loss under Section 988 of
the Code. In addition, all or a portion of the gain realized from the
disposition of market discount bonds will be treated as ordinary income under
Section 1276 of the Code. A market discount bond is defined as any bond
purchased by a Portfolio after April 30, 1993, and after its original issuance,
at a price below its face or accredited value. Finally, all or a portion of the
gain realized from engaging in "conversion transactions" may be treated as
ordinary income under Section 1258. "Conversion transactions" are defined to
include certain forward, futures, option and "straddle" transactions,
transactions marketed or sold to produce capital gains, or transactions
described in Treasury regulations to be issued in the future.
Under Section 1256 of the Code, any gain or loss realized by the
Portfolio from certain financial futures and options transactions (other than
those taxed under Section 988 of the Code) will be treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. Gain or loss will
arise upon the exercise or lapse of such futures and options as well as from
closing transactions. In addition, any such futures or options remaining
unexercised at the end of the Portfolio's taxable year will be treated as sold
for their then fair market value, resulting in additional gain or loss to the
Portfolio characterized in the manner described above.
Offsetting positions held by a Portfolio involving financial futures
and options may constitute "straddles." Straddles are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of straddles is governed by Sections 1092 and 1258 of the Code, which, in
certain circumstances, override or modify the provisions of Sections 988 and
1256 of the Code. If the Portfolio was treated as entering into straddles by
reason of its futures or options transactions, such straddles could be
characterized as "mixed straddles" if the futures or options transactions
comprising such straddles were governed by Section 1256. The Portfolio may make
one or more elections with respect to "mixed straddles." Depending upon which
election is made, if any, the results to the Portfolio may differ. If no
election is made, to the extent the straddle rules apply to positions
established by the Portfolio, losses realized by the Portfolio will be deferred
to the extent of unrealized gain in any offsetting positions. Moreover, as a
result of the straddle rules, short-term capital loss on straddle positions may
be recharacterized as long-term capital loss, and long-term capital gain on
straddle positions may be treated as short-term capital gain or ordinary income.
The Taxpayer Relief Act of 1997 included constructive sale provisions
that generally apply if a Portfolio either (1) holds an appreciated financial
position with respect to stock, certain debt obligations, or partnership
interests ("appreciated financial position") and then enters into a short sale,
futures, forward, or offsetting notional principal contract (collectively, a
"Contract") respecting the same or substantially identical property or (2) holds
an appreciated financial position that is a Contract and then acquires property
that is the same as or substantially identical to the underlying property. In
each instance, with certain exceptions, the Portfolio generally will be taxed as
if the appreciated financial position were sold at its fair market value on the
date the Portfolio enters into the financial position or acquires the property,
respectively. Transactions that are identified hedging or straddle transactions
under other provisions of the Code can be subject to the constructive sale
provisions.
Investment by a Portfolio in securities issued or acquired at a
discount, or providing for deferred interest or for payment of interest in the
form of additional obligations could under special tax rules affect the amount,
timing and character of distributions to shareholders by causing such Portfolio
to recognize income prior to the receipt of cash payments. For example, the
Portfolio could be required to accrue a portion of the discount (or deemed
discount) at which the securities were issued each year and to distribute such
income in order to maintain its qualification as a regulated investment company.
In such case, the Portfolio may have to dispose of securities which it might
otherwise have continued to hold in order to generate cash to satisfy these
distribution requirements.
The International Equity Portfolio may qualify for and may make an
election permitted under Section 853 of the Code so that shareholders may be
eligible to claim a credit or deduction on their Federal income tax returns for,
and will be required to treat as part of the amounts distributed to them, their
pro rata portion of qualified taxes paid or incurred by the Portfolio to foreign
countries (which taxes relate primarily to investment income). The International
Equity Portfolio may make an election under Section 853 of the Code, provided
more than 50% of the value of the Portfolio's total assets at the close of the
taxable year consists of securities in foreign corporations, and the Portfolio
satisfies the applicable distribution provisions of the Code. The foreign tax
credit available to shareholders is subject to certain limitations imposed by
the Code.
If the International Equity Portfolio invests in an entity that is
classified as a "passive foreign investment company" ("PFIC") for federal income
tax purposes, the operation of certain provisions of the Code applying to PFICs
could result in the imposition of certain federal income taxes on the Fund. In
addition, gain realized from the sale or other disposition of PFIC securities
may be treated as ordinary income under Section 1291 of the Code and gain
realized with respect to PFIC securities that are marked-to-market will be
treated as ordinary income under Section 1296 of the Code.
PORTFOLIO TRANSACTIONS
GENERAL. Transactions are allocated to various dealers by the
Portfolios' investment personnel in their best judgment. The primary
consideration is prompt and effective execution of orders at the most favorable
price. Subject to that primary consideration, dealers may be selected to act on
an agency basis for research, statistical or other services to enable the
Adviser to supplement its own research and analysis with the views and
information of other securities firms. No brokerage commissions have been paid
to date, except as noted below.
To the extent research services are furnished by brokers through which
the Portfolio effects securities transactions, the Adviser may use such
information in advising other funds or accounts it advises and, conversely, to
the extent research services are furnished to the Adviser by brokers in
connection with other funds or accounts the Adviser advises, the Adviser also
may use such information in advising the Portfolios. Although it is not possible
to place a dollar value on these services, if they are provided, it is the
opinion of the Adviser that the receipt and study of any such services should
not reduce the overall expenses of its research department.
LARGE CAP EQUITY PORTFOLIO, SMALL CAP OPPORTUNITY PORTFOLIO, MID CAP
PORTFOLIO, EQUITY VALUE PORTFOLIO AND INTERNATIONAL EQUITY PORTFOLIO. Brokers
also are selected because of their ability to handle special executions such as
are involved in large block trades or broad distributions, provided the primary
consideration is met. Large block trades may, in certain cases, result from two
or more clients the Adviser might advise being engaged simultaneously in the
purchase or sale of the same security. Portfolio turnover may vary from year to
year, as well as within a year. It is anticipated that in any fiscal year, the
turnover rate for each of these Portfolios generally should be less than 100%.
Higher turnover rates are likely to result in comparatively greater brokerage
expenses. The overall reasonableness of brokerage commissions paid is evaluated
by the Adviser based upon its knowledge of available information as to the
general level of commissions paid by other institutional investors for
comparable services.
When transactions are executed in the over-the-counter market, the
Adviser will deal with the primary market makers unless a more favorable price
or execution otherwise is obtainable.
The Fund's Board of Directors has determined, in accordance with
Section 17(e) of the 1940 Act and Rule 17e-1 thereunder, that any portfolio
transaction for the Portfolio may be executed by certain brokers that are
affiliates of the Adviser when such broker's charge for the transaction does not
exceed the usual and customary level.
MUNICIPAL INCOME PORTFOLIO, GOVERNMENT INCOME PORTFOLIO, TAX FREE
MONEY MARKET PORTFOLIO AND GOVERNMENT MONEY MARKET PORTFOLIO. Purchases and
sales of portfolio securities usually are principal transactions. Portfolio
securities ordinarily are purchased directly from the issuer or from an
underwriter or market maker. Usually no brokerage commissions are paid by the
Portfolio for such purchases and sales. The prices paid to underwriters of
newly-issued securities usually include a concession paid by the issuer to the
underwriter, and purchases of securities from market makers may include the
spread between the bid and asked price.
INFORMATION ABOUT THE PORTFOLIOS
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PORTFOLIOS' PROSPECTUS ENTITLED "GENERAL
INFORMATION."
Each Portfolio share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and non-assessable.
Shares have no preemptive or subscription rights and are freely transferable.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise, to the holders of the outstanding voting securities of an investment
company, such as the Fund, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
portfolio shall be deemed to be affected by a matter unless it is clear that the
interests of each portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, the Rule exempts the
election of directors from the separate voting requirements of the Rule.
Each Portfolio will send annual and semi-annual financial statements
to all its shareholders.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
The Bank of New York, 90 Washington Street, New York, New York 10286,
acts as custodian of each Portfolio's investments. The Bank of New York has no
part in determining the investment policies of any Portfolio or which securities
are to be purchased or sold by a Portfolio.
BISYS Fund Services Ohio, Inc., an affiliate of BISYS, 3435 Stelzer
Road, Columbus, Ohio 43219, acts as the Fund's transfer and dividend disbursing
agent. Under the transfer agency agreement with the Fund, the Transfer Agent
maintains shareholder account records for the Fund, handles certain
communications between shareholders and the Fund and pays dividends and
distributions payable by the Fund. For these services, the Transfer Agent
receives a monthly fee compiled on the basis of the number of shareholder
accounts it maintains for the Fund during the month, and is reimbursed for
certain out-of-pocket expenses.
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038-4982, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of Common Stock being sold pursuant to each Prospectus.
KPMG Peat Marwick LLP, Two Nationwide Plaza, Columbus, Ohio 43215,
independent auditors, have been selected as each Portfolio's auditors.
FINANCIAL STATEMENTS
The Portfolios' Annual Report to Shareholders for the fiscal year
ending December 31, 1998 will be supplied with this Statement of Additional
Information when it is available in February 1999.
<PAGE>
APPENDIX
Description of certain ratings assigned by Standard & Poor's Ratings
Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch IBCA, Inc.
("Fitch"), Duff & Phelps Credit Rating Co. ("Duff") and Thomson BankWatch,
Inc.("BankWatch"):
S&P
BOND RATINGS
AAA
Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB
Bonds rated BB have less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payment.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
COMMERCIAL PAPER RATING
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's
BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category. The
modifier 1 indicates a ranking for the security in the higher end of a rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of a rating category.
COMMERCIAL PAPER RATING
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or relating supporting institutions) rated Prime-2 (P-2) have
a strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Fitch
BOND RATINGS
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB
Bonds rated BB are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Duff
BOND RATINGS
AAA
Bonds rated AAA are considered highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA
Bonds rated AA are considered high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A
Bonds rated A have protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB
Bonds rated BBB are considered to have below average protection
factors but still considered sufficient for prudent investment. Considerable
variability in risk exists during economic cycles.
BB
Bonds rated BB are below investment grade but are deemed by Duff as
likely to meet obligations when due. Present or prospective financial protection
factors fluctuate according to industry conditions or company fortunes. Overall
quality may move up or down frequently within the category.
Plus (+) and minus (-) signs are used with a rating symbol (except
AAA) to indicate the relative position of a credit within the rating category.
COMMERCIAL PAPER RATING
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
BankWatch
COMMERCIAL PAPER AND SHORT-TERM OBLIGATIONS RATINGS
The rating TBW-1 is the highest short-term obligation rating assigned
by BankWatch. Obligations rated TBW-1 are regarded as having the strongest
capacity for timely repayment. Obligations rated TBW-2 are supported by a strong
capacity for timely repayment, although the degree of safety is not as high as
for issues rated TBW-1.
INTERNATIONAL AND U.S. BANK RATINGS
In addition to its ratings of short-term obligations, BankWatch
assigns a rating to each issuer it rates, in gradations of A through E.
BankWatch examines all segments of the organization, including, where
applicable, the holding company, member banks or associations, and other
subsidiaries. In those instances where financial disclosure is incomplete or
untimely, a qualified rating (QR) is assigned to the institution. BankWatch also
assigns, in the case of foreign banks, a country rating which represents an
assessment of the overall political and economic stability of the country in
which the bank is domiciled.
